Earnings call, Bharti Airtel Q2 financial results

Opening remarks by Gopal Vittal, MD & CEO (India and South Asia), Bharti Airtel at the Investor Webinar on financial results for quarter ended Sep 30, 2021

Good afternoon, ladies and gentlemen. Thank you for joining this webinar to discuss Bharti Airtel’s results for the Quarter ended 30th September 2021. Also present with me on this webinar are Harjeet Kohli, Kamal Dua and Rajiv Sharma.

Let me start with a quick review of recent events that have impacted the industry. As you are aware, the government announced seminal reforms that will help preserve cash flows and enable the industry to drive investments. There have also been substantial steps taken to simplify the way we do business by cutting back on several needless approvals and easing the customer on-boarding processes. We welcome these steps and remain committed to meeting the vision of a powerful Digital and connected India.

The second important event this Quarter has been our rights issue. We have had a very encouraging response. Our issue saw a subscription of approx. 1.44 times, overbid by both public and promoters. We thank all our investors for believing in the Airtel story. Airtel is well poised to benefit from the huge growth we are seeing in Digital adoption across 4G/5G, home broadband, Data Centers, digital services, Payments and much more.

 Now to our performance. Our overall portfolio of India mobile, enterprise and homes in India and Africa has delivered strongly this quarter.

Our consolidated revenues for the Quarter grew by 5.5% sequentially to reach 28,326 crores and our EBITDA margins improved over the last quarter from 49.1% to 49.5%.

Let me now touch on each of our businesses.

 In our Broadband business we have seen strong customer growth of close to half a million, a level of net additions that is the highest ever in a single quarter. Our overall customer base is now at 3.8 million.

The focus on high quality urban homes, our Local Cable Operator partnership model and Airtel Black continue to drive our strategy around home broadband. We expanded our infrastructure in the quarter and added over 1.1 million home passes. Our innovative digital partnership model with the local cable operator has been a game changer for us. Our presence has now expanded to 436 towns. In order to accelerate growth and improve the experience at our stores we have now started to insource all our retail stores. You may recall that 1400 of the 2000 odd stores were earlier on a franchise model. We hope to conclude this process by the end of this fiscal year.

We believe Fiber to the Home is a very large opportunity and will continue to step up investments to take our network to 2000 towns across India with 35 million home passes in the next 3 years.

 In DTH, we now have a presence in 18 million homes with an ARPU of INR 148. Private DTH players are seeing users particularly in the Hindi belt move to Free Dish—some of the Hindi General Entertainment channels with very good content are now being offered for free and have impacted our performance. Yet, we are positive about the DTH business from a medium-term perspective. The opportunity to convert from cable is massive. There is also a massive opportunity to leverage the advent of OTT content and deliver a unified and connected experience through Airtel X Stream. Our go to market efforts by bringing in all Airtel services through the unique and differentiated Airtel Black will allow us to create value for customers and drive growth.

 Let me turn to the Enterprise business
For the Quarter, Airtel Business clocked revenues of 3,995 crores, a sequential growth of 5.4% on revenue and 8.4% on EBITDA. Our margins improved to 39.9% this Quarter. I am personally excited about our Enterprise product portfolio which allows us to capture future growth opportunities. I will talk more about this later today. Last time I spoke to you about our focus on going both wide and deep. Wide to tap into the 80 percent of customers who account for only 20% of our revenues. And deep in the accounts we have solid presence in so that we can sell many more products and raise switching costs. As a result, our focus on new product acceleration continues. We are also excited about the data centre business and intend to step up investments to 5000 crores in the next few years. Our unique ability to differentiate by providing resilient connectivity coupled with our strong relationships with customers across both domestic players as well as hyper scalers gives us a solid competitive advantage.

 Let me now finally comment on the Mobile business
Our performance here in this Quarter has been strong. Despite a substantial tariff increase at the lower end of the market, we were able to grow our mobile net additions at 2.2m and 4G customers at 8.1m. This underscores the strength of our strategy to focus on quality customers. Given that bulk of the tariff increase has flowed through into revenue, our ARPU improved to 153, an increase of Rupees 7 in a single quarter.

Our revenue market share at the end of Quarter one was well over 35.6%, a lifetime high. We continue to believe that the mobile industry ARPUs are not sustainable and should improve to 200 in the near term and 300 in the longer term.

This quarter we have launched our second version of the Mera Pehla Smartphone cash back programme. This program is applicable across 175 devices with a price of less than Rupees 12000. While this will certainly create buzz and preference for the Airtel brand in the market place, our experience suggests that this will not have a meaningful dilutive impact on ARPU or profitability, something that we have thought about carefully as we designed the contours of the program.

I would now like to step back and share my excitement at the four critical moats that Airtel has. You will find some detail on this in the form of a few slides that will be uploaded on our website today.

 The first Moat is around Payments and our Airtel Payments bank.
Today, Airtel Payments Bank has a customer base of 115 million with a monthly transacting user base of over 31million users, an annualised GMV of over USD 17 billion and a merchant base of over 8 Million. Revenue is close to INR 1000 crore on an annual basis and we are now EBIDTA and PAT positive this quarter. One reason we believe this business is a strong moat for Airtel is that when a customer’s bank account number is also her Mobile number, there is much lower churn.

Our monetization model for the Payments bank can be broken down into three broad categories: First, Transaction income driven by our ability to participate across the value chain. Second, interest income. Finally, Fee income which originates from our ability to cross sell. Let me elaborate on these.

Unlike other players in the market, we think of the India opportunity through a multi segment way across 3 different parts. Tier 3 and beyond markets, Digital users particularly in Urban areas and finally the B2B segment.

Let’s start with Tier3 and beyond markets.

Here, our strength is the ability to leverage our distribution and, with 0.5m Business Correspondents, we are well ahead of anyone else in the market. To put this in context, our total payment bank distribution is 2 times that of the total ATMs and bank branches in the country. I believe that we have not just a first mover advantage but an only mover advantage that allows us to offer our customers a full stack digital account here. It is this advantage that has enabled us to get to leadership in the Remittance market. Remember that this market is growing rapidly and estimated to grow at 70% over the next few years. A second big opportunity here is Aadhar enabled Payment systems which allows customers to use Aadhar authentication for various banking activities. This segment is expected to grow upwards of 45% CAGR over next 4 years. We are also driving financial inclusion by being a key player in the distribution of various government sponsored schemes.

The second opportunity is the Digital user. Here we are well placed as we can leverage the 180million+ customers we have across our Digital assets. We offer a plethora of services such as lucrative interest rates, gift cards, digital gold, fastag, telecom recharges, payments and debit cards. Our large merchant base of more than 8 million allows us to drive both engagement and monetisation. This is one area that is now seeing solid traction and you will hear more about this in the coming quarters.

The third segment is B2B. With the growth of e commerce and the need for cash management across a very distributed geographical foot print we have a unique advantage through our large retail foot print. 100 billion USD in cash is digitised monthly and cash management charges are estimated between 0.5%-1.0% of the collection amount.

As a result of this multi segment view of the market, a critical metric we focus on is what we call the take rate. This rate is the conversion from GMV into Revenue. On the take rate we are at 0.74% which is amongst the highest in the industry. This shows our relentless prioritization of monetization over what we believe can otherwise become a mindless attempt to grow GMV through discounts and cash backs.

As you can see, we are just getting started and with the bank breaking even, we believe that the realization of this massive opportunity is now a natural right given our strengths.

 The second exciting moat I see is around our enterprise business with its robust future proofed portfolio which I referred to earlier. The reason this business is such a strong moat for Airtel is the tremendous stickiness that we have with customers for our services. The fact that customers trust us with their data, the enormous respect they have for our governance and privacy are all intangible but priceless sources of competitive advantage.

As of date, we have only disclosed the broader revenue numbers for this segment. Today, let me provide a little more color to allow you to understand the robustness of our overall portfolio. Our Revenue in the enterprise business has three component parts.

The first component of Revenue is voice services. This part of our portfolio has been under pressure. And this is the same for all players in the industry. Our profitability is at par with the industry here and our focus is to continue to grow market share given our relationships with customers while preserving profitability so as to generate cash.

The second revenue component is Connectivity and Connectivity related solutions. This includes all our services around connectivity, data centres, Airtel Secure, SD WAN, IoT and connectivity based partnerships such as bundled routing solutions. Here there is healthy double digit growth and our margins are better than any of our competitors.

In this segment, we have a 31.7% market share in data market and a 44% market share in the mobility market. We believe that we are very well poised to see further consolidation of customer spends in Enterprises as we move towards 5G.

The third component of Revenue is CPaaS (Communication Platform as a Service). This part of our business has been the fastest growing part of our portfolio at very strong double digits. In this segment, our profitability here is well above the industry average. This part of our business has now become meaningful and accounts for almost 15% of the total enterprise business.

Our CPaaS business plays to our strengths of combining our network and digital strengths. With the launch of Airtel IQ we are very well poised to win this rapidly growing market. We plan to sharpen our offers and focus on bespoke solutions to accelerate share. We also now want to expand this across the globe through our wide coverage of our sales teams located in all parts of the world.

 The Third moat is our Quality customers and high value homes. We say this because our portfolio plays squarely to the premiumization that will continue to unfold in India.

Last quarter, I spoke to you about our view of the India consumer market opportunity. Let me refresh your memory again.

We see the market in three parts. The bottom segment has about 400 million users comprising of farmers, rural traders etc. who are largely users of feature phones today. They are looking for basic connectivity and a satisfactory experience that is hassle free. This is the segment with the lowest level of ARPU.

The second segment has almost 500 million migrants, gamers, young students, blue collared workers and traders. We call them Aspirers. We see a 2X shift in ARPU when the feature phone user switches to a smart phone. Simultaneously we see a lowering of churn. We have built powerful analytics using data science to drive this switch. We also have honed to a fine science the underlying drivers of churn. Within the company we have what we call the ten commandments of churn each of which is based on a very granular understanding of customer behavior.

Then there are potentially 50 odd million high value homes in India. They comprise of executives, self-employed professionals, business men etc. These are customers who want to feel special, desire a simple, convenient experience and are concentrated in the top 25 cities of India. The first point of entry for us is Postpaid. Here again we see a doubling of ARPU when someone switches from prepaid to postpaid. One of the lesser known secrets of our business here is our Family proposition. This allows the customer to add a member of their family and share data with them on the same plan. Today a majority of our postpaid customers are on the Family plan. Churn here is miniscule and switching cost very high.

Right at the top of the pyramid we see ARPU tripling when a customer moves from a simple postpaid plan to being a part of Airtel Black. The primary benefit of Airtel Black for us is that it raises switching costs for customers and provides genuine value to our customer.

It is this overall focus on premiumization and quality customers that has allowed us to raise our ARPUs even in the absence of tariff hikes over the last 5 quarters. As I said earlier given the natural structure of our portfolio we are in a pole position to win.

The fourth moat is our capabilities in the Digital layer that is riding on our underlying platform to drive meaningful digital services revenue at a negligible capex and opex.

There are four capabilities we have here and I have talked about these in the past. Let me briefly provide some texture to each.

First, Data – We have made significant investments over the last few years in our data infrastructure platforms, in data science and in data analytics. One such investment has been in an integrated CLM which allows us a 360 view of our customers. This is what helps in the premiumization approach I talked of earlier. It also helps us to drive other digital revenue streams.

Second, Payments – We are now doubling down on accelerating payments through leveraging the unique strengths of the Telco – authentication, distribution, security and digital scale. We recently launched Airtel Safe Pay and Bank wala Sim. You will see more innovation from us addressing the Urban digital user in the coming months.

Third, Distribution. Today, we have state-of-the-art capabilities in the form of real time messaging, vernacular campaigns and an omni channel view all with real time metrics across our entire portfolio of customers. Our new integrated CLM has replaced the earlier business-led view with a much more cohesive and simple customer view based on clearly identified cohorts. This is what helps drive the next best offer through strong digital intelligence across both our core business as also digital services.

Finally, Network. We have made substantial investment in the digital layer through cutting edge tools that leverages AI and ML. Let me give you an example of onesuch Tool. This tool provides us with network and customer insights that helps us identify the right site for deployment. In addition it gives us precious insights on where we need to get more customers at an individual site with a clear set of hypotheses on why we have been unable to. It is this very granular understanding that allowed us to get almost 40 percent of incremental 4g net adds in the last 12 months from specific locations that we targeted. A second home grown tool leverages AI and ML to trouble shoot and fix network experience.

It is these four capabilities of Data, Payments, Distribution and Network that is now helping us generate digital services revenues that are now increasingly meaningful. We have two sources of revenue in the consumer side – Subscriptions or Commissions and Ad Tech. On the B2B side our source of revenue is really SaAS led.

Subscriptions/Commissions work off our underlying assets – Wynk music, Airtel Thanks and Airtel X stream.

In Ad Tech we now have integrated all our assets across Digital assets, DTH and Media dark vehicles such as Ring tones. We have over 140 brands already leveraging our platform and growing.

Let me turn to B2B. Our biggest bet here is Airtel IQ which is expected to be a platform for all kinds of cloud communications services. Voice, Video, Streaming and eventually even work force management. Every one of these services is being used by Airtel and we now have over 175 customers on this platform. These customers range across the biggest internet companies, banks and many more.

As you can see, we are increasingly thinking of our business as an ecosystem. We believe we are at an exciting phase in our digital journey.

In these last few years, I have learnt that moving a business as large as ours from an offline view of the world to an omni channel digital world takes anywhere between 3-4 years. The good news is that we commenced our journey 5 years ago. I have also learnt that you have to be focused on asking the right questions. The three key questions we ask ourselves all the time are (a) what problem are we solving (b) how do we get the right talent to solve this problem and (c) how do we ensure that their paths are clear so that they can get it done.

This is easier than it sounds. It needs leadership resolve, it needs a collaborative culture of inclusion and above all it needs a flat, agile and decisive way of working.

The good news is that all this plays squarely to our strategy of winning the best

 Quality customer, giving them a brilliant experience and doing this by building compelling digital capabilties.

 I want to end with a few words on ESG, Governance and the balance sheet.

The Company remains aligned with the Paris Climate Accord, proactively implementing clean, fuel-based power solutions for our towers, data centres, switching centres and other facilities.

We have remained committed to society, our customers and employees right through the harrowing time of the pandemic. We have always demonstrated the highest standards of corporate, financial and operational disclosures. Our classification of revenue and costs are in line with our best global peers. More importantly, with the additional colour on the Payments Bank this Quarter, we have shown our commitment to maintaining the highest standards of disclosure. At the right moment, we will give you more colour on our Digital Services in terms of disclosure.

 A final word on the balance sheet. The balance sheet continues to be robust with healthy and improving cash flows. Our leverage ratio is under 3 and we remain committed to being financially prudent and yet growth focused. An important highlight that I do want to underscore is that in the past quarter we have reduced our bank Debt to Zero. We will continue of course to evaluate all options to maintain a comfortable leverage profile and optimize associated costs.

In sum, our performance for the recent Quarter has been strong because of the resilience and depth of our portfolio. In every one of our businesses we are at a lifetime high in terms of revenue market shares, the most critical barometer of our competitiveness. Our strategy and choices are dictated by our view of the market and the way we can tap into that opportunity. These choices are simple and cohesive. It is these choices that has enabled us to build an Airtel of the future which is well positioned to win.
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