It must be his aggressive, entrepreneurial streak that pushes 49-year-old Sunil Bharti Mittal, chairman and group CEO of Bharti Enterprises, to find innovative ways to replicate his telecom success in other fields like agriculture and retailing.
Bharti Airtel, the flagship company of the group offering all telecom services under its banner, is a well-known success story. From a rather humble start with selling push-button phones, the group, riding on the unprecedented mobile boom in the country, now towers over not just its Indian peers but internationally too.
The largest mobile telecom operator in the country, Bharti Airtel, currently valued at over $40 billion, has in the last 12 years grown from strength to strength.With 44.76 million mobile subscribers as of July 2007, it is a member of the exclusive club of global service providers with more than 40 million customers from any single country.
Vodafone Essar, with 34.6 million mobile subscribers, is its closest rival followed by Bharat Sanchar Nigam Limited (BSNL) and Reliance Communications (RCOM) with 29.7 million and 28.9 million mobile subscribers respectively.
Current status
For Bharti Airtel, the last one year has been particularly good as it witnessed strong growth both in terms of subscriber additions and revenues. From 24.1 million users as of July 2006, there has been a spectacular jump of more than 100 per cent in its user base, giving it an over-24 per cent mobile market share from 21.25 per cent as of July 2006. This, at a time when other large operators such as RCOM and BSNL have been losing share.
Rated among the top 10 performing companies in the world by BusinessWeek, Bharti Airtel’s financials have also received a significant boost. Its gross revenue for the year ended March 2007 stood at Rs 185.19 billion, while net profits were at a healthy Rs 40.6 billion. The first quarter (April-June 2007) financial performance too has been better than forecasted, giving a further fillip to the company’s overall performance.
With a strong balance sheet, Bharti Airtel is not likely to run into any financial constraints for any of its upcoming projects. As one lender says, “We have been with the company from the day it launched services and since then its financial status has improved substantially.Today, its cost of borrowing is one of the lowest in the industry.”
Of late, the company has started looking outwards to generate funds for its expansion plans. This makes good business sense considering that the cost of borrowing funds overseas is relatively cheaper.
With plans to spend $3.5 billion in fiscal year 2007-08 to upgrade and expand its network, Bharti Airtel is clearly looking at another year of sustained growth with a focus on offering services in the rural areas, increasing its wireline base through broadband and IPTV services, and increasing its enterprise base.
Bharti’s edge
So, what is it that has allowed Bharti Airtel to retain its edge and the top slot consistently (except for a short period in 2004 when Reliance pushed itself up to the top position) even in the face of stiff competition?
Telecom analysts believe it is a mix of many Bharti Airtel strengths ?? its management, innovative strategies, sound financials, strategic partnerships and, above all, the entrepreneurial spirit of Sunil Mittal, who is today worth over $10 billion and is the sixth richest Indian in the world according to Forbes magazine.
Shubham Majumder, associate director ?? research, telecom analyst, Macquarie Securities, India is more specific: “Its main strength is its continuous focus on profitability and ensuring sufficient returns on equity and capital investment. Bharti Airtel has shown the true power of the low-cost wireless services model. Very few emerging market operators actually realised the power of this model.”
The high volume, low-tariff model is not new to telecom operators in India, who offer the cheapest mobile services in the world. But “cheap” here does not mean “unprofitable”. Key players, including Bharti Airtel, RCOM and the Tatas, are all believed to earn a pre-tax profit margin of at least 40 per cent before interest and depreciation.
The distinction for Bharti Airtel, therefore, could be that, as Majumder puts it, “All its actions have been undertaken with an eye to achieving superior profitability and returns on capital investment and equity. They have done this by IT outsourcing, managed services, sharing of passive infrastructure, etc.”
An integrated private player, Bharti Airtel has in the last few years structured itself into three strategic business units in order to increase operational efficiencies.These are: mobile services, broadband and telephone (B&T) services, and enterprise services.
The mobile business provides mobile and fixed wireless services. The B&T business provides broadband and telephone services in 94 cities, and the enterprise services business provides end-to-end telecom solutions to corporate customers, and national and international long distance services to carriers.
Operating in all the 23 telecom circles in the country, Airtel’s high speed optic fibre network spans over 43,600 km covering all the major cities. The company also has two international landing stations in Chennai, connecting two submarine cable systems ?? i2i to Singapore and SEA-ME-WE-4 to Europe. Recently, it was awarded a facility-based operator licence in Singapore, which will enable the company to operate international carrier facilities from Singapore. This was a good strategic move as, with SingTel, its 30.8 per cent partner, the licence will help Bharti Airtel leverage the other’s expertise and allow it to provide services to customers on its own infrastructure.
“All Bharti Airtel moves are cautious, prudent and strategic to future business,” says Saurabh Kaushal, industry manager, ICT Practice, Frost & Sullivan. This is, to a large extent, evident in how the company conducts its management processes.
Over the last three years, Bharti Airtel has been attracting a lot of attention globally because of its innovative business model. Setting a precedent in the industry, the company has outsourced most of its operations to IBM, Ericsson and Nokia.
It recently signed a $2 billion network outsourcing contract with Ericsson under which the latter will supply, design, deploy, optimise and manage Bharti Airtel’s GSM network across 15 circles in India.
The company’s rationale is simple. As Akhil Gupta, group managing director, Bharti Enterprises, says, “We want to be the most admired brand in India by 2010.Our core focus area is the customer. What we can do best is customer management, brand management and financing. But on network technology, someone else is better than us, so it is better to have experts handle that for us.”
However, bagging subscribers in this cut-throat business is not easy. For this, Bharti Airtel has to rely on its human resources. Its management team is coveted and is viewed as an asset by the industry.Not only has the company been able to retain industry stalwarts such as Akhil Gupta, Manoj Kohli, Jagbir Singh and Don Price in its top management, it has also been able to win over talented people from BT and Verizon.
After several management shuffles over the last two years, Bharti Airtel has built an integrated organisational structure, which has a strong management core that is driving the company’s strategy and operations.
“Unlike other family-owned businesses, Bharti Airtel is clearly professionalising and decentralising its management. I can’t think of any corporation in India that is still owned by a family and has devolved management upon the secondary, tertiary tiers of managers. You don’t see that happening in a big way in large corporations of Bharti Airtel’s size and scale,” says Majumder.
For Bharti Airtel, it is a deliberate strategy. “Right from the start, we have looked for talented people who are passionate, innovative and ready to take charge,” says Gupta. For this, Bharti Airtel pays generously. The brand obviously helps to attract talent. With employee turnover high in the industry, talented people need to be convinced about the business model, the management efficiency, and the stamp that the company carries.
“One of Bharti Airtel’s key strengths is its brand. The company has managed to build a strong brand that has penetrated all strata of society. No other company has managed to create such a huge impact so fast and so aggressively,” says Romal Shetty, director, risk advisory services, KPMG.
Concerns
However, this does not mean that Bharti Airtel does not have its share of anxieties.Gupta himself says candidly: “For companies that have done well, the fear of sliding into complacency is always there. If anyone was to ask me my biggest risk today, it would be this. It is therefore important to retain that entrepreneurial edge and the ability to make quick decisions while having solid business processes.”
While it is unlikely that Bharti Airtel is not taking measures to cover these potential risks ?? it is constantly reorganising its businesses and adapting to the markets ?? the fact remains that some analysts are concerned about its future as it gets bigger.
According to Majumder, the biggest challenge for Bharti Airtel is to continuously focus on improving its profitability and returns as it enters the rural areas in a big way. Up till this point or even the next two to three years, the growth will be on a large scale, leading to economies of scale and high EBITDA margins which would drive return on equity. But going forward, analysts fear that managing costs may become a challenge.
Till now, the company has been doing very well in capex management because subscriber acquisition and subscriber retention costs, and cost of employee turnover, etc. have not been high compared to the returns.
“But when growth slows down after a few years, all these issues will come up because you don’t know how much to keep spending to ensure healthy returns. As it is, the company is spending $3.5-$4 billion a year,” says Majumder.
Also, there are bound to be certain implications in moving into semi-rural and rural geographies, where the next level of growth will be found. Poor infrastructure and lack of electricity are two problems.
According to Kaushal, an even bigger worry is overestimating demand. “The fact that Bharti Airtel is putting up 40,000 towers may be excessive compared to the demand as rural consumers are low end and the demand for mobile services has yet to pick up. Besides, companies like BSNL have more experience in those regions, apart from first-mover advantage. Therefore, Bharti Airtel will have to be very innovative to get a large slice of that market,” says Kaushal.
Infrastructure sharing will be an important element in serving these areas.But as Namrata Sudan, analyst, Kochhar and Company, puts it: “Bharti Airtel may need to attach greater emphasis on reducing operating expenditure to maintain the company’s current competitive advantage, while tapping the rural markets.”
Bharti Airtel is taking that into account. So far, the progress in the countryside has been good. The company has covered 250,000 towns and villages. It is rolling out much faster than anyone else. According to company officials, margins will definitely be sustained, if not improved.
The rural market will be a largely prepaid one. Therefore, collection and bad debt may not be a big problem. Moreover, Bharti Airtel does not expect the competitive intensity to be very high (at least for some more time) and therefore certain costs involved with brand visibility can be contained for the moment.
In the metros, however, it is going to be a different story altogether. Analysts feel that with the coming of Vodafone, the competition will become fiercer, triggering a war for market share in full earnest.
Vodafone is the number one global telecom player with a strong presence in 3G and value-added services. Analysts feel it will go all out to woo subscribers with offers that will include handset bundling, handset retailing and handset subsidy along with mobile services, which will coerce other GSM operators into following suit.
For now, though, Bharti Airtel is not too worried, saying merely that it welcomes the competition. It also knows that Vodafone will take some time to acquire a pan-Indian footprint, given the spectrum constraints. Initially, therefore, Vodafone’s gain in market share will probably be at the cost of smaller operators.
However, what Bharti Airtel really needs to look into is the perception that its quality of service is not too good. As Shetty says, “Although Bharti Airtel is a strong brand, it is not strong on its quality of service.” Over the last six months, the Telecom Regulatory Authority of India (TRAI) has repeatedly pointed this out to Bharti Airtel as well as to other telecom players. The lack of available spectrum and interconnection problems with BSNL could be reasons for the drop in quality.
Recently, TRAI also pulled up the company for its increase in SMS and outgoing call tariffs. Although Bharti Airtel claims that tariff increase was market driven and applied only to certain schemes, it may well be that, with the Department of Telecommunications and the IT and communications minister keen to keep tariffslow, the company may be compelled to lower rates.
Apart from these major challenges, a few smaller tasks for the company include expanding internationally and improving its data and enterprise services. Lastly, it remains to be seen how quickly the company can introduce 3G in the market, and at what price structure.
Going forward…
For now, however, the company is secure.With Indian wireless operators adding 73 million subscribers in the year to June, the country’s user base is expected to top 500 million by 2010. Of this, Bharti Airtel hopes to retain the lion’s share.Mittal’s stated goal is: “100 million subscribers by 2010.”
Towards that end, the company is targeting to expand its business portfolio and enter into the broadcasting segment with direct-to-home (DTH) and IPTV services. The company has received a letter of intent from the Ministry of Information and Broadcasting for introducing DTH services. And it has floated a wholly owned subsidiary, Bharti Airtel Telemedia, to begin DTH operations around March 2008.
The company has also announced its plans to launch IPTV services to the National Capital Region by the end of 2007. Trial runs are already under way in 1,000 households in Gurgaon.
With convergence on the cards, Bharti Airtel, which is part of the global fixedmobile convergence alliance (FMCA), is expecting to introduce FMCA services by the end of 2007. The service will enable customers to use a single phone with a common number for both mobile and fixed line calls. The technology will also benefit mobile operators since transferring the call traffic to fixed lines reduces the pressure on spectrum. Other members of the FMCA include BT.
Meanwhile, the company has also tied up with four global IT majors ?? AlcatelLucent owned Mobilitec, Germanybased CoreMedia, US-based Adamind and UK’s Apertio ?? to build a service delivery platform (SDP) in collaboration with IBM.
The company is investing over $100 million on the platform, which is expected to be fully operational by mid-2008.The SDP will enable Airtel to offer services related to content, messaging and application through a single platform to all its customers irrespective of whether they use Airtel’s mobile, landline or broadband services.
All in all, given that the demand for telecom services will continue to be robust across all segments, the consensus is that Bharti Airtel has gathered enough critical mass to ensure further growth and build on it.
Recent initiatives
Under the two-year supply and services contract, Ericsson will plan, design, deploy, optimise and manage Bharti Airtel’s GSM network across 15 circles in India.
