Ready for battle

September 1, 2016. It's a date that Sunil Mittal, Chairman of the $14.45-billion Bharti Airtel, would not forget in a hurry. The launch of Reliance Jio, on that day, has changed the face of the telecom business in the country. Jio's free voice calls for lifetime are expected to affect incumbent telecom operators, especially Airtel. After all, they derive around 70 per cent of their revenues from voice.

The largest telco in India, Airtel has decided to take competition head on. Gopal Vittal, MD & CEO of Bharti Airtel (India and South Asia), says that the company has seen tremendous competition in the past 15-20 years. "It requires the right quality of network and right alliances within the ecosystem. There's surely a pricing pressure due to competition. We will deal with it once they start charging," says Vittal. Jio has offered free data and voice calls till December 31. Already, Airtel is feeling the heat of competition. In its recently declared July-September quarter results, consolidated net profit fell by almost 5 per cent. Revenue growth, at 3.4 per cent, also slowed down.

Airtel had starting preparing for the battle with Jio long ago. In November 2015, it had launched Project Leap, a plan aimed at improving network quality, earmarking Rs 60,000 crore investment over a three-year period. It also rolled out myPlan Infinity, which offers unlimited local, STD and national roaming voice calls and data benefits.

Besides, the telco is now focusing on high-value subscribers. Nearly 20 per cent of its subscribers generate 60 per cent revenues. These subscribers are postpaid customers who emphasise more on quality of service than the tariffs. The tariff war typically plays out in the low end of the market - acquisition of more prepaid customers by lowering rates. Vittal points out that Airtel has simplified the tariff structure for postpaid customers. "From about 6,000 plans earlier, we now have just two plans," he says.

The focus has shifted to safeguarding ARPU (average revenue per user). Airtel's ARPU in quarter ending September stood at Rs 188, which is higher than the industry average of Rs 127 (quarter ending March 2016). With Jio's aggressive tariffs, ARPUs are expected to drop for the industry. Besides Airtel, other telcos will be affected as well, given that they will have to drop rates to match Jio's tariffs. To keep ARPUs intact, Airtel has to offer more data. For instance, suppose Airtel is offering 1 gigabyte (GB) data for Rs 250. It will have to offer substantially more data - say 5 GB - at the same price because consumers are demanding more. This way, the ARPU remains same but the amount of data offered shoots up significantly. The network capacity has to be ramped up to deliver more.

In order to expand its network, Airtel has acquired spectrum organically and inorganically in recent years. For example, it has bought Videocon Telecom's spectrum in six circles in the 1800 megahertz (MHz) band and Aircel's 2300 MHz spectrum in seven circles. Besides, it has spent Rs 43,373 crore to acquire 285.4 MHz spectrum in different bands in the last two auctions. "We have made investments of Rs 1.6 lakh crore in building networks so far," says Vittal.

Spectrum acquisition is the biggest cost component for telcos. It requires huge investments that are difficult to be paid out of cash flows. Telcos take debt to fund these spectrum purchases. That's why Airtel's standalone debt has grown the highest among top 500 companies between 2014/15 and 2015/16. Its debt has risen to Rs 45,743.5 crore in 2015/16, up 112 per cent from Rs 21,569.7 crore in 2014/15.

"The ongoing capital expenditure and future requirements of more spectrum is likely to keep their debt level high. Debt servicing will be under pressure due to inability to improve ARPUs and pressure on EBITDA (earnings before interest, tax, depreciation and amortisation)," says Tanu Sharma, telecom analyst at ratings agency India Ratings.

In order to pare debt, the company is looking at selling some assets. In March, it announced a deal with American Tower Corporation (ATC) for selling some 1,350 towers in Tanzania for about $180 million. Bharti Airtel International (Netherlands) BV, a subsidiary of Bharti Airtel, signed a definitive agreement in May to sell-and-leaseback about 950 towers in the Democratic Republic of Congo to Helios Tower Africa. "The agreement will allow Airtel to focus on its core business and customers, while enabling it to deleverage through debt reduction," said the official release at the time of deal.

In Africa, Bharti Airtel has undertaken tower assets sales in 11 countries and divested telecom operations in two countries (Burkina Faso and Sierra Leone) over the past 24 months. The sale proceeds have helped in deleveraging.

Airtel also has plans to monetise significant stake in its tower unit Bharti Infratel where it owns 71.96 per cent. Recently, the company authorised a committee of directors to sell stake in the company. Analysts say that Airtel could raise as much as Rs 33,000 crore if it brings down stake from current level to 26 per cent. "They are keen on selling more assets but it depends on valuations that they get," says India Ratings' Sharma.

Vittal says that net-debt to EBITDA ratio stands at 2.3, which is comparable to most telcos around the world. "I don't see any challenges in servicing of debt," he says. The rise in competition has shaken up the largest telecom player and it still remains unclear whether Airtel will emerge stronger from the battle.

@manukaushik