Bharti profit falls 27% on Zain deal

Bharti profit falls 27% on Zain deal

New Delhi: Bharti Airtel Ltd reported a 27% fall in its consolidated net profit largely on account of losses from its recent acquisition of Zain’s operations in 16 countries in Africa, and analysts said the numbers indicate that the telco’s future could hinge on the success of these very operations as well as its ability to make a success of its third generation (3G) services, which it will launch by the end of the year.

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Bharti reported a net profit of 1,661 crore for the second quarter of the fiscal year, down from 2,263 crore reported in the same quarter last year.

The telco reported a 47% jump in revenue to 15,215 crore largely due to 3,891 crore from its Africa operations. Bharti’s revenue in the same quarter last year was 10,379 crore.

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This is the first full quarter for the firm since its acquisition of Kuwait-based Zain’s telecom assets for around $10.7 billion (around 47,500 crore today).

The telco was able to generate around $1 billion in free cash flow, enabling around $800-900 million pre-payment of more than $10 billion debt on its books arising from the Africa acquisition and payment for next generation spectrum in India, Manik Jhangiani, chief financial officer of Bharti Group, said.

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The firm’s profits were also hit by a higher tax rate on an average from its African assets. The tax rates in India average out to around 16-18%, but in Africa they average out to around 30-35%, Jhangiani said.

Winning in Africa

On 8 June, Bharti announced it had completed the acquisition of Zain’s African assets, which added 42 million new subscribers and access to a population of around 450 million across 15 African nations in the African continent. It later acquired an associate firm’s operations in Seychelles.

“We have been able to arrest the declining trend of revenues and Ebitda (earnings before interest, taxes, depreciation and amortization, a measure of profit) in Africa due to the lack of investment by Zain in the assets," said Manoj Kohli, chief executive officer (CEO) of Bharti’s International operations. “There is far more pricing power in Africa and there are early results of positive elasticity in Africa."

Bharti has announced capital expenditure of around $800 million in Africa and the telco is expected to unveil its new branding for the Africa operations next week. The margins in Africa are still low, Kohli said, adding that he hopes to improve them by next year.

The average minutes of usage per user, in Africa, increased by around 9% to 112 minutes while the the average monthly revenue per user (Arpu) fell by 1% to $7.4.

Kohli also said that Bharti was not going to get into a price war in the continent.

“There’s no intention of any price war (in Africa). We want competitive tariffs. We’ve to retain the pricing power in Africa," he said.

Airtel Africa is also looking to leverage its 3G licences in nine countries. “Africa does not have DSL and the median age in the country is between 17-18. This present a huge opportunity for us in terms of providing Internet access," Kohli said. DSL refers to digital subscriber line.

3G in India

The telco expects to launch 3G services in India by the end of this calendar year. Bharti paid around 12,295 crore for 3G spectrum in 13 of the 22 circles in the country. 3G services enable high-speed Internet on wireless devices, especially mobile phones and laptop computers.

The firm does not expect an irrational tariff war in the 3G space, Sanjay Kapoor, CEO of Bharti Airtel’s India and South Asia operations said.

Bharti said it had 195 million subscribers across 19 countries as of 30 September. This number includes 147.7 million customers, or 21% of the market in India.

The telco’s Arpu in India fell 20% compared with the same quarter last year, to 202. Minutes of usage rose by 1% to 454 minutes per user.

“Arpu may never rise. New technologies may lead to some rise, but it would be very little," Kapoor said. The CEO expects revenue to come from greater usage and additional services, including what is referred to as non-voice revenue. Bharti’s non-voice revenue grew from 9.8% of total revenue in the second quarter of last year to 12.7% this year. Globally, non-voice revenue is around 20% of total revenue.

Two analysts said the company’s Africa operations could do better.

“The elasticity shown in Africa is great and the rise in minutes of usage is also positive, but the Ebitda performance was well below expectations," said one of them, who covers telecom for a Mumbai brokerage. Still, he added, the operations are “showing early signs of heading in a very profitable direction".

“The revenue and subscriber additions were good, but the Ebitda numbers (for Africa) were far below expectations," added the second analyst, who covers telecom for a multinational brokerage. Both analysts spoke on condition of anonymity.

The second analyst said the company faces several threats and needs to get its 3G play right and also ensure that it doesn’t lose too many subscribers when the mobile number portability regime comes into effect. This will allow customers to switch telcos without changing numbers.

Shares of Bharti fell 1.77% to 328.15 at close on the Bombay Stock exchange that ended down 0.27% to 20,875.71 points.

Graphic by Yogesh Kumar/Mint