Airtels Growth Strategy :Surviving in Africa

Sunil Mittal isnt walking into a park with his plan to buy Zain Telecoms African business its rough
patch and he needed to be doubly cautious. The company feels telecom tariffs are among the highest
in the world. The opportunity is there to slash prices is enormous. Six months ago, it looked as if Sunil
Bharti Mittals play for MTN, Africas largest mobile operator, was an act of great strategic choice. On
February 15, when Bharti declared that Zain, the third-largest telecom operator in that continent, had
accepted its bid, it was clear that there wasnt much of a choice left in such matters.
Bharti Airtels home market is bleeding after the latest price war. Indian markets are getting extremely
competitive .Nowhere in the world are there a dozen or more players unprecedented existence of
12 players are there in India. This has already resulted in a no-holds barred war. Revenues have been
fallen to as low as half a paise a second. Every cmpanys balance sheet is hurting , as per the latest
information available Bhartis Income grew by 7.71 per cent .operating expenses by 11.61 per cent and
profit by 7.47%.Fresh spectrum to improve quality of services isnt available. Bhartis new ventures are
nothing much to write about today - Telecom has sucked all the energy of the company hence Mr
Mittal could not concentrate on insurance; in retail, everybody is struggling including him. Mittal has
to stick to what he knows best and thats telecom. The only emerging market that can offer scale and
future growth is Africa.1 The 53 countries that make up Africa have a combined population of a billion
people. Thats almost as big as India and only a little smaller than China, where Bharti cant go. Only
two out of five Africans have access to mobile services. The demand for mobile services is growing at
an average rate of 25 percent across top 16 African markets. African countries are poor as well, just
like large parts of India.
Stock Market Reaction
Here is the question: if it is such a good idea, why are the Indian stock markets so pessimistic? Bhartis
share fell 9.22 percent on February 15, 2010 ,the day it announced the Zain deal. The reaction was
quite opposite in Kuwait, the home country for Zain, where the market soared 126 points, the largest
single
day
gain
in
over
six
months.
Regulatory difficulties of operating in so many African countries, repatriation of money from these
countries, lack of clarity on mobile technology in Africa [are all] worrying the market.

Annual Report 2010-11 Sri Sunil Mittal , CEO of the company to wrote to shareholders :,
Last June, we turned a new chapter in the history of our Company, when we set foot in Africa, widely referred to as the last
frontier of growth. In one sweeping move, we extended our mobile network across 15 new countries in the continent. The
move truly heralded the arrival of Bharti Airtel on the global telecom map. Although we already had a multi-country
presence in South Asia, entry into Africa introduced a paradigm shift in how we looked at the world and how the world
looked at us.
Our entry into Africa is perfectly aligned with the emerging global reality, where future growth is increasingly going to be
rooted in emerging and developing economies. In fact, Africa and India are predicted to be the fastest growing regions in
the global economy with average annual real GDP growth estimated at 7 percent and 8 percent, respectively, between 2010
and 2050.
Entry into Africa has changed our lives enormously. Our global expansion is anchored in our strategy of transplanting our
successful business model and blending it with local needs. The challenge of operating in multiple socio-cultural, political
and regulatory environments is obviously there. The bigger challenge for the Company, however, is in building a unifi ed
global character embodying the highest standards of corporate governance that Airtel is so proud of. In the last ten months,
we have initiated synchronized action on multiple fronts people leadership, brand presence and the business eco-system.
1

Valuation of ZAIN
Bharti is seeking to pay Zain for the African operations valuation of nine-times EBITDA. Valuation of
six-times of EBIDTA would have been more appropriate, some experts felt. After playing the lead
role in India for almost 15 years, Bharti will for the first time (not counting its Bangladesh investment)
learn to be a challenger in a major market. Zain is present in 17 African countries and is a market
leader in two: Tanzania and Congo. In two others, Kenya and Nigeria, it is a distant second. In Africa,
the three big markets are South Africa, Nigeria and Egypt. Zain is present only in Nigeria .In Nigeria it
has an ownership dispute with Econet Group, but that could be a minor niggle.
The major issue will be to turn around Zain, whose African operations are in losses right now. And it
is not because Zain is a laggard. But it is no MTN either, which is the market leader by far and quite
profitable too. And that begins at getting the organisational culture right.
Fixing the interiors
Unlike MTN, Zain has a centralised command-and-control structure but most of its presence in
Africa has been built through acquisitions, biggest being that of Celtel. The model hasnt worked. Its
outgoing CEO Saad Al Barrak led the telcos acquisition drive. He paid $3.4 billion for Netherlandsbased Celtel in 2005 to enter sub-Saharan Africa, as he wanted to turn Zain from a local company with
600,000 customers in 2002 into a top-10 global operator by 2011.
All of these acquisitions will be diverse companies and to lash them together into a composite
corporate culture will be perhaps the toughest task. The deal poses for an interesting scenario : two
independent entities Zain Africa and Bharti both of which are struggling in their own markets when they merge, managing itself would be a big issue.
Approach towards Integration
This is where Sunil Mittal will be hoping its top team will deliver. As a first step, Mittal has recently
entrusted the responsibility of managing the international business to his trusted lieutenant, Manoj
Kohli. The domestic business is now led by Sanjay Kapoor. At the same time, in preparation for its
global surge, Bharti group human resources head Inder Walia had already begun to build up a global
cadre of senior managers who have worked in different geographies. There is Shireesh Joshi who is
from Pepsi China. Chief Financial Officer B. Srikanth is from Unilever, UK. Joachim Horn, director networks, was the CTO of German Telecommunication major T-Mobile. None of these guys has any
Africa experience but each understands how multinationals build their presence in a new market and
that is likely to help.
Actually the way to understand is to analyse MTNs approach. It has a strong culture that encourages
the understasnding of local culture. Best practices from one location are transplanted into other
geographies. Secondments were routine and that helped bring in best practices from different parts
rather than [being] just HQ driven. That also makes MTNs local units better run and more
empowered to tailor the product etc. to the local market. Till now, Zain has had a very top-down
approach and its local units are not empowered. This is revealed in the companys name itself. Zains
culture is not quite equipped to understand Africa. In fact, even the brand Zain has no meaning in
Africa. It is primarily a middle-eastern name that was brought in here underscoring the point that
headquarters play a big role.

Mittals team will have to find a solution to these seemingly touchy-feely issues but which will
determine how employees see themselves and how customers connect to the brand. Different Zain
businesses have been run like a loose entity, so processes are weak. This cuts both ways as it may be
easier for Bharti to bring in its own processes etc. and knit it closely together. on the other hand, is
simply too canny to thrust his own cadre of managers in the difficult markets of Africa. While there is
no official word, senior officials in Bharti reckon that he will initially rely on Zains local managers.
Kohli is likely to provide the overall supervision, supported by a few key corporate finance and
technology professionals.
Revenue Profile

A.Revenues (A.1..A.3)
A.1Services
A.2Indefeasible Right to use Sales
A.3Equipment
B.Operating Expenses
C. Operating Income (A-B)
D.Income Before Income Taxes
E.Net Income
E.1
E.2 Attributable to Bharti Airtel

(Rs in Crores)
31-03-2008 31-0331-032009
2010
27024.93
36961.55
39615.02
26900.26
36625.04
39003.27
43.62
15.98
521.40
81.04
17.67
90.34
19379.39
26551.88
29633.99
7645.53
10409.67
9981.03
7653.70
9307.29
10097.80
6815.89
8645.83
9301.98
115.07
175.92
199.37
6700.82
8469.91
9102.61

Profile of Segmental Revenues

A. Revenues (A.1..A.3)

31-03-2008 31-03-2009 31-03-2010

27024.93
36961.55
39615.02

A.1 Mobile Services

Segmental Profit
A.2Telemedia(Broad Band)
Segmental Profit
A.3Enterprise Services
Segmental Profit
A4.. Passive Infrastructure Services
Segmental Profit
A5.Others
Segmental Profit
A6.Eliminations
Segmental Profit
P. Segmental Profit Attributable to Bharti-Airtel

21786.01
5212.03
2848.44
510.80
5554.91
1510.34
602.34
73.73
243.10
(579.19)
(4009.88)
(26.88)
6700.82

30360.11
6565.69
3351.74
893.95
8361.16
2788.92
4248.94
212.99
361.14
(1952.49)
(9721.54)
(39.15)

32487.16
5818.50
3415.41
589.74
8359.75
3176.18
3542.54
220.93
582.53
(689.92)
(8772.36)
(12.83)
9102.61

Is Africa New battle Ground

What does Bharti find in Africa that makes it so attractive it tried twice for MTN South Africa and
was even prepared to get into a deal where control of the combined entity wasnt very clear.
3

Zain: Key Performance Indicator

Zain in Kuwait, formerly MTC is the Groups Flagship Operation was established in 1983 and made
history in 1994 by becoming the first telecom operator to launch commercial services in the region.
Customers(000)

2003
2004
2005
2006
2007
2008

1920
3192
13650
27037
42501
63535

Revenue EBITDA
Million
Million
US$
US$
1094
473
1344
557
2254
914
4466
1953
5912
2424
7441
2776

Net Income
Million
US$
346
407
622
1015
1130
1196

Alok Shende, principal analyst of Ascentius Consulting, details the saturation. With 12 service
providers in some of the large circles, there is tremendous pressure on pricing, margins and customer
churns, he says. With 500 million consumers already on board, the next 250 million subscribers will
come from bottom-of-the-pyramid markets without adding significantly to the topline or bottomline.
Cash flows have peaked. This makes for an opportune time for Indias leading telcos to look out for
Greenfield market.
Other geographies are not too attractive. "The markets in Europe and America are already saturated.
The Asian and Gulf markets are slowly moving towards the saturation point. In the markets of Africa,
the inflection point is now and growth is likely to move into a different trajectory," explains
Bandyopadhyay of Spice.
"Africa is where the next phase of growth is," adds Vikas Sharma, managing director at investment
banking firm Nomura India. "Margins that telecom players make there are higher than in India."
There are other plusses. "Bharti could also use Africa's underdeveloped telephone infrastructure to its
advantage by leapfrogging into newer technologies, particularly those related to 3G networks," says
Bundeep Singh Rangar, chairman of IndusView, a cross-border M&A consultancy. "For Sunil Mittal,
Africa is the key."
K. Raman, practice head (infocomm, media &: education) at the Tata Strategic Management Group,
an independent management consulting firm, spells it out: "Africa presents an opportunity for a variety
of reasons. Telecom penetration in African countries varies from 37 per cent 65 per cent. There are
quite a few market with penetration less than 40 percent. That presents an opportunity for subscriber
growth. Tariffs are relatively higher and costs in most telecom operations can be brought down.
Running a profitable operation with low tariffs, while driving growth thorugh rapid subscriber like
bharti and such an approach could work in the African markets as well. This could be a reason why
quite a few Indian companies are interested in the geography.
There is a similarity of business imperatives and therefore, applicability of business models, adds
Parida of Vodafone Essar. Several African markets have relatively low penetration levels and promise
strong growth for telecom.
4

The African market is homologous to the Indian market in terms of its structural similarities, says
Shende of Ascentius Consulting. Africa has apopulation of one billion, similar to Indias 1.2 billion.
Both Africa and India have disparity in income distribution and a high proportion of low income
population. The CINI index, a measure of the degree on inequality of distribution of wealth, is 46.2
for Africa compared to 32.5 for India. In Africa, as in India, higher degree of poverty is not
synonymous with low adoption rates. Large distances, the informal job market and lower penetration
of fixed-line telephony have increased the importance of the mobile phone in the citizens life.
But Africa has its dangers too. There are many countries, and a great degree of varioation. You cant
go in with a one-size-fits-all frame of mind. There are greater political risks and economic risks, says
Sanjay Chawla, telcom strategist, Anand Rathi Financial Services. Inflation, for instance, is afactor.
Adds Nishna Biyani, telecom analyst at Prabhudas Lilladher,
Most of these countries are politically instable. These are shoals that Mittal will have to navigate.
One last question remains: has Bharti been left with the wooden spoon? Did it have to take zain
because there was no other choice, MTN of South Africa - with whom it negotiated twice - having
backed out? MTN was a much larger company, much better run and with a wider footprint (see chart).
The African footprint
India Inc
The Essar Group is planning to invest $2 billion in the telecom sedor in Africa. Late last year, it
acquired 51% of the UAE-based Dhabi Group's Warid Telecom operations in Uganda and Congo
for $160 million. The group has a licence to operate in Uganda and operations in Kenya through
Essar Telecom Kenya. The Yu cellular network in Kenya has close to a million subscribers.
Reliance Communications (RCom) bought Ugandan telco Anupam Global Soft and invested $500
million in rolling out its network. RCom has been trying for Kenya and looking at Zambia. Reliance
Globalcom subsidiary, Flag Telecom, has established itself in Sudan, Nigeria and S. Africa.
Mahanagar Telephone Nigam Ltd has prepared a war chest of $100 million plus for acquisitions in
Africa. It already has a 100% subsidiary in Mauritius, styled Mahanagar Telephone Mauritius Ltd.
Bharat Sanchar Nigam Ltd is looking at smaller buys in Africa, after losing out in the Zain deal. It is
reported to have a $6 billion budget for international takeovers, but hasn't been having much luck. It
recently lost the bid for managing telecom networks of Ethiopian Telecommunications Corp to
France Telecom.
Tata Communications has increased its stake in Neotel, South Africa's first converged communications
network operator, to 56%.
Bharti Airtel: Performance at a glance
Particulars
Unit
s
2007
2008
Total
000 39,012 64,268
customer
s
base

Financial Year Ended March 31

2009
2010
2011
2012
97,593 137,01 220,878 251,646
3
5

2013
271227

2014
295948

Mobile
000 37,141 61,985 94,462 131,34
services
s
9
Broadband 000 1,871
2,283
2,726
3,067
& telephone s
services
Digital TV
000 405
2,297
services
s
Based on consolidated income statement
Revenue
184,20 270,12 373,52 418,94

2
1
8
Mn 2
EBITDA
74,407
114,01
152,85
168,14

8
8
9
Mn
Cash profit
73,037
111,53
135,76
162817

from
5
9
Mn
operations
Earnings
46,784 73,115 85,910 105,09

before tax
1
Mn
Profit after
40,621 63,954 78,590 89,768

tax
Mn
Based on consolidated statement of financial position
Shareholder
114,88 217,24 291,27 421,94
s equity
4
9
0
Mn 4
Net debt
42,867 40,886 84,022 23,920

Mn
Capital
157,75 258,13 375,30 445,86

employed
0
1
0
Mn 0
Ket Ratios
EBITDA
%
40.39
42.21
40.92
40.14
Capex
%
N.A
N.A
N.A
61.59
Productivity
Opex
%
N.A
N.A
N.A
39.25
Productivity
EBIT
N.A
N.A
N.A
25.14
Margin
Return on
%
43.10
38.51
30.91
24.52
shareholder
s equity
Return on
%
31.57
33.29
30.69
20.65
capital
employed
Net debt to time 0.58
0.36
0.55
0.15
EBITDA
s
Interest
time 26.47
29.51
30.38
30.65
coverage
s
ratio
Book value
30.30
57.23
76.72
111.13
per equity
6

211,919

241,148

259844

283580

3,296

3,270

3283

3356

5,663

7,228

8100

9012

595,383

683267

769045

857461

200,718

222025

232579

277770

180581

198,899

195643

241813

76,782

63,792

47853

78643

60,467

42,594

22757

27727

487,668

506,113

503217

597560

599,512

618442

583567

605416

1,087,18
0

1,12455
5

108678
4

120297
6

33.71
66.93

32.49
69.17

30.24
69.21

32.39
72.91

45.13

43.84

45.43

45.20

16.57

13.90

10.98

14.14

13.30

8.57

4.51

5.04

10.79

7.06

5.68

6.65

2.95

2.60

2.51

2.20

11.20

9.09

6.77

7.56

128.41

133.27

132.51

149.49

share
Net debt to time
shareholder s
s equity
Earnings per
share (basic)

0.37

0.19

0.29

0.06

1.23

1.22

1.16

1.01

10.72

17.12

20.70

23.67

15.93

11.22

6.00

7.02

Chairmans Address to Share holders (Annual Report 2013-14)

Dear Shareholders,
In the wake of tepid growth in the US and Europe, emerging and developing markets experienced
significant challenges, particularly in the shape of currency fluctuations. India, in particular, had a
tough year with decelerating GDP growth and persistent inflationary pressure. Africa, the other
significant economic region for us registered accelerated recovery during the year from the global crisis
induced by last years Euro debt problem.
Notwithstanding this economic turbulence, global telecommunications continued to generate plenty of
excitement. The tectonic shift towards data and internet gained momentum on the back of accelerated
smartphone penetration and data tariff rationalisation. While more than 28% of our total base in India
comprises active data customers, the corresponding number exceeds 32% in Africa.
The fact that data traffic nearly doubled during the year clearly points to the big change in revenue
diversification underway in these markets for us.
Mobile money is turning out to be one of the most transformational tools to come out of operators
baskets in Asia and Africa. With 1.7 Mn active airtel money accounts during Q4, we have made a
robust take off in India even though the regulatory environment is still not settled and hence, does not
support rapid penetration. In comparison, Africa appears to be a far more evolved market with 3.5
Mn customers. With a total transaction value of USD 2.2 Bn during Q4 in Africa, I am extremely
optimistic about the growth of this platform on the continent. In India, we successfully participated in
the February 2014
auction for spectrum in the 900 MHz and the 1,800 MHz bands, which helped renew some of our
early licences in the country. These acquisitions are in line with our strategy of building a robust
network for the future and enhancing our leadership position in the fast growing data segment. We
further reiterated our commitment to a data-centric future as we completed the acquisition of
Qualcomms 4G licences in four circles in India.
In-country market consolidation through inorganic expansion is a key element of our business strategy
in Africa. The Company consolidated its market leadership in Uganda and Congo Brazzaville during
the year through its acquisition of Warid Telecoms operations in these countries. It gives me
immense pleasure to inform you that we have become the second largest operator in Nigeria, which
overtook South Africa as the largest economy in the continent.
We ushered in several changes in the top leadership and organisational profile in both the regions.
While Gopal Vittal was designated MD & CEO India and South Asia, Christian de Faria took
overall responsibilities for African markets from Manoj Kohli, who has relocated to India after leading
our foray on the continent over the last three years.
The Company raised equity capital of ` 67,956 Mn from M/s. Three Pillars Pte Ltd., an arm of Qatar
Foundation Endowment through a preferential allotment. Similarly, our wholly owned subsidiary,
Bharti Airtel International (Netherlands) BV successfully completed several rounds of overseas long
dated bond issues across USD, EUR and CHF to raise equivalent of USD 5.3 Bn till date on
extremely favourable terms.
Our commitment to corporate governance received global recognition during the year when
Transparency International, the globally reputed civil society organisation ranked Bharti Airtel fourth
7

among the top 100 emerging market multinationals in a study on corporate transparency and
reporting.
The Company Board also went through changes during the year. While Pulak Prasad and Nikesh
Arora departed the Board after their long and productive association, four new members - Sheikh
Faisal Thani Al-Thani, Ben Verwaayen, V. K. Viswanathan and D. K. Mittal joined us during this
period.
Even as I welcome the new members to the Board, I take this opportunity to express my sincere
gratitude to Pulak and Nikesh for their meaningful contribution towards the success of the Company.
The scope of our philanthropic School Programme in India was expanded during the year to include
new initiatives like Learning Centres and School Quality Support to reach out to an additional 9,900
students over and above over 38,000 students we are currently catering to across 254 schools under the
flagship Satya Bharti School Programme. In Africa, the Our School Programme is now reaching out
to nearly 24,000 students in 45 schools across 17 countries.
Telecom is at the cusp of a transformational change. Accelerated data consumption by a youthful
population is going to be the underlying story of this sector in the future. Our sustained investments for
licensing spectrum, network expansion and strategic acquisitions in different markets positions us well
for accruing incremental dividends in this evolving growth story.
The global mobile market
Scale and structure: The mobile industry alone has seven billion users, generating over US$960 billion
of annual service revenue every year. The majority of revenue comes from traditional calls and texts
(for example, last year 7,800 billion texts were sent around the world last year). However, over the last
few years the demand for data services, such as internet browsing on a smartphone, has accelerated,
and today around 28% of mobile revenue is from data, up from 13% in 2009. Around 74% of mobile
users are in emerging markets, such as India and Africa, reflecting the typical combination of large
populations and the lack of fixed line infrastructure. The remaining users are from wealthier mature
markets, such as Europe. However, the proportion of the population with a phone or mobile
penetration tends to be higher in mature markets (usually over 100%) and lower in emerging
markets, particularly in rural areas, due mainly to lower incomes and less network coverage.
Growth:The demand for mobile services continues to grow strongly. In the last three years the number
of users increased by an average of 9% each year. In 2009 global mobile penetration was only 69%,
and by 2013 it had risen to 98%. Most of the increase in users has been from emerging markets due to
favourable growth drivers young and expanding populations, faster economic growth, low but rising
mobile penetration, and less fixed line infrastructure. The other key area of growth is data, which is
being driven by increasing smartphone and tablet penetration, better mobile networks, and an
increased choice of internet content and applications (apps).
Competition:The mobile industry is highly competitive, with many alternative providers, giving
customers a wide choice of supplier. In each country there are typically at least three to four mobile
network operators (MNOs), such as Vodafone. In addition, there can be numerous mobile
virtual network operators (MVNOs) suppliers that rent capacity from mobile operators to sell on to
their customers. There can also be competition from internet-based companies and software providers
that offer alternative communication services such as voice over internet protocol (VoIP) or instant
messaging services.
Regulation:The mobile industry is very heavily regulated by national and supranational authorities.
Regulators continue to lower mobile termination rates (MTRs) which are the fees mobile companies
charge for calls received from other companies networks, and to limit the amount that operators can

charge for mobile roaming services. These two areas represent around 12% of service revenue for
Vodafone.
Revenue trends:In an environment of intense competition and significant regulatory pressures, the
price of mobile services has tended to reduce over time. However, with both more mobile phone
users, mainly in emerging markets, and more data usage, global mobile revenue remains on a positive
trend and expanded by 2% in 2013.
The global fixed market:The fixed communications market is valued at around US$500 billion.
Over the last three years, revenue from voice services has declined as the demand for traditional fixed
line calls has remained static at around one billion users. In contrast, revenue from fixed broadband or
internet usage on the PC is growing with an estimated 650 million customers worldwide an increase
of nearly 30% over the last three years. This growth has been spread across all forms of broadband
DSL (copper), cable and fibre, and within this, there is a growing preference for the high speed
capability provided by cable and fibre.

Global Telecommunication Revenues :

(US $ Billion)
2009
822
362
170

Mobile
Fixed Voice
Fixed Broad Band

2010
862
340
184

2011
902
319
197

2012
940
298
209

2013
963
277
217

Mobile Users Market

China

Europe

Asia

India

America

18%

17%

Emerging Mature
15%
4%

14%

North
6%

South
10%

Africa

Middle
East

11%

5%

Vodafone had following information at the end of 2013

Revenue 4394 million
EBITDA 1397 million
EBITDA Margin 31.8%
Assignment :
1.Please read this case and get your self acquainted with facts and figures and the story of Airtel ?
2. Which are the areas you feel Sri Sunil Mittal should have given more attention?