Selling Africa tower business won't ease Airtel's woes

While the divestment will help cut debt, it will increase the outgo on lease rentals

Since July, Bharti Airtel has sold 11,400 of the 15,000 towers it had across 17 countries in Africa. The move, the Sunil Mittal-led company said, was meant to pare debt and cut capital expenditure on passive infrastructure. The question is, will this be enough to turn around its African operations which it had acquired from Zain Telecom in 2010 for $9-10 billion? Africa, though not in the red, is burdened with high debt (over $10 billion) and low profitability.

Bharti Airtel sold its towers under three deals: 3,100 towers to Helios Towers in July for about Rs 3,000 crore, 3,500 towers to Eaton Towers in September for about Rs 3,500 crore and 4,800 towers to American Tower Company (ATC) last month. While the company did not reveal the financial details of any of the deals, ATC is estimated to have brought the towers for a little more than $1 billion (Rs 6,200 crore), given that valuations in Nigeria are much higher than in any other country in Africa. By selling these towers, Bharti Airtel is estimated to have garnered about $2.1 billion which has been mostly used to cut its debt, Rahul Singh of Standard Chartered said in a note. This will, analysts estimate, bring down the company's quarterly interest outgo to about Rs 3,300 crore in 2014-15 from Rs 3,660 crore in 2013-14.

At the same time, there will be a reduction in the operating cost for the tower business, but the outgo on lease rentals may increase as it is the anchor tenant for the next 10 years for all the towers it has sold. Analysts estimate network operating costs to go up to 26 per cent from 22 per cent of its Africa revenues ($4.49 billion in 2013-14). In an earlier note, brokerage firm India Infoline Finance Limited had estimated that the tower deals would be cash flow accretive to about $100 million annually, given the $320 million in annual savings on tower investments that could offset higher rental expenses. Harit Shah of Karvy Stock Broking says the deal will up Bharti Airtel's profit before tax by 6 per cent.

There could be more such divestments. Bharti Airtel Chief Financial Officer Nilanjan Roy, during an earnings call in July, had specifically mentioned that the company would sell more infrastructure in Africa. Operationally, the company will need to do more. Its operating expenses in Africa have been rising. Bharti Airtel stated a 10.8 per cent increase in operating costs to $631 million in the July-September quarter compared to $570 million in the corresponding quarter in the previous year, primarily on account of investments in network and sales & marketing costs.

"Depreciation and amortisation charges have reduced to $206 million compared to $226 million in the corresponding quarter last year mainly due to the impact of 'assets held for sale'," it said.

A long-standing problem
Africa continues to be a stress point for Bharti Airtel, even as it has turned around its India operations. To add to its woes, operations in Bangladesh and Sri Lanka also continue to underperform. During the July-September quarter, Bharti Airtel reported net profit of Rs 1,383 crore, a 170 per cent rise from the corresponding quarter of 2013-14. It could have posted much stronger results if it did not have to bear the increasing pressure from operations in Africa, Bangladesh and Sri Lanka. Except for India, where it generated a net profit (before exceptional items) of Rs 2,449 crore, Bharti Airtel reported losses in other countries: Rs 753 crore in Africa, up from Rs 288 crore in the same quarter last year and Rs 153 crore, up from Rs 133 crore, in Bangladesh and Sri Lanka combined.)

Also, total revenue in Africa dropped to Rs 6,895 crore from Rs 7,025 crore earlier and in Bangladesh and Sri Lanka to Rs 389 crore from Rs 454 crore earlier. In July-September, capital expenditure in Africa rose to Rs 1,602 crore, a 166 per cent jump from Rs 964 crore, while operating cash flow was barely Rs 28 crore, as compared with Rs 936 crore in July-September 2013. However, capex in Bangladesh and Sri Lanka together almost halved to Rs 66 crore from Rs 132 crore and operating cash flow almost doubled. "At this stage, it would be very difficult to correct operations in Bangladesh. Sri Lanka never paid back. And, pressure in Africa has been increasing. Bharti Airtel has been looking for a buyer for its Sri Lanka operations for quite a long time but is yet to find a suitor. The way Bangladesh is going, it might have a similar fate," says a top analyst with a global consultancy firm. Axiata and Etisalat have been named as potential suitors for Bharti Airtel's Lanka operations in the past but there was no deal.

Credit Suisse, in a note after the company announced its last quarterly results, said that the African operations continue to be a sore point. With rising capex and notoriously high tax levels, the management target of cash flow self-sufficiency in Africa was getting pushed into the future, it added. "Initially, Bharti Airtel needed to grab subscriber market share to penetrate the market. Now, it is time to inculcate value in it," says a Mumbai-based telecom analyst. The performance in Africa is seen as the "biggest key negative" by analysts, including Morgan Stanley.

There's more to it. Mittal's men in Africa failed to achieve any of the targets he had set for them in 2010: $5 billion revenue from operations, EBITDA margin at 40 per cent and 100 million subscribers by March 2013. At the end of September 2014, it had 71 million subscribers, $1.1 billion in quarterly revenue and EBITDA margin of 23.6 per cent.

Probably, Mittal needs a Gopal Vittal for Africa as well. Vittal took over as CEO of India operations in late 2013. The country's largest cellular operator reported its first growth in net profit after 15 consecutive quarters of fall in net profit in October-December 2013, the same quarter in which Vittal took over and started taking tough corrective measures. Since then, Bharti Airtel has reported growth in profits every quarter.