The company’s ability to expand Zain’s operations and reduce balance sheet stress will decide the profitability of the deal
From being an Indian player to breaking into the top-five global wireless telecom league is a big jump for Bharti Airtel. While this move is seen as a positive, there are concerns that this jump might have a hard landing.
The balance sheets are likely to be under stress; there has been a Rs 12,000-crore outflow for 3G licenses and additional debt for the Zain acquisition. This will see interest cost rising by around Rs 900 crore ($200 million) a year, says the management. The net debt to earning before interest, tax, depreciation and amortisation (Ebitda) from almost nothing has reached the 2.8 times level.
Though this is below that of Reliance Communications and Idea Cellular, whose levels are way above three times, the stress will persist. The outcome of the 2G spectrum additional payout, yet to be resolved, will also add. On the profit and loss side, there will be additional pressure, as the tax outflow is also slated to rise. The cash tax outflow as a percentage of profit before tax grew to 21.8 per cent in FY10 from 13.8 per cent in FY09. A few more circles, which contribute 45 per cent to revenues, will move out of the tax holiday period within the next two years. The focus will therefore be on the company’s ability to boost Zain’s market share.
To expand its network, Bharti will be looking at network sharing with other operators in Africa. Till now, Bharti has worked on passive sharing. Going for active sharing on such a large scale may be a challenge. This can be a short-term arrangement till it sets its own network, reckon analysts.
Moreover, it will also be taking the minute factory model to Africa. Here, the company outsources network planning and information technology backbone. This allows rapid network expansion and conversion of fixed costs to variable costs. The advantage Bharti will have is that Zain operations are generating cash and the strain will not last longer than many estimates. Moreover, Bharti has demonstrated its abilities in India to innovate and reach out.
