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Distress Signals

Sunny Sen | Print Edition: March 3, 2013

It was a cloudy morning in Gurgaon when Bharti Airtel announced its largest ever year-on-year drop in net profit. For one official at India's largest mobile operator, what was even cloudier was the company's financial future. Standing in the office parking lot, he jokingly wondered if he should start looking for a new job.

Maybe he should. But, then again, maybe not.

Analysts say Bharti Airtel's October to December net profit may have slumped 72 per cent from a year ago, but there is a silver lining too - the company is likely to bounce back soon because it still has the largest subscriber base in India. "Airtel is a case of the No. 1 dominant player tottering in the market," says a partner at a leading global consultancy and audit firm. "But it is unlikely to see another such quarter where the fall is so bad, as tariffs will improve and data revenues are likely to pick up."

It has been a stunning fall for Bharti Airtel which was once the toast of the telecom industry in India. The company's founder, Sunil Bharti Mittal, started in 1995 with just one circle in Delhi, but in barely seven years the former bicycle parts-maker had made his company the country's largest mobile operator. His innovative strategy of outsourcing all infrastructure needs helped Airtel grow into a telecom behemoth with a revenue of Rs 71,451 crore and operating profit of more than 40 per cent for over a decade.

But today, Bharti Airtel is saddled with massive debts and competition is nipping at its heels. It has a net debt of Rs 64,000 crore and needs close to another Rs 55,000 crore to renew its second generation spectrum. Worse, net profit has fallen for 12 quarters, average revenue per minute is down and the share price has also slipped about 40 per cent from a high of Rs 534 in October 2007. "If you have Rs 60,000 crore on your books, nobody is going to give you more money at an interest rate of five or six per cent," says Ankita Somani, telecom and information technology analyst at Angel Broking.

What went wrong?

One of the main reasons for Bharti Airtel's financial woes is the bruising competition in the telecom sector. The operator has been hit by dirt cheap call rates, mounting financing costs and foreign exchange losses because of the depreciation of the rupee. But the biggest drain on the company's finances is its money-losing African business.

In 2010, it acquired the African operations of Kuwait-based Zain Telecom for $10 billion and had expected revenues of $5 billion from that business by2012/13. But it is likely to miss that target by close to $1.5 billion.

BHARTI AIRTEL IS BANKING ON ITS NON-VOICE SERVICES WHICH HAS BEEN GROWING AT AN IMPRESSIVE CLIP

"Some of the countries are making money, but we have to get the non-earning countries to make more money," Manoj Kohli, CEO (International) and Joint Managing Director of Bharti Airtel, told a press conference.

Bharti Airtel, 33 per cent owned by Singapore's SingTel, is now in firefighting mode. Last month, it replaced its chief executive, Sanjay Kapoor, who was known for his hands-off style, and brought in former Hindustan Unilever executive Gopal Vittal to head the India operations. Analysts say Vittal's 20-year experience at protecting margins in consumer goods will help control Bharti Airtel's falling margins.

The company has also restructured its India operations in a bid to get closer to its customers. It has split the country into eight regions instead of three in the hope that the new decentralised structure will create a more connected organisation.

"This will drive better cohesion in operations and sales distribution, enable sound portfolio management and ensure sharing of good practices across circles," says a Bharti Airtel spokesperson.

Bharti Airtel is also banking on the higher-margin non-voice services business which has been growing at an impressive clip. Non-voice accounts for 17.3 per cent of the company's total revenues at present, up from 16.8 per cent in the quarter ended September. Average revenue per user from data services rose nine per cent in the October to December over the previous quarter, to Rs 47. To stabilise itself, Bharti Airtel will have to hold on to its long-term customers and continue boosting revenue from data and other value-added-services.

The operator is also pinning its hopes on its buyout of Alcatel-Lucent's stake in the very joint venture company to which it had outsourced its fixed-line and broadband networks. The deal allows it to lease the fixed line and broadband network to other telecom operators.

"They can leverage the network by building 2G, 3G and 4G - all at the same time and optimise spends on all these three," says an equity analyst with an investment bank.

Analysts say Bharti Airtel will benefit from the Supreme Court decision to revoke - in the wake of the 2G spectrum scam - the licences of some smaller players who were cutting into its business. The reduced competition gives the company room to increase call rates, as well as its Indian subscriber base of 182 million. "While these operators are not meaningful players in terms of market share, they were operating at low utilisation levels and were discount players in the market. They were taking away minutes traffic, which was one of the factors that drove incumbents to keep tariffs low," writes Kunal Vora of BNP Paribas in an equities research report.

Most analysts say Bharti Airtel has to increase voice call rates to reverse declining profits. It has already raised tariffs once in January. to meet rising costs, as it faces a huge onetime surcharge on airwaves at a government auction in March. But even that may not be enough.

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