Bharti Airtel: Reducing the bumps in African safari

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For the country's largest telecom services provider, revenues from international operations account for a little over a third its consolidated revenues. Bharti Airtel's international footprint extends from Bangladesh and Sri Lanka in South Asia to West and Central Africa. Africa is far the biggest international market for the mobile company, with operations in 17 countries.

The acquisition of Zain's business in Africa in mid-2010 helped it to diversify its India risk, given its leading volume and value market share in India. Besides, the African continent offers higher revenue per user (ARPUs) of around $7 against $4.4 in in 2011. The initial projections, however, are taking time to materialise and Bharti fell short of reaching its revenue and Ebitda ( earnings before interest, taxes, depreciation, and amortization) target for FY13 at $5 billion and $2 billion, respectively. While revenues at $4.4 billion were close, it was the Ebitda number at $1.16 billion which has been the key disappointment. The key reasons have been higher competitive intensity, regulations and political instability.

The management believes rates will be stable and competitive intensity will reduce. It is betting on data growth, as well as mobile commerce through its brand, Airtel Money. Naveen Kulkarni and Vivekanand Subbaraman of Phillip Capital say in Africa's biggest market, Nigeria (35 per cent of Bharti Africa's revenues), revenue growth is improving and competitive intensity is declining.

On the operational front, the company has been able to arrest the fall in ARPUs over the past two quarters. While ARPUs are down seven per cent year on year to $5.8, they have grown 5.4 per cent since the June quarter. Further, capex for the Africa operations has come down from a peak of $235 million in the March quarter to $140 millon currently. If Bharti is to make its African operations click, it will need to grow its revenues at a faster pace and cut costs to improve its Ebitda, static at $300 million for some time.

On the domestic front, things are looking up. The four biggest players in the telecom market have been increasing their revenue market share, with the share of Bharti Airtel, the largest operator, at 29.1 per cent at the end of December quarter, up 40 bps over the year ago period. One major reason for the re-rating in telecom stocks has been the return on pricing power, with ARPU showing a steady increase. For Bharti Airtel, this figure is 37 paise, up 5.6 per cent from the number a year ago.

The key trigger would be the growth of data revenues. While this segment constitutes only 10 per cent of revenues, expect rapid growth, given that both data volumes and revenues have doubled year on year in the December quarter. Morgan Stanley analysts believe data contribution to revenues in the Indian telecom sector is likely to double by FY16 from the current 10 per cent.