A not so long, long time ago, in a country all around us, Airtel and Vodafone were almost undisputed leaders of the telecom market.
Enter a juggernaut called Reliance Jio, and with it, tremors in the apple cart. Vodafone and Idea are about to form an alliance; Jio continues to roll on grabbing with it Saavn and as many ears and eyeballs as it can along the way in its aggressive bid to close the gap with its rivals; and Airtel remains the market leader – for now – and according to an Economic Times survey, still the most admired company in India in the telecom space.
Airtel is now also training its eyes on a territory that has suddenly become profitable – Africa. With the players placed the way they are and the race for telecom supremacy ever intensifying, we start a new series a day after Star Wars Day, May the 4th. This is Telecom Wars – Episode One, A New Hope for Airtel in Africa.
Reports emerged today that Bharti Airtel plans to raise as much as $1.5 billion by diluting about 25% of its stake when it lists the holding company for Africa operations, Bharti Airtel International (Netherlands) BV, or BAIN BV, in early 2019 on the London Stock Exchange.
At its upper end, it would also mean that the holding company will be valued at about $6 billion. The money obtained through dilution will help bolster Airtel’s efforts to stay competitive in the Indian market, where Bharti has just declared its first-ever quarterly loss.
Net loss, before exceptional items, for the India business in the three months ended March 31, 2018, stood at Rs 652.30 crore, compared with a net profit of Rs 770.80 crore a year earlier, the Sunil Mittal-led telco said in a statement on Tuesday. This is in contrast with the profits it is seeing in Africa now – just this quarter alone, the Africa operations posted a profit of 698.7 crores, sparing the company some blushes. Ironically enough, when Airtel started its Africa operations, it was widely considered a poor move. In response to a question on the one business decision that he regrets the most, Sunil Mittal himself said Africa may have been a poor decision. “We all must have made lots of mistakes. Lots of decision when I look back, I wish they were better thought through. If you pin me down to one, I would say in 2010 our decision to go to Africa was a bit rushed and that has taken 6-7-8 years and lot of resources and my personal time to fix that.” Look how things have changed in 2018. Like the saying goes, there is always money in the banana stand. And well, as it turns out, in Africa.
WHAT AFRICA BRINGS TO THE BHARTI TABLE NOW
Bharti Airtel’s consolidated revenue dropped 10.5% on year to Rs 19,634 crore primarily as data and voice tariffs in India fell further. Revenue from India operations — which make up almost 77% of the total — declined 13% year on year to Rs 14,795.50 crore, dragged by lower revenue from mobile services which fell 20% on year. For the full financial year, 2017-18, Airtel’s consolidated net profit declined 71% on year to Rs 1,099 crore and consolidated revenue fell over 12% to Rs 83,688 crore. Africa revenues account for 25.13% of Airtel’s consolidated revenues and the company attributed this to strong data growth and Airtel Money transactions.
That was all number-heavy stats, but the subtext is that Airtel is reading the writing on the wall here in India, and it reads J, I, O. The tariff wars are showing no signs of a ceasefire with reports of Jio planning to further slash prices. Africa operations, projected to be healthy in the near future, have therefore assumed an unexpectedly important role in Airtel’s coffers now. The listing on the LSE could also help Bharti Airtel deleverage its balance sheet, analysts have observed. Useful considering overall debt was Rs 95,000 crore at the end of March!
A November 2017 report from investment banking company CLSA says that for the next three years, Africa revenues will grow by 3% CAGR (Compound Annual Growth Rate) led by lower access charges – which is a fee paid by a subscriber to a carrier to get on their network – and tight cost controls. Africa’s balance sheet was helped by Airtel selling assets worth $3.25 billion over the past three years. Airtel sold 10,540 towers and sold its Burkina Faso and Sierra Leone operations.
AIRTEL’S STRATEGY IN AFRICA
Airtel’s strategy in Africa has been one of establishing a presence (paved by its acquisition of Zain) and also making local friends. Over the past few years, it has been trying to capture the African market through local deals. It has made three small-ticket acquisitions in Uganda, Congo Brazzaville and Kenya. Livement reported that, in October, Airtel signed a deal with Millicom, which operates the brand Tigo, to combine their operations in Ghana. After this deal, in December, Airtel’s subsidiary in Rwanda announced the acquisition of Tigo Rwanda Ltd, making Airtel the second largest telecom firm in that country.
“Airtel has taken proactive steps in Africa to consolidate and realign the market structure in the last few remaining countries where its operations are lagging on account of lower market share and presence of too many operators,” Bharti Airtel chairman Sunil Bharti Mittal said in a statement on 19 December. “We are also committed to the long-term viability of our operations in Kenya and Tanzania, to ensure that in 2018, all our 15 operations in Africa start contributing positive margins and cash flows towards a healthy and profitable Airtel Africa,” Mittal had said back then.
WHY IS AIRTEL STRUGGLING AT THE TELECOM WARS?
With our focus now Out of Africa, let’s return to the main premise itself – telecom wars. According to data from Trai, as of 31 December 2017, Airtel had 24.85% of subscriber market share, Vodafone had 18.2%, Idea Cellular 16.83% and Reliance Jio 13.71%. As far as revenue market share is concerned, as of 31 December, Airtel had 27.96% of revenue market share, followed by Vodafone India (20.65%), Reliance Jio (19.74%), and Idea Cellular (17.33%), data compiled by BloombergQuint showed.
With the rise of Jio, most older telcos are struggling. Today, the focus is on Airtel, and why Airtel is struggling. Simply put, three reasons:
- Continued pricing aggression from Jio
- Regulatory hurdles including cut in international termination rates
- Subscriber preference for lower-priced bundle packs than higher ones
Reliance Jio launched free services in September 2016 and commercial services in April 2017. When it launched free services, everyone’s subscriber base was rising. Between March 2016 and September 2017, Airtel, Vodafone, and Idea added 31, 9, and 15 million subscribers each. In that period, which is since the time of its launch to September 2017, Jio had accrued 190 million subscribers.
They had to once Reliance Jio started charging for services, and subscriber growth of other operators started tapering since. According to TRAI’s telecom subscription data published in February 2018, Bharti Airtel led the telecom market with 24.85% share as of December-end. According to the data, Reliance Jio’s market share stood at 13.71%, few points lower than Vodafone’s and Idea Cellular’s market shares of 18.20% and 16.83% respectively. But, Jio recorded the highest growth rate of wireless subscribers which is 5.27%, among all telcos in the month of December.
Bloomberg reported last April that both Airtel and Jio “may raise as much as Rs 36,500 crores selling bonds as the telecom titans build a war chest in what investors hope will be the home stretch in India’s bruising tariff war.” The vast amount of 36500 crore rupees, which is about 78 percent of the total outstanding bonds of India’s top four telecom firms, signals that Airtel and Jio are getting prepared to roll out next-generation services and manage about Rs 32,000 crore of debt due in the next five years.
Raj Kothari, head of trading at Jay Capital Ltd. in London believes an end to tariff wars may be in sight after all. “After four years of intense price pain, the India telecom battle could be in its last stretch. It’s down to the big boys and they are piling up funds for that,” he was quoted as saying by Bloomberg.
Bharti Airtel has said that the money would be used for treasury activities, including refinancing, and for paying off spectrum dues. Jio meanwhile hasn’t specified details of end use although data compiled by Bloomberg show that it has significant repayments due in the next few years.
The perceived advantage of Jio
What are the perceived advantages that Jio has? Have TRAI regulations benefitted Jio? What are the changes that other telcos have had to make in order to stay competitive? What has happened to those companies that have not managed to stay afloat? What has happened to their subscribers? What about data share and how does Jio fare there? In its mode to aggressively expand and acquire subscribers, does Jio have a plan for the long game? In the coming weeks, this will be our focus – what is the disruption in the galaxy? And how is each side faring? We have not even touched upon broadband and other services that these telecom operators provide. These are all questions we have to take time to answer, which is why Telecom Wars is a series, and this merely its first Episode.
There we have it – the Telecom Wars, and we have barely scratched the surface. Today’s focus, on Episode One, was on Airtel and the challenges it is facing in the wake of Jio. “In my view, Airtel’s best scenario is if Jio can be stopped and if pricing can come back to normal,” says Rohit Prasad, a professor at the Management Development Institute (MDI) and an observer of the telecom industry. “The second best scenario is the government bails out the telecom industry by making various kinds of concessions, and that second best scenario might come to pass.”
In the middle of all this emerges a glimmer of hope for Airtel in Africa. If back in 2010, you as a shareholder had criticised Airtel for venturing into Africa, perhaps now is as good a time as any to eat crow. How Airtel’s future in India evolves is anyone’s guess, but one thing is for certain – it is going to be a hard-fought war. – Money Control