In 2010, Indian telecom business was a different world. Business in the country was tough, with wafer thin to vanishing margins, with 14 operators competing in a saturated environment. India was looking tough for Airtel after enjoying years of market leadership. Heavy competition, strict regulatory environment has been eating into telecom profits.
The desire to diversify, especially into Africa, got much stronger after a share-swap deal with South African telecom giant MTN turned sour. In the meantime, a Dutch-headquartered Kuwaiti company called Zain wanted to sell its loss-making telecom business across 15 African countries. Airtel paid $10.7 billion for the business.
Combined, African countries had a population that was ten times the size of India.
Mobiles became the first form of communication across countries that were too remote to lay telephone lines in. Mobile commerce was also picking up fast in the continent which had few resources and fewer banks.
True to the word, Bharti gained a large number of customers, making it the fifth largest telecom operator in customers. However, the acquisition also made its balance sheet very heavy with debt as it coincided with the 3G spectrum sale, bringing its total debt to Rs 59,951 crore by the end of the financial year. The company currently has as much as Rs 62,215 crore in debt. This is after two more rounds of spectrum auctions. In spite of good growth in data revenues in India, the new business is yet to make a great contribution to profits. It did not help at all that the high debt time of Airtel coincided with the high interest rate season in the country.
This state of affairs continued even as the company made commendable strides into many areas of Africa, solving regulatory issues in Uganda, and also launching and marketing its mobile wallet service there. It became the second largest operator in Nigeria, which is the second largest telecom market after South Africa, in the continent. Airtel also launched 3G and other data services in the market, which were picking up as fast as they could, growing by over 50% last year.
The troubles of Africa were twice as many as the achievements. Inflation and high interest rates were killing many economies in the continent. The currency fluctuation also did not let the African business make a fair contribution to the main balance sheet.
The cost of operations was also mounting as they continue to use fossil fuels to run 2G and 3G sites. The distribution costs of far flung areas too made a dent. The margins were also thin as Africa took the easy way into many markets, triggering a tariff war in Kenya and Nairobi back in 2010. The margins are steadily dropping as the overall African Average Revenue Per User (ARPU) went down to $5.6 from $6.3 last year, showing a sharp decline.
The reversal of these cuts will be much slower than in India as the competition still exists. It will not vanish magically, unlike in India, where a sudden licence cancellation of many new players in 2012 changed the fortunes of the likes of Airtel for the better. Airtel will remain a company that is constantly growing, be it in numbers or in services. That would mean it would be steady in investments from a strong parent who has enough patience.
Back home, the burden of debt also became a handicap for Airtel to expand its Indian business, which has started to look good now. The data revenues are ringing in and margins too are picking up slowly as call rates have stabilized. The time is right for Airtel to capitalize its position in the industry as the market leader. That would mean pumping in money into new areas like 4G to stay ahead of challengers like Reliance Jio.
It is time that African business brings in some cash for Airtel’s India plans. That can happen only in the form of a sale. By looking to sell businesses in Burkina Faso, Chad, Congo Brazzaville and Sierra Leone, Airtel has retained the better of the markets like Kenya and Nigeria, which have high potential in the future.
Looking at the share price spurt after the talks were announced, shareholders seem to agree with the sale too. Africa might be a good market, but it is not better than India.
Katya B Naidu has been working as a business journalist for the last nine years, and has covered beats across pharma, healthcare, telecom, technology, power, infrastructure, shipping and commodities.
