 "As Ambani eyes Africa with new telecom venture, should Airtel be worried?")
Airtel, a household name in India, has quietly established itself as a significant player in nearly half of Africa’s telecom landscape. It has emerged as the second-largest player on the continent, trailing only behind South Africa’s MTN.
This journey began fourteen years ago when Bharti Airtel’s chairman, Sunil Mittal, took a bold entry into the African market. Initially envisaged as a replication of India’s telecom success story, Africa presented a vastly different terrain marked by sparse population and political instability, posing daunting challenges for any telecom pioneer.
Despite the initial hurdles, Airtel Africa navigated the turbulent waters, expanding its presence across 14 countries and firmly establishing itself. However, a new challenge looms on the horizon. Mukesh Ambani, the chairman of Reliance Industries (RIL), renowned for disrupting India’s telecom landscape with Reliance Jio’s advent in 2015, is now venturing into the African telecom market, albeit in a different capacity.
RIL, through its subsidiary, is set to offer cutting-edge 5G shared network infrastructure solutions in Africa in collaboration with a local company supported by Ghana. Partnering with Next-Gen Infrastructure Co (NGIC), backed by the Ghanaian government and private entities, RIL’s subsidiary, Radisys, along with Tech Mahindra and Nokia, aims to provide advanced network support across Ghana and subsequently extend its services throughout the continent.
While Ambani’s telecom vendor venture in Africa doesn’t directly compete with Airtel’s broadband services, it signifies his strategic foray into a growing market ripe for digital transformation. With Ambani’s formidable resources and track record of executing large-scale ventures, speculation arises regarding potential future expansions into broadband services, which could potentially challenge Airtel’s dominance and reshuffle the competitive landscape.
Sunil Mittal’s African gambit
Airtel Africa, boasting dominance as the leading or second-largest operator by customer market share in 13 out of 14 markets, has firmly established its foothold with 4G services across the board. Impressively, the Africa unit contributes a substantial 27 per cent to the telco’s consolidated revenues.
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The visionary behind this expansion is none other than Sunil Mittal, a first-generation entrepreneur heralded for his role in catapulting Airtel to the forefront of India’s telecom sector. Mittal’s venture into Africa commenced in 1997, two years after the inception of Airtel in India. Although his initial attempt to penetrate Botswana was unsuccessful, Mittal’s resolve remained unshaken.
Fast forward over a decade, and Mittal seized a daring opportunity in 2010. Bharti Airtel, under Mittal, acquired African operations from Kuwait’s Zain for a staggering $9 billion. This landmark transaction marked India’s second-largest overseas acquisition, trailing only Tata Steel’s monumental $13 billion purchase of Corus in 2007. Consequently, Airtel ascended to become the world's fifth-largest cellphone company by subscribers, solidifying its global stature.
Mittal’s significant investment in Africa followed a setback in the form of an unsuccessful attempt to acquire MTN, the largest telecommunications company on the continent. This move underscored Mittal’s commitment to exploring new markets. Africa presented an ideal prospect for Airtel, which grappled with intensifying competition, plateauing revenues, and burgeoning regulatory challenges in India. However, the reality proved to be more complex than initially perceived.
From aspiration to adversity and back
Airtel had secured a debt of up to $8.5 billion from a consortium of lenders to facilitate the Zain deal, which not only expanded its presence across Africa but also introduced it to markets fraught with financial losses. Mittal likely relied on his extensive expertise in India’s telecom sector, where he had achieved success as an early mover. He understood the nuances of profiting from telecommunications in a country where he had pioneered operations. Africa, reminiscent of India two decades prior, presented similar challenges and opportunities for growth in telecom.
In an interview with CNN, Mittal had said, “We have been looking towards Africa for a long period of time so our entry into Africa has been part of well-considered strategy of carrying the low-cost, high-volume minutes factory that we've developed in India to be brought into Africa.”
“For our business model to succeed you need to have scale. As you deepen your networks into more rural, difficult areas and as you re-balance tariffs you see the usage going up -- both of existing customers and new customers that come onboard,” he added.
Zain Africa had 42 million subscribers and an annual revenue of $3.6 billion. Airtel aimed to replicate its Indian success in Africa, setting ambitious targets of reaching 100 million subscribers and generating $5 billion in annual revenue by 2012-13. However, the ground realities in Africa differed significantly from Mittal's expectations. The continent's vast, sparsely populated areas posed logistical challenges, necessitating extensive infrastructure development. Moreover, navigating diverse regulatory frameworks across numerous countries compounded operational complexities.
By 2016, amidst the disruptive impact of Reliance in India’s telecom market, Airtel faced mounting pressure, prompting discussions of a potential exit from Africa. In 2017, Mittal acknowledged that venturing into Africa had been a misstep, highlighting its adverse effects on Airtel’s operations and finances in India.
Airtel’s profitability enhancement strategies
To bolster profitability, Airtel devised strategies to streamline operations, reduce debt, and fortify its 4G network expansion. Raghunath Mandava, former CEO of Airtel Africa, outlined a strategic pause in 2016 to recalibrate operations, implementing innovative network technologies to enhance efficiency and reduce costs.
“We froze the capex for a year, redesigned the network for each country with 4G in mind, and then swapped the entire network with single RAN technology which allowed us to give 2G, 3G and 4G through software upgrades. The initial investment was higher but we knew it was foolproof for the next five to seven years,” Mandava told Mint.
The introduction of new network technology significantly expanded capacity at minimal additional costs, contributing to revenue and profitability growth. Furthermore, Airtel implemented a revised distribution model for SIM cards, transitioning from large distributors requiring substantial capital to smaller entrepreneurs, thus broadening the company’s market reach.
Airtel Africa also pursued an aggressive strategy to reduce its substantial net debt, which stood at $7.5 billion in 2016-17. This included divesting its operations in Burkina Faso and Sierra Leone for $800 million. Subsequently, in 2019, Airtel Africa undertook a listing on the London Stock Exchange, raising approximately $750 million. It also secured $1.45 billion through pre-IPO placements with seven global investors, including Qatar Investment Authority, Warburg Pincus, Temasek, Singtel, and SoftBank Group International. To streamline expenses, the company opted to sell its towers and then lease them back at reduced costs.
Additionally, significant investments were made in Airtel Mobile Commerce, its mobile money business, with Mastercard contributing $100 million and TPG’s Rise Fund and the Qatar Investment Authority each investing $200 million.
In recent years, Airtel Africa has experienced a robust resurgence in its business operations. This revival culminated in the company achieving its first full year of profitability in FY18, marking a notable turnaround from previous periods of sustained losses. These positive developments have dispelled earlier doubts surrounding Mittal’s strategic decision to enter the African market in 2010. Presently, Airtel Africa aspires to ascend to the position of the continent’s leading telecommunications provider.
Where Airtel Africa stands
Airtel Africa's optimistic trajectory has encountered setbacks due to currency fluctuations. The company reported a post-tax loss of $89 million for the latest fiscal period, primarily attributed to significant challenges posed by foreign exchange volatility. This contrasts with the $750 million post-tax profit recorded in the preceding fiscal year.
Management at Airtel Africa has cited persistent devaluation of the Naira as a major factor negatively impacting the telco’s revenue and Ebitda in FY24, amounting to a $1,042 million and USD554 million decline respectively.
In addition, the company incurred a foreign exchange loss of $1,070 million for the year, with $770 million being treated as an exceptional item.
Despite these challenges, Airtel Africa has witnessed positive developments in key performance indicators. Average revenue per user (Arpu) has increased by over 11 per cent Year-on-Year (Y-o-Y) to $2.6, while the customer base across 14 markets grew by 9 per cent to nearly 153 million in the quarter ending March, FY24. Data revenues also surged by over 31 per cent Y-o-Y to $492 million. Notably, Airtel Africa’s net debt has significantly decreased to $3,505 million.
Analysts view Bharti’s continued investment in the African telecom operation as strategically sound, given Airtel Africa's consistent operating performance. The success of its mobile money unit has been instrumental in unlocking value in the African market, with recent global deals valuing the unit at $2.6 billion.
Although concerns persist regarding the impact of Nigerian Naira devaluation on Airtel Africa’s operating income in FY25, the company’s Q4FY24 revenue and Ebitda exceeded expectations, driven by robust Arpu growth. However, some analysts caution that the full impact of the currency depreciation may not have been realised in FY24 and could continue to affect performance in the upcoming fiscal year.
Africa remains a promising market for telecom companies, particularly with the potential of the digital economy in smaller countries. Airtel Africa’s success with its mobile money unit underscores this potential, while India's digital public infrastructure (DPI) serves as a compelling model for African nations. The efficient and transparent nature of DPI makes it attractive for less developed and developing countries grappling with corruption and inefficiency.
With Reliance’s emerging presence in Africa, there is speculation about its impact on Airtel Africa’s position, given the latter’s substantial investment and growth plans in the region. Whether Reliance’s entry will disrupt Airtel’s established presence remains uncertain, but it certainly signals a shifting landscape worth monitoring.