Bharti Airtel's overseas operations continue to struggle

Gopal Vittal took over as chief executive officer (CEO) of Bharti Airtel (India) when the company was under stress.

The appointment seems to have helped.

The country’s largest cellular telephone operator reported its first growth in profit, after 15 consecutive quarters of fall in net profit, in October-December 2013, the same quarter he took over. Since then, Bharti Airtel has reported growth in profits every quarter, ensuring better performance in the next one.

However, while Vittal was able to take tough but needed corrective steps to ensure an India growth story, Africa continues to add pressure on the balance sheet.

Added to its woes from abroad are Bangladesh and Sri Lanka now.

Even a couple of quarters earlier, Bangladesh had reasonable performance.

But the numbers in July-September showed Bharti needs to re-look at its business there.

As for Sri Lanka, it has never shown Bharti any profit. In the July-September quarter, Bharti Airtel reported a net profit of Rs 1,383 crore, a 170 per cent rise from the corresponding quarter of 2013-14.

It could have reported a much stronger result if it did not have to bear the increasing pressure from operations in Africa, Bangladesh and Sri Lanka.

India alone has generated a net profit (before exceptional items) of Rs 2,449 crore or Rs 24.49 billion; however, it had a loss of Rs 753 crore (Rs 7.53 billion) in Africa and Rs 153 crore (Rs 1.53 billion) in Bangladesh and Lanka.

The corresponding figure for these regions last year was a loss in Africa at Rs 288 crore or Rs 2.88 billion and one of Rs 133 crore (Rs 1.33 billion) in Bangladesh and Lanka.

Net income (before exceptional items) in India was at Rs 967 crore (Rs 9.67 billion).

The figure jumped 2.5 times in July-September as against the same quarter of FY14. The loss from operations in Africa, Bangladesh and Sri Lanka jumped 1.6 times.

Also, total revenue in Africa dropped to Rs 6,895 crore from Rs 7,025 crore earlier.

That from Bangladesh and Lanka dipped to Rs 389 crore from Rs 454 crore earlier. In July-September, capital expenditure in Africa rose to Rs 1,602 crore or Rs 16.02 billion, a 166 per cent jump from Rs 964 crore, while operating cash flow was barely Rs 28 crore or Rs 280 million, as compared with Rs 936 crore in July-September 2013.

However, capex in Bangladesh and Lanka together almost halved to Rs 66 crore (Rs 660 million) from Rs 132 crore (Rs 1.32 billion) and operating cash flow almost doubled.

Ebitda (earnings before interest, taxes, depreciation and amortisation) margins in Africa came down to 23.6 per cent in the quarter from 26.9 per cent in the corresponding quarter last year, a fall of 330 basis points.

Operations in Bangladesh and Lanka also underperformed, with the customer base declining 11 per cent and total minutes of usage by 17 per cent.

Net addition of subscribers in South Asia (Bangladesh and Lanka) dropped by a huge 3,123 per cent, mainly because of poor performance in Bangladesh.

Average revenue per minute (Arpu) in the voice segment dipped six per cent in Africa, to $4.1 and realisation from voice by seven per cent, to $0.03.

As in India, the non-voice revenue contribution also rose to 23.8 per cent from 21.5 per cent at the end of the June quarter.

Data usage per customer increased by 10 per cent but realisation from data dipped nine per cent, Data Arpu remained flat.

But, Christian de Faria, its CEO for Africa, said after the results announcement that the impact was in line with expectations.“We are optimistic about the potential in Africa, despite these aberrations,” he added.

South Asia Arpu also dropped to Rs 125 from Rs 138, and data Arpu rose to Rs 45 from Rs 38 in the previous quarter.

Thumbs-down on elsewhere Analysts have remained sceptical about Bharti Airtel’s operations abroad. “At this stage, it would be very difficult to correct operations in Bangladesh.

Sri Lanka never paid back. And, pressure in Africa has been increasing. Bharti has been looking for a buyer for its Sri Lanka operations for quite a long time but is yet to find a suitor.

The way Bangladesh is going, it might have a similar fate,” said a top analyst with a global management consulting firm, with experience of working for a rival telco.

Axiata and Etisalat have been named as potential suitors for Bharti's Lanka operations in the past but there was no deal.

“Geographical expansion did not work for Bharti and it only increased its burden. While India continues to show better performance, sustainability in the overseas market is becoming an issue for Bharti,” added the analyst.

The African operations continue to be a sore point. Credit Suisse, in a note after the company’s quarterly results, stated that with rising capex and notoriously high tax levels, the management target of cash flow self-sufficiency in Africa was getting pushed into the future.

However, the company said in a quarterly investor note: “The contraction in voice revenue (in Africa) was primarily on account of seasonality,regulatory and environmental factors.

Operating expenditure increased…primarily on account of investments in network and sales & marketing costs.” “Initially, Airtel needed to grab subscriber market share to penetrate the market.

Now, it is time to inculcate value out of it, which is yet to see any indication,”said a Mumbai-based analyst.

The performance in Africa is seen as the “biggest key negative” by analysts, including Morgan Stanley.

There is also rising debt, of Rs 62,215 crore ($10.09 billion).

It began rising after it bought Zain Telecom’s Africa assets to enter one of the most under-penetrated markets, in 2010.

But, unlike its competitors, it did not have a comprehensive infrastructure back-end and required fresh investments.

To date, Bharti is yet to achieve any of the targets ($5-bn revenue from African operations, with an Ebitda margin at 40 per cent and 100 million subscribers by March 2013) that it had cited when it entered Africa.

At the end of September 2014, it had 71 million subscribers, $1.1 billion of quarterly revenue and the Ebitda margin was 23.6 per cent.

If Mittal stays with his dream of cracking the African continent, analysts say it will remain a pain for a few years, unless a miracle happens.