New Delhi: The costs of an acquisition in Africa and payments for third-generation (3G) spectrum and infrastructure took a toll on the profits of Bharti Airtel Ltd, but analysts said the telco could return to its highly profitable ways after a year.
On Thursday, Airtel announced a 31% drop (compared with a year ago) in net profit for the fourth quarter of 2010-11 to Rs 1,400 crore. The telco’s revenue rose by 51% to Rs 16,266 crore over the same period, thanks to the contribution of its now nine-month-old African operation.
The results caused shares of what is now the world’s fifth largest telco to fall 4.7% before recovering a bit; they closed 3.25% down at Rs 357.60 on the Bombay Stock Exchange on a day when the exchange’s benchmark index fell 1.4% to close at 18,210.58 points.
Apart from higher costs, profits of the telco were also hit by rebranding expenses, foreign exchange charges, and a net interest expense of Rs 683 crore. In the last quarter of 2009-10, its net interest expense was only Rs 35.5 crore (net of finance income).
The head of Bharti Airtel’s international operations Manoj Kohli said profitability of the African operation would improve soon. The African operation has a higher cost structure, he admitted, but the company had started working on this and results were already beginning to show in the cost per minute, a metric telcos use to measure their cost efficiency.
Bharti Airtel paid around $11 billion (Rs 49,060 crore today) to acquire its African business from Kuwait-based Zain Group last June. Analysts have expressed concern over the higher churn of customers in Africa and confidence over improving indices such as revenue per minute and minutes of usage.
“The process of rationalization of tariffs has been completed. Zain had been charging a 20-30% premium on tariffs as compared with the market and we have corrected this. The cost will come down as our unique business model slowly kicks in,”?added?Kohli. “We will keep as much of the pricing power as we can.”
The company is also betting big on data services in both continents especially since voice tariffs, particularly in India, have hit rock bottom.
“We have gone live (with 3G services) in 43 cities and we expect to roll out (these services) in 500 towns by the end of the current fiscal,” Sanjay Kapoor, head of Airtel’s India and South Asia operations, said. Airtel has launched 3G services in nine of the 13 circles where it won spectrum in last year’s auction and expects to launch in the remaining four once it receives permission to do so. “Traction is good, but an ecosystem for any new technology takes time to mature and start delivering,” Kapoor said, commenting on the response to the company’s 3G services.
He also said the firm expected to roll out its 4G offering (a broadband wireless access or BWA service) using the so-called long term evolution technology by the end of 2011-12, which will make India one of the first countries in the world to go 4G. And Bharti, which has spectrum to offer these services in four circles, would “ultimately want to offer BWA services across the country”, Kapoor added.
Bharti Airtel’s emphasis on data and broadband services extends to Africa.
“We will be relaunching 3G services in seven countries and also launching (greenfield) 3G services in three countries—Kenya, Congo and Sierra Leone over the next two-three months,” Kohli said.
Mobile commerce will also be a focus for the company in both continents. Airtel Africa will launch the services in two stages of eight countries each over the next two-three months, Kohli said. And in India, the telco plans to launch its mobile wallet services in Delhi and Chennai after launching in Gurgaon earlier this year.
The telco is is also looking at diversifying its revenue streams while reducing its cost through the creation of joint venture tower firms in Africa on the same lines as its Indus Towers Ltd joint venture in India, a partnership with Vodafone Essar Ltd and Idea Cellular Ltd. “The formation of the independent tower companies in all the African countries is almost complete,” said Akhil Gupta, deputy chief executive officer of Bharti Enterprises Ltd, Airtel’s parent company.
That should help, said an analyst from technology consulting firm Gartner Group.
“Bharti’s results reflect the expected drag from its Africa operation. This was expected as the company attempts to streamline operations in the African sub-continent and service debt. Centralization of operations and spinning-off the tower business should ease pressure and unlock value in the short-medium term,” said Kamlesh Bhatia, principal analyst at Gartner. “The drop in competition levels compared to last year will help ease pressure on margins for Bharti and contain churn going forward.”
From $530 million on 31 March 2010, Bharti’s total debt has risen to $13.42 billion as on 31 March 2011. Bharti also repaid some $650 million of its debt in this fiscal year.
Much of the debt was taken on by the telco to finance the African acquisition and pay Rs 15,609.82 crore for 3G and BWA spectrum.
Another analyst said Bharti Airtel would return to its pre-2009 profitability level after at least four quarters of turmoil. “It will take that much time for the data usage to increase and the Africa margins to increase enough,” a Mumbai based analyst working with a multinational brokerage firm said, speaking on condition of anonymity. A lot of work needs to be done to bring down the cost, he added.
Another Mumbai-based analyst at a multinational brokerage firm, who too did not want to be identified, echoed these sentiments. “The drag from Africa operations, and the interest cost and related expenditure will remain for a while, but the profitability that Airtel is known for should return in another four-six quarters if it remains on a similar operational trajectory,” he said.
Overall, Bharti Airtel’s average revenue per user fell by 12% to Rs 194, and average minutes of usage, 4% to 449 minutes. The telco will spend $3.1 billion on capital expenditure this year, including $1-1.2 billion in Africa and $400 million on its Indian towers business, Manik Jhangiani, group chief financial officer for Bharti Enterprises, said. The remaining will go into the India and South Asia business.
For the year ended 31 March, Airtel’s revenue rose 42% over the year ago to Rs 59,467 crore and net profit declined 32.6% to Rs 6,046.7 crore.