Airtel became the third-largest telecom service provider in the world in mid-2015, in terms of mobile subscriber base…

June 2015: In June 2015, Bharti Airtel became the third-largest telecom service provider in the world in terms of mobile subscriber base. According to the World Cellular Information Service, its subscriber base now totals more than 300 million across its many operational markets, which include Sri Lanka and Bangladesh as well as 17 countries in the African region.
The company has come a long way since 1995, when it began operations by offering telecom services in Delhi. Its “minutes factory” business model for voice services revolutionised the Indian telecom industry and was adopted widely, not just in the domestic market but also in similar foreign markets. This business model enabled Airtel to offer mobile services at substantially lower rates and resulted in a significant increase in its voice customers and voice service usage.
Over the next several years, aggressive network expansion and declining tariffs in the industry led to the rapid adoption of voice services. With this, Bharti Airtel further cemented its leadership position in the domestic market, despite facing stiff competition from incumbent operators and new entrants. Its total subscriber base grew from 19.57 million as of March 2006 to over 300 million as of March 2015: a compound annual growth rate (CAGR) of 35.40 per cent.
Today, Bharti Airtel is the market leader in terms of subscriber base in most circles in India. In addition, it has consistently been among the top three players in most African markets.

Consolidating its market position
Following the Supreme Court’s cancellation of 2G licences in 2012 and the exit of some operators in a few circles, the competition in the Indian telecom industry has cooled down to some extent. This has enabled Airtel to further consolidate its revenue and subscriber market shares, which was recorded as 30.97 per cent and 23.3 per cent respectively as of March 2015.
In terms of spectrum holdings, too, Airtel has been leading the market with a share of about 16.1 per cent. It has been aggressively acquiring spectrum across bands, not just with the aim of expanding its network coverage but also to serve the rising demand for high-speed data services. In the March 2015 spectrum auction, the company acquired 111.6 MHz of frequency airwaves. In the previous two auctions in February 2014 and November 2012, it had acquired 115 MHz and 5 MHz respectively.
With substantial holdings of liberalised spectrum, Airtel is in a good position to offer high-speed mobile data services across different technological platforms and service levels to different customer segments.

Data services becomes the key growth driver
While voice services have been leading the growth of the telecom industry over the past decade, data has now emerged as the key growth driver. The increasing smartphone penetration on account of declining prices has been fuelling data traffic growth on the networks of telecom operators. Along with smartphone proliferation, the high usage of over-the-top applications and social networking services are other factors driving data growth. Airtel’s total data usage during the quarter ended March 2015 stood at 86.62 billion MB; a growth of 82 per cent over the 47.65 billion MB recorded during the corresponding period in 2014. The operator also witnessed a 41 per cent increase in data usage per customer during the period, which resulted in higher data revenues.
However, the data traffic growth has put pressure on Airtel’s 2G and 3G networks, which are currently facing difficulties in ensuring an optimal user experience. To address this issue, Airtel is aggressively expanding its data network coverage and capacity, earmarking a capex of Rs 64 billion for expanding 3G network coverage in 2015-16. With the acquisition of spectrum in the 2100 MHz band in several circles, it now intends to gradually do away with the intra-circle roaming agreements with other operators and offer 3G services using its own spectrum. This will enable the company to improve the quality of its 3G offerings and also lead to higher incremental revenues.
Keeping in mind the fact that spectrum in the 900 MHz band has better in-building propagation properties than that in the 2100 MHz band, Airtel has also been focusing on using the former to provide premium 3G services. To this end, the company has launched these services in the Mumbai and Kolkata circles under the brand “Platinum 3G” at prevailing tariffs.
Airtel has also been rapidly expanding its 4G footprint as the December 2015 roll-out obligation deadline gets closer. It has already launched commercial 4G services in several cities and has trials under way in many others, including Mumbai, Delhi and Chennai. While the initial roll-outs of the long term evolution (LTE) network have been based on time-division duplex technology, the company will also adopt the LTE-frequency division duplex (LTE-FDD) platform for offering 4G services using 1800 MHz spectrum. This band has a more mature LTE ecosystem and is more effective from the coverage perspective. The operator is expected to use a mix of both technologies to offer 4G services, with a focus on coverage and capacity. In this regard, Airtel has already collaborated with Nokia Networks to launch LTE networks on the FDD platform in six circles. With the launch of commercial 4G services on the LTE-FDD platform, its uptake will increase significantly on account of the technology’s mature device ecosystem.

Enterprise opportunity and Digital India
The enterprise business is another segment that Airtel has been looking to tap for driving revenue growth. The company is keen to capitalise on the growing demand for services like high-speed broadband, machine-to-machine, big data and analytics, the Internet of Things, device management and cloud solutions. This is becoming an important segment for Airtel as enterprise contributes about 10 per cent to its overall service revenues.
According to industry estimates, the Indian enterprise market was valued at Rs 450 billion in 2014. It is projected to grow at a CAGR of 10 per cent per annum till 2019. Among Indian operators, Airtel is best positioned to tap this growing market, considering its pan-Indian wireline and wireless telecom network.
Airtel is also optimistic about the opportunities offered by the ambitious Digital India initiative. It has committed an investment of Rs 1 trillion over the next five years for the implementation of the associated programmes. The company intends to set up robust telecom networks in rural regions to offer services like e-health care and e-education, among others. In this regard, Airtel has already partnered with the Madhya Pradesh government and launched E-shakti, a service that aims to create awareness about the internet and improve literacy among women. In the first phase, Airtel intends to cover six districts in the state, including Bhopal, Gwalior and Satna.
Deleveraging its balance sheet
With its debt burden expected to soar on account of high spectrum acquisition costs, Airtel has been taking several corrective measures to deleverage its balance sheet over the past year. For instance, it divested a stake of about 3 per cent in Bharti Infratel, its tower unit, to global investors for about Rs 19.25 billion. Part of this amount will be used to pare its existing debt.
The company has also been selling its tower assets in the African market. It has reportedly already sold about 11,400 of its 15,000 towers and earned about $1.3 billion in the process, which will again be used for paring debt. Airtel will shortly be selling its remaining tower assets in six other countries as well. According to industry experts, even though the move will result in higher expenses on account of lease rentals, the sale of its tower assets will have a net positive impact on the company’s financials due to opex savings and reduced interest.
Continuing with its strategy of raising low-cost funds in the foreign bond market, Airtel raised $1 billion through the sale of 10-year bonds at a coupon rate of 4.375 per cent. A portion of the proceeds is expected to be used to repay its debt and reduce interest rates.
Rating agencies reckon that Airtel will decrease its debt burden by leveraging its internal accruals as well. Fitch expects the company to use its cash and cash equivalents of about $2.2 billion to deleverage its balance sheet.

Market competition to intensify
A fresh wave of competition is expected in the telecom industry with the entry of Reliance Jio Infocomm Limited (RJIL), which is slated to launch commercial services by the end of 2015. The company has a pan-Indian licence for broadband wireless access spectrum, and has also accumulated significant frequency airwaves across the 800 MHz and 1800 MHz bands in several circles for offering 4G services. The competition that RJIL is expected to provide can be gauged from its investments in building its telecom network. As of March 2015, it had invested Rs 570 billion in acquiring spectrum and setting up infrastructure.
The telecom industry is concerned that RJIL could indulge in a tariff war in order to gain market share. This could severely affect Airtel’s voice revenues. The last time there was a tariff war in the industry, the profit margins of the incumbents had plunged. RJIL is expected to have a nationwide presence, which will further affect Airtel’s pan-Indian revenues.
A counter-view is that RJIL could be rational in pricing its offerings, given the quantum of its investments. This view is supported by the company’s intention of becoming an integrated telecom player and its focus on offering a complete bouquet of services to differentiate itself.
In view of the concerns regarding a tariff war and its impact, Airtel has already hiked data tariffs to capitalise on the rising usage. This augurs well for the company as the growth in voice revenues has remained subdued in the recent past on account of the declining voice realisation per minute (RPM). The reduction in termination rates from March 2015 and in roaming charges by the Telecom Regulatory Authority of India have already started affecting voice RPM. This trend is expected to continue as roaming charges get reduced further.
In the short term, data tariffs could also decline with the rise in competition after RJIL’s services are launched. However, industry experts are of the view that low data tariffs will not continue in the long run as service providers have to earn a return on their investments.

Regulatory overhang continues
Despite the government’s best efforts to reduce regulatory uncertainties, the sector continues to face several issues. For one, the final spectrum trading and sharing guidelines are yet to be released. With spectrum shortage becoming a big problem for operators, speedy implementation of these guidelines would help service providers address the issue of rampant call drops being faced by customers across the country. While Airtel has significantly increased its spectrum holdings, sharing spectrum with other operators would allow it to improve operational efficiency and ensure customer satisfaction.
Another major impediment that is being increasingly faced by operators relates to securing right of way (RoW) from government authorities for laying fibre cable. Not only do operators have to pay high charges for RoW but they must also secure the approval of multiple authorities, resulting in significant delays in network roll-outs. This will affect Airtel’s plans of expanding its fibre network to support the rising bandwidth demand, particularly in metros and Tier I cities as operators continues to ramp up 3G networks and launch 4G.

Positive future
The outlook for Airtel remains positive as it has taken several encouraging steps to maintain its leadership position. The acquisition of considerable spectrum across frequency bands will enable it to fill coverage gaps and also expand its voice and data services to newer cities and towns. Although its short-term operational performance could be affected by RJIL’s entry, Airtel’s long-term position remains strong, given its pan-Indian reach and loyal customer base. However, the company will have to rethink its overseas market strategy as its operations in other countries are turning out to be a drag on its overall financial performance.