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Bharti: Mixed emotions flying around - Views on News from Equitymaster
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Bharti: Mixed emotions flying around
Jun 16, 2010

There have been quite a few news flows on telecom major, Bharti Airtel over the past few days. These are more to do with the key developments that are taking place within the company and the sector. On the company front, the key development is of Bharti formally completing its African acquisition. On the sector front, much is being written about the recently concluded 3G and BWA spectrum auction.

The Chairman of Bharti Airtel, Sunil Mittal would naturally be a very busy man these days. He is busy working on strategies to launch the Airtel brand in Africa (by October this year), for which he seems to be quite excited. On the other, he has clearly expressed his frustration regarding the regulatory issues being faced back home.

Preparation for the African Safari
On this front, a lot is happening for Bharti as of now. After all, the success of its African operations is what will make the company stand out from the crowd. Mr. Mittal would want to get everything right from the word go. After all, he has set an ambitious target of becoming the top operator in Africa by 2015. No room for error in that case! To achieve the same, Bharti is aiming at doubling its subscriber base (in Africa) within a period of three years.

He has created a separate division for managing international operations. This will be headed by long time employee Manoj Kohli, who was heading the domestic operations till recently. Mr. Sanjay Kapoor has now taken over that position. A leading business daily today has reported that Bharti recently re-hired two executives that had left the company a while ago. One of them is Kenya-based Essar Telecom's chief executive, Jayant Khosla.

It is also reported that Bharti is looking to make some operational changes that would facilitate its success. It will be splitting African operations into three markets. One would be English speaking Anglophone. The other would be the French-speaking Francophone. And the third would be Nigeria.

The verdict over the company's move to take over Zain's African assets has been quite divided. It can be clearly asserted from the stock of Bharti underperforming the BSE-Sensex. However, one major concern we had was of the cost of debt that Bharti would have to pay. However, with Bharti stating that interest rates on the US$ 9 bn debt it has taken to acquire Zain would be a minimal 1.9%, our concern has somewhat subsided. Although, forex issues do remain.

Historically, Bharti has been quite a risk averse company. In a recent interview with a leading business daily, Mr. Mittal expressed the same. The original plan was to repay debt by improving and strengthening operations of its African operations. This basically means that the cash flow generated from the African operations will help in repayment of debt. It has also not ruled out the possibility of bringing down debt by selling stake in its tower or parent company.

Anyways, frustration building up back home!
With the conclusion of the spectrum auction processes for 3G and BWA, Bharti has ended up being the company that has shelled out the maximum across both the auctions. Considering that the actual amount Bharti would be shelling out would be way higher than what was initially budgeted, it would definitely be of some concern to Mr. Mittal.

Anyways, he has openly expressed distress over the same. As per an article in a leading business daily, he has confessed to being ‘plagued and somewhat defeated' by the regulatory environment. He is of the view that the government has pushed incumbent players against the wall by trying to increase telephony affordability by inviting new players. His views on TRAI's recommendations on 2G spectrum pricing were also in similar context.

In the past he has gone ahead and termed spectrum pricing as ‘unrealistic' and the whole auction process as having a ‘faulty design'. However, not that everything is done and over with, one needs to move on.

Considering that the input prices for the services that Bharti and other telcos are looking to launch - 3G and BWA - discussions over the affordability of these services are now doing the rounds. The big question is whether companies will take the chance of not keeping prices as low as they are (for 2G services) in order to recover costs faster. However, this would take a certain amount of toll on the volumes (subscribers) desired. However, if they price it too low, it would not be as viable as they sought it to be.

As for BWA, Mr. Mittal believes that the opportunity for cheap broadband is lost. "There is no question. If India wants cheaper broadband, that opportunity has been bypassed. We will not have cheaper broadband," he said recently.

While the top honcho of Bharti Airtel may believe that the opportunity for cheap broadband may be lost, in order to generate volumes, companies will need to make their services affordable. As such, a possible tariff war in the broadband space cannot be ruled out. This is especially considering that certain players have very deep pockets.

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