For Bharti Airtel, Africa yet to pay back

Its operations there remain a drag, with quarter gone by showing its biggest-ever loss, with targets set in 2010 still far away

Bharti Airtel's African foray has always meant big pressure on it. On Wednesday, the Sunil Mittal-led cellular operator, with presence in a little more than 20 countries, reported a 115 per cent jump in consolidated net income for October-December, after a decline in the earlier 15 quarters.

However, its operations in Africa continued to under-perform, with a net loss of $154 million. This was the highest quarterly loss since Bharti acquired Zain Telecom's African assets.

Revenue from Africa increased three per cent to $1.16 billion, average revenue per user (ARPU) grew one per cent while voice ARPU declined one per cent without any change in realisation from voice during the quarter. The only respite was a six per cent growth in data ARPU, again toned down as realisation, which determines profitability, from data dropped nine per cent.

Equity analysts are disappointed. An analyst with Deutsche Bank - equity research (Asia), has noted in a report that equity value of Africa operations could be estimated at a negative Rs 27 each share, while Indian operations could be valued at Rs 367 a share. "Africa remains challenging as Ebitda (earnings before interest, taxes, depreciation and amortisation) has stagnated at $300 million for eight quarters."

"One key downside risk for is the slower-than-expected recovery in Africa. Business has suffered on account of a slowdown in the African economy. A pick-up in revenues in six to nine months is expected."

The company said mobile voice pricing in Africa remained stable at 3.31 cents a minute, and overall ARPU rose one per cent to $ 5.8. "However, rates have fallen in a few markets, leading to negative elasticity," said Manoj Kohli, managing director and chief executive (international operations), in the earnings call.

An analyst with Morgan Stanley termed the underperformance as the "biggest key negative".

Bharti had to pay higher taxes due to loss-making markets in Africa, fuelled by high withholding tax. "In Africa, it has to pay taxes on its profit-making entities and is not able to offset the taxes on its loss-making entities. This increases the tax rate. This should change when the rest of Africa becomes positive."

The only good piece of news is Africa had another quarter of strong growth from the 3G data and Airtel Money services across all its markets. "We expect this to sustain due to large investments in brand and network," said Kohli.

Bharti has added 1.9 million subscribers during the quarter taking total user base to 68.3 million. Data revenues in Africa grew 17 per cent quarter-on-quarter while the jump was 93 per cent year-on-year. The good sign is data accounts for 7.4 per cent of Africa revenues. But, forex losses in a few operating countries and a sharp jump in tax provisions were the key drivers of the rise in losses," said Ankita Somani, analyst with Angel Broking.

Selling and distribution costs increased 170 basis points quarter-on-quarter and interconnect costs rose 100 basis point q-o-q in Africa leading to the lacklustre 25.8 per cent overall margin, down 124 basis points quarterly. The reason was higher advertisement spend to launch Airtel Money and increased network costs.

However, funding gap, a key concern for the investors, has been moderating. "Bharti has been financing Africa operations and debt by the cash flows of the Indian operations. The current Ebitda is able to take care of the capital-expenditure requirements, the interest cost of operations and the acquisition debt," said the Deutsche Bank analyst.

Bharti has no "immediate" plans to exit any of the 17 markets in Africa. "We aim to become the No 1 or a strong No 2 operator in each of the markets in Africa with more than 30 per cent market share, and there is "no negative call" to explore possible exits from any of the markets in Africa," said Kohli, adding the growth had come back in Nigeria, the largest telecom market in the continent.

Kohli, who will move out of operational involvements in telecom business starting April, however, could not reach any of the targets - $5-bn revenue from African operations with Ebitda margin at 40 per cent and 100 million subscribers by March 2013 - Bharti had when it entered the market in 2010. A few quarters ago, Kohli had admitted the company would not be able to achieve the targets but Bharti is yet to fix a new timeline.