Five years later, Airtel's Africa operations still struggling to hit targets

Five years ago, Bharti Airtel, the India–based mobile telecom firm bought Zain Africa's regional operations in a $10.7 billion deal with the hope of turning around assets that were in the loss-making zone of $100m.

Bharti’s plan was to become a global competitor spread across some of the world’s fastest growing markets in sub-Saharan Africa and Asia.

To achieve this plan, Bharti invested in the Airtel Africa business with focus put on growing subscriber numbers from 42 million in 2010 to 100 million by 2013 as well as improving the segment’s revenues.

In its strategic plan, Bharti had given itself 2013 as the year for achieving these targets but five years on, none has been achieved and it is beginning to seem like the multinational could have bitten off more than it could chew.

According to results released last month, as of June 30, 2015, the Airtel Africa segment had 78.3 million customers, 21.7 million shy of the 100 million subscribers it had set to achieve by 2013.

In the same period, the segment posted a net loss of $154m, widening from the $137m it had registered as of March 31, 2015.

Total revenue earnings dropped to $970m (Shs3.5 trillion) from $1.16b (Shs3.89 trillion) posted as of March 31, 2015, which according to analysts, could in the long run be a drag-on on Bharti’s consolidated earnings.

Weakening currencies

The drop in earnings, according to notes published along with the teleco’s results, were brought on by heavy currency depreciations that have since the beginning of the year patronised Africa with an average depreciation rate of more than 21.6 per cent.

For a telecom to operate and generate the much-needed revenue and profit, it needs some level of economic stability in the various countries of operation. Many economies across Africa have been facing headwinds since 2014.

By June 30, 2015, Airtel’s earnings in all its 17 markets in Africa had been heavily eaten into with the worst cuts happening in Madagascar, whose currency depreciated by 37.5 per cent.

Ghana’s cedi depreciated 30.7 per cent, Nigeria's naira (28.3 per cent) and the Ugandan shilling by 26.9 per cent, all of which had a significant knock-ons on Airtel Africa's earnings.

In Seychelles, the currency registered a 22.8 per cent depreciation compared to Tanzania’s 20.9 per cent and Zambia’s 19.2 per cent.

Airtel conducts business in local currencies in all the countries it operates. However, it has debt obligations, equipment purchases and service providers that bill in dollars, hence the rise in foreign exchange losses.

At the time of acquisition, Bharti, which has a combined subscriber base of 324.3 million customers in its 20 markets, had secured a $8.5b (Shs31.1 trillion) loan facility to accelerate its growth.

Optimistic

But Christian de Faria, the Airtel Africa chief executive officer, exudes an optimistic view of the firm's future on the basis of growing subscriber numbers that have gone up to about 78.3 million – notwithstanding the 2013 target of 100 million customers.

While Bharti Airtel is the third largest mobile provider in Africa, the telecom has not leveraged its large spread to lift the Africa segment out of the losing abyss – at least not in the last half decade.

This, analysts say, presents the company with a dilemma, which may force it into ‘risky' investment decisions at a time when economic fundamentals are not reading right.

A report published by Credit Suisse, a research and credit rating firm, describes Africa as a ‘pain point’, pointing to the continent’s dwindling fortunes amid heavy currency depreciations, political uncertainty and falling crude oil prices.

“Africa continues to be a pain point—with external factors (currency fall, economic weakness) and crude oil fall compounding an already tough competitive and regulatory environment,” the report published in April says, stressing the challenges awaiting potential investors.

But Bharti could be prepared to splash some more cash given that Sunil Bharti Mittal, the founder and chairman of Bharti Enterprises, recently told participants at the World Economic Forum in Abuja that “we will invest $1b (Shs3.66 trillion) in Africa per annum over the next few years.”

At the time, according to the company’s financials, the firm had already invested more than $5b (Shs18.3 trillion) in network upgrades, expansion and creating new platforms such as mobile money and data connectivity among others.

'Second fiddle'

When Bharti entered the African market the logic had been simple - the continent had over a billion people who needed telecom services, which were available but only to a rich few, who through average revenue per user (ARPU), illustrated they had the money to spend on telecom service.

ARPU is a measure used by communications companies to give a glipmpse of what customers on average spend on calls, allowing them to track revenue sources and growth.

However, the logic could have read off the grid because Airtel Africa, which operates three divisions, including Anglophone, Francophone and Nigeria markets, continues to play second fiddle in most of the markets it operates in.

This, along with other challenges appear to have forced the multinational to rethink its strategy on the continent as it is beginning to show willingness to exit some markets.

In Nigeria, Airtel is still engaged in legal disputes since the Zain acquisition. This is compounded by other challenges such as capital controls on dollar purchase and the drop in oil prices has greatly reduced subscribers' spending power.

In Kenya, Adil El Youssefi, Airtel Kenya's CEO, warned recently that the telco could be forced to quit the market “if government does not curb ‘anti-competitive’ behaviour by the market leader (Safaricom) which has condemned competitors to losses”.

However, Kenya's industry regulator responded bt telling Airtel to compete or exit the market.

Last month, Airtel confirmed it would exit Chad, Sierra Leone, Burkina Faso and Congo Brazzaville, selling its stake to French giant - Orange (formerly France Telcom) at $1b.

According to market analysts, Bharti decided to sell the four subsidiaries to fund its Nigerian arm as it seeks to make substantial inroads in a market dominated by MTN and Globalcom.

As of June 2015, MTN had 62.8 million subscribers followed by Globalcom which has 312.5 million and Airtel at 29.5 million.

However, in notes published along the June 2015 financials, Airtel said the decision to sell part of its Francophone division (the four franchises) had been informed by the need to let Orange Telecom, which understands those markets sufficiently, serve customers.

About Bharti Airtel

Bharti Airtel has a combined subscriber base of 324.3 million customers spread across 20 markets. It has operations in 17 African countries, India, Bangladesh and Sri Lanka.

It is the third largest telephone operator after China Mobile and Vodafone Group. The telecom who founded by Sunil Bharti Mittal who is also the current group chairman.