Bharti Airtel’s Unhappy African Safari

Bharti Airtel, India’s biggest mobile phone operator and the world’s fifth largest, saw profits fall by 31 per cent in the fourth quarter of FY 2010-2011 compared with last year, weighed down by its African operations where its business has been growing at a tenth of the rate in India.The figures confirm analysts’ fears expressed when Bharti bought the African assets of Zain, the Kuwaiti operator, in June 2010 in a $10.7bn deal. But Bharti has been even slower to break even in Africa than analysts predicted.“Bharti’s results reflect the expected drag from their Africa operations. This was expected as the company attempts to streamline their operations in the African sub-continent and service the large debt. Centralization of operations and spinning-off the tower business should ease pressure and un-lock value in the short-medium term. Socio-economic issues in the region will however continue to be cause for concern,” wrote Kamlesh Bhatia, principal analyst at Gartner, in a note to India Infoline after Thursday’s results announcement.

Bharti operates in 15 African countries, of which six are currently loss-making, company executives told analysts on a conference call.Since its African acquisition, Bharti has been struggling to reduce operating costs to bring its prices into line with those of local competitors. At the time of the deal, analysts expected the telecom operator to break even in two quarters but they have been disappointed. Company executives now expect to complete streamlining in Bharti’s African operations in the next four to six quarters.Africa currently provides 27.5 per cent of Bharti’s earnings. But at 1.4 per cent, the annual rate of revenue growth from the continent is barely a tenth of that in India and South Asia, at 12.7 per cent.Nevertheless, revenues from Africa are picking up.

“Overall, operationally they were better and they managed to get margins in the Africa business. Moreover, the management has also mentioned that pricing premiums in the Africa market, which were huge compared with local players, have been bought down, so they are comfortable,” Srishti Anand, an analyst at Angel Broking, told beyondbrics.

In Q1 FY 2010-2011, its first full quarter in Africa, it had revenues of $248m from the continent; in Q4, African revenues rose to $924m. The company’s brand, Airtel, is gaining recognition across the continent and has drawn subscribers away from competing brands – a good sign for subscriber numbers in the future, says Anand.The number of Airtel subscribers in Africa grew by 5.5 by per cent during the quarter and currently stands at 44.2m, with the strongest growth coming from Nigeria, Democratic Republic of Congo, Zambia, Tanzania and Gabon, where Bharti continues to gain market share.

“Access charges, network operating charges should come down which should help margins. In the next two years, we expect a 300-350 bps expansion in margins for the Africa business,” Anand said.Bharti, like other Indian companies, may possess an advantage in Africa. The company has perfected a low-cost / high-volume model in its home market. Based on its experience in India, the world’s second largest mobile phone market by subscribers, the company is in a position to offer affordable services to African consumers, executives said during the conference call.

It also plans to spin off its tower infrastructure business, releasing cash to help expansion on the continent, as it did in India.The company plans capital expenditure of $1-1.2bn in Africa, out of a planned total of $3.1bn.In the Indian market, Bharti has benefitted from subscribers moving to the network after the government allowed number portability. But the rate of growth of subscribers, currently 320,000 a month, may not be sustainable, Anand said.India’s telecom sector has been in the news for a debilitating corruption scandal. Operators face fresh regulations and have paid a premium for 3G telecoms spectrum, putting pressure on profit margins.“Valuation is on the higher side currently, so we don’t recommend fresh buys for Bharti, but for those holding the shares a movement of 5-10 per cent is possible. We’ll get some clarity in the next quarter. Until then it’s just wait and watch,” said Anand.

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