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One Year After
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Mittal's desire to hit the African market was evident even a year before when he bid without success to consummate an acquisition/ merger with MTN, Africa's biggest telecom operator. Almost nobody questioned India's largest telecom firm's great African push. What they did question was the audacity of the Zain acquisition that required Bharti to shell out $10.7 billion in cash. Substantial amounts of this was loan. Now it forms part of $12.57-billion unpaid loan, which still sits on the parent Bharti Airtel's balance sheet. The question is: is it beginning to haunt Bharti?
A year down the line, Zain, which was delisted and renamed as Bharti Airtel International BV headquartered in Nairobi, is still battling it out in the African markets. And its parent Bharti is bearing the brunt of its struggle for profitability and market leadership.
The African operation has grown from 36 million subscribers in the quarter ended June 2010, when Bharti acquired Zain Africa BV, to 46 million subscribers in the quarter ended June 2011, but Bharti continues to hurt in the region with a net loss of $2 million on total revenues of $979 million. That's an improvement over the $15-million net loss Zain incurred in June 2010. In the previous fiscal ended March 2011, the African operations incurred a net loss of $75 million.
Technically, Bharti leads in eight of the 16 countries where it operates in Africa. The fact, though, is that it is the market leader only in the smallest of countries such as Chad, Malawi and Gabon. Zain's arch rival MTN continues to lead in Africa's biggest telecom markets such as Nigeria, Ghana and Uganda and continues to fend off Bharti's challenge with a worldwide subscriber base of 150 million and (about 60 million in its Africa operations) at the end of March 2011. In the year ended 31 December 2010, MTN reported a net profit of $2.42 billion on revenues of $16.6 billion.
|AIRTEL IN AFRICA|
|Presence: 16 countries Subscribers: 44.2 million Performance (FY 2011):|
Bharti Airtel is weighed down by the burden of the Zain acquisition, 3G rollouts in India, higher interest payout, falling Arpu (average revenue per user) and a far-from-enthusiastic response to 3G in India. In a reflection of the prevailing sentiment, days before the company was to declare its June quarter results, Bharti stock fell by 6.5 per cent to Rs 413.50 anticipating yet another bad quarter due to African operations. "Bharti results reflect the expected drag from their Africa operations," says Kamlesh Bhatia, principal analyst at Gartner. For instance, in the last quarter ended June 2011, while Bharti's Indian and South Asian operations reported an Ebitda equivalent to 36.4 per cent of the region's revenues and a net profit equivalent to 12 per cent, the African operations were at 26.7 per cent and -0.2 per cent, respectively. "We have taken the right step at the right time. We are digging our heels deep in a continent which is the biggest future market of the world," says Manoj Kohli, CEO (international) and joint managing director of Bharti Airtel, whose African colleagues initially found it tough to pronounce his name. "Now they call me Manoj," he says. (Read the interview with Kohli).
|THE AIRTEL-MTN DEAL|
|The Bharti-MTN DEAL broke off on 30 September 2009 — its second attempt after one in May 2009. Both Indian and South African governments rejected calls to make regulatory changes to facilitate the deal. MTN shareholders were not cooperative; Bharti wasn't willing to give a controlling stake to MTN.|
Kohli has committed to the management that by March 2013, Bharti Airtel International BV will have 100 million subscribers (up from 46 million today), $5 billion revenue ($2.88 billion in March 2011) and $2 billion Ebitda (from $691 million) from African operations. However, not everybody is as hopeful. "We believe that Kohli's expectation of 40 per cent Ebitda margin is on a higher side and (we) remain conservative over Africa and don't see a turnaround in the near future," says a Jaypee Research report on Bharti Airtel dated April 2011.
Analysts and industry observers cite several reasons for that outlook. For one, 12 months since the takeover, Bharti is still to unsettle the market leader in any of the African markets (Zain was already the leader in all of the six markets). Employee costs in the African markets are far higher than those in the Indian market. Bharti Airtel, which scoffs at the ongoing price wars in the Indian market, has been badly bruised after triggering a price war in some of Africa's biggest markets.
Kohli, however, cites the positives: Arpu in the region range from $3 to $18, with the mean being $7 (in India, it is $4.3). Mobile penetration is just 40 per cent as compared to 60 per cent in India. A Deloitte report states that the demand for mobile connectivity in Africa is growing at an average of 25 per cent annually. Bharti is yet to bring in the full economies of scale of outsourcing and network sharing.
Battle Field Nigeria
Bharti's biggest struggle is in Africa's largest market Nigeria (73 million subscribers), where Bharti stands third in the pecking order. The country accounts for 36 per cent of Bharti's African revenues. Its attempt at gaining a foothold with a price war has left Airtel badly bruised. Voice call rates were slashed from $0.24 for the first minute of each day to $0.079 per minute after the end of certain hours as against $0.16 per minute for the whole day. An attack on the ISD market with a new scheme called ‘2Good' halved the prices for all domestic calls (both on-net and off-net) and offered competitive rates for calls to the US. Bigger rivals MTN, EMTS Nigeria and Warid Telecom hit back by slashing rates by more than 70 per cent. Airtel was prepared for a cut, but not to this extent.
|POOR SIGNAL: Zain headquarters in Kampala, Uganda (Bloomberg)|
MTN, incidentally, reported an Ebitda margin of 62 per cent as of December, 2010. "It will take many years to catch them," says Kohli. The strategy could not produce the desired results. On the contrary, it added pressure on Airtel Nigeria's margins as subscribers started keeping two phones — one for low-cost tariff for voice (from Airtel), the other for low cost data from MTN and the others. Worse, Airtel Nigeria was dragged by its rivals to the telecom regulator Nigerian Communication Commission with complaints of predatory pricing. The matter is pending. But Airtel received support from Ernest Ndukwe, former executive vice-chairman, Nigerian Communications Commission, who said, "I have continued to see tariff drop since the last exercise with respect to interconnect rates. Going forward, prices will fall because we have always insisted that more competition will affect tariffs in a positive way".
Africa's second-largest market Kenya has over 19 million subscribers. Bharti ranks a distant second here, according to Nomura Research. The Airtel initiated price war caused a considerable dent on the balance sheets of its rivals, including Safaricom, Kenya's largest telecom operator. Its profits during the financial year ending 31 March 2011 fell by about 13 per cent. A bruised Safaricom hit back with a cut in its data tariff plans. Daily Nation, the leading newspaper from Kenya, wrote, "Ignited by Airtel, Kenya and series of retaliation from other operators, the cost of voice calls fell 50 per cent to Shilling 3 per minute and consumers can send SMS at rock bottom price."
Airtel executives say that the price cuts did open up the market. Safaricom CEO Bob Collymore of Safaricom commented on his company's poor performance saying, "Safaricom's results would have been better without the price wars that is without doubt." Airtel emerged partially successful by gaining more than 5 per cent in terms of subscribers. But, it had to rethink its business plan for the next year from successful tariff schemes for services like of Safaricom's M-pesa. "Safaricom and MTN have understood the market well and been able to align with the local market," says Nitin Navish Gupta, assistant vice-president at Evalueserve.
Mark To Market
In Africa's other markets too, Bharti has a long way to go before leadership. In the third-largest market Tanzania, Bharti (28 per cent marketshare) is No. 2 behind Vodacom (41 per cent). In the fourth-largest market Ghana, Bharti trails at No. 4 with 10 per cent marketshare compared with market leader Scancom/MTN's 51 per cent, says Nomura Research. Among the markets where it leads: Gabon (52 per cent marketshare) is a 1.37-million subscriber market; Chad (53 per cent) is a 2.7-million market; Malawi (63 per cent) is a 2.4-million market and Zambia (60 per cent) is a 4.4-million market. But competition isn't that intense in these markets. Chad and Malawi have only two operators, including Bharti. Zambia has three and Gabon four. Total subscriber base of these countries is equal to the number of subscribers India adds every month. Kohli says the KYC (know your customer) norms in Africa are more stringent than they are in India. "It has slowed the market. All operators are struggling to get on top of this regulatory expectation. The network capacities and coverage are still a challenge which I am sure (we) will overcome very soon," says Kohli. "We have gained revenue market share in all the markets. In some markets more and in some markets less."
"We have probably about six countries that are loss-making at this point. If we look at the 12-month outlook most of these are turning into positive territory," Manik Jhangiani, group chief financial officer of Bharti Enterprises said at an analyst meet. An analyst in India advising the company says that financially — and on subscriber base — Nigeria, Kenya, Uganda and Ghana are the major problem areas while in the other 11 it has a strong financial position that it inherited from Zain. Bharti's most potent competitor continues to be MTN which is extremely strong player in West, Central and South Africa. In the East, it's Vodacom. MTN has played on the African sentiment to build a very strong brand connect with the locals. Bharti competes directly with MTN in Nigeria, Ghana, Congo, Uganda and Zambia while Vodafone in Tanzania, DRC and Kenya. These are critical markets both financially and strategically for Bharti to become the leader in Africa. A report by HDFC Securities Institutional Research says, "Zain Africa (now Bharti Airtel) derives 54 per cent of its revenues and 52 per cent of its Ebitda from these five (Nigeria, Ghana, Congo, Uganda and Zambia) countries.
While India is still struggling to get its act right in m-commerce, transactions on the mobile have caught on in Africa. M-commerce accounts for 10-12 per cent of the business of cellcos and is growing at 39 per cent per annum. "My driver in Nairobi sends money to his wife everyday," says Kohli. Bharti Airtel is hamstrung here. While it has completed all legal formalities of acquiring Zain, the regulatory clearance to launch m-commerce in eight countries is expected only next year. "The central bank's approvals have been taken," says Kohli. These include large markets such as Kenya, Tanzania, Malawi, Zambia, Uganda, Gabon, Ghana, Sierra Leone, Madagascar, Niger, DRC and Burkina Faso. The rest will be taken up in phase 2. "Airtel will have to depend upon the government-to-government relations to expedite approvals," says Gupta of Evalueserve.
The Struggle Within
One of Bharti Airtel's biggest challenges is to integrate 6,500 employees of Zain. In the first two months, Kohli and his senior team travelled to all 16 countries in the first two months twice over to meet with all stakeholders — employees, dealers and distributors, all government, banks and all key people and institutions. Zain employees had become a bit cynical having seen the company change hands five times in a decade. Kohli held over 100 town hall meetings to address anxious employees and personally wrote to all the employees about Bharti's intent. He also replied individually to the 300-odd people who wrote back within 24 hours. "The question amongst them was — is Airtel here to stay?" says Rajan Swaroop, CEO and managing director of Airtel Nigeria. Jayant Khosla, CEO (Anglophone markets), says Bharti empathised with local sentiments while integrating.
|UP & DOWN|
The best and the worst of Airtel Africa Operations
|THE BEST: MALAWI|
Subscribers: 2.5 million
MoU: 250 million
SHARE IN TOTAL MARKET: 63 per cent
THE WORST: NIGERIA
Subscribers: 15.8 million
MoU: 100 million
SHARE IN TOTAL MARKET: 10 per cent
Even as Bharti is slowly overcoming the HR challenge, it is struggling with the cost of human resources. According to Jaypee Research, the employee cost in Africa is 9 per cent higher than that of India. There are other challenges, too, such as widespread prevalence of diseases, poor rail, road and air infrastructure, and political upheavals. At the same time, the company has come across some pleasant surprises. In Zambia, the government wanted Bharti to help create rural network, "We asked for USO funding and they agreed," says Kohli. In Sierra Leone, the government wanted affordable services. Kohli says Bharti requested for lowering of interconnect rates and the country's President agreed within 30 minutes and issued a statement by the evening. "There is so much respect for India. Many heads of state fondly remember Indian teachers who taught them," says Kohli.
An Unfinished Agenda
The first year went into rolling out the Airtel brand to replace Zain, strengthening the networks and regulatory clearances. The company designed a new red-and-white logo to mark its international expansion, targetted mainly at the youth. With a median age of 17 years (India: 25), Africa is the youngest population in the world. The red colour has a special significance in Africa — Coca-Cola and Toyota, which have red logos are among the leaders. "The Airtel brand and colour are engaging and have been liked by the customers," says Tiemoko Coulibaly, CEO for Francophone markets, Bharti Airtel, responsible for seven countries.
The biggest challenges are to become profitable and take leadership position in the region. "Bharti in Africa does not have a short term plan. Airtel has taken a long term bet on Africa." Even though profitability is yet to be achieved, the subscriber base has grown 28 per cent since the time Bharti took charge. Revenue has grown 16.8 per cent from the quarter ended September 2010 till date, while Ebitda has grown nearly 30 per cent. This was largely aided by Bharti's renewed focus on MoU (minutes of usage) in Africa, which has grown 342 per cent from 3.7 billion to 16.3 billion in the past year. But a higher number of subscribers no longer guarantee higher revenue. In Africa, like in India, the Arpu will fall and the focus will shift to MoU. Right now, the Arpu in the 16 countries is $7.2 as of March 2011 against $4.3 in India. But the MoU at 120 in Africa is about one-fourth of India's 449.
Bharti, however, takes comfort from the fact that its masterstroke — telecom and IT outsourcing — is still to play out in Africa. Having perfected managed services over the past six years in India, Bharti is only now replicating it in Africa. It has handed over business process outsourcing to IBM, Tech Mahindra and Spanco. Network operations and management to equipment vendors Ericsson, Huawei and Nokia Siemens Networks. IT to IBM, Avaya and Comviva. Kunal Bajaj, partner and director (India) at Analysys Mason, says it will help improve the bottom line (when this rolls out).
Another opportunity at cost-cutting would be infrastructure-sharing through 12,000 towers it owns. Evalueserve's Gupta says, "Tower sharing is at a nascent stage in Africa. Other operators should respond to it. Most of them have infrastructure of their own. The opportunity of reducing capex on network is low." Kohli says, "Some firms did hesitate but when we offered our towers, they also opened up".
Kohli says the youth in Africa will be big users of broadband and Internet, a service that Bharti will provide using 3G and high speed packet access technologies. It already has the 3G spectrum in 10 countries and expects in six other countries by next year. The company plans to invest $1 to 1.2 billion in Capex in Africa.
Even though the first year has left Bharti with little to write home about, its most crucial initiatives are still to roll out. It may be naive to dismiss Bharti's African safari just yet. After all, its formidable reputation is built on some incredible innovations, including the pioneering IT and infrastructure model that has since become the gold standard in the global telecom industry. Wait for the next update.
Read the interview with Manoj Kohli, CEO (International) and Joint Managing Director, Bharti Airtel
(This story was published in Businessworld Issue Dated 15-08-2011)