Airtel's profits weighed down by Africa acquisition, 3G

The company has raised tariffs in India to counter pressure on margins

The acquisition of Zain's operations in 15 African countries and investment in 3G spectrum in India continued to be a drag on the profits of India's Bharti Airtel in the second quarter, the company said on Wednesday.

Revenue for the quarter ended June 30 was 169.7 billion rupees (US$3.7 billion), up 39 percent from the same quarter last year. But net profit was down 28 percent to 12 billion rupees. The results were more or less a re-run of the last quarter when the company posted revenue growth of 51 percent, but net profit fell by 31 percent.

Bharti Airtel, India's largest mobile operator, acquired its African operations in a $10.7 billion deal in June last year. It also paid 156 billion rupees for 3G and broadband wireless licenses and spectrum in India. The company's debt at the end of the quarter was 600 billion rupees.

Profit before taxes dropped in the quarter mainly on account of a higher interest outgo as a result of the Africa acquisition and investments in 3G in India, and amortization of a 3G license fee, Manik Jhangiani, chief financial officer of the Bharti Group, said during a conference call. The tax rate also increased because of cuts in tax holiday benefits in India.

Bharti Airtel is in an investment phase in Africa and in 3G in India, and a decline in profits because of interest costs is expected for some quarters, said Kamlesh Bhatia, a principal research analyst at Gartner. The company is also going through a restructuring that should see it more centralized and benefiting from economies of scale across its operations in Africa and South Asia, he added.

The company had 221 million mobile subscribers at the end of the quarter, up 4 percent from last year. About 175 million of these subscribers were in India, Sri Lanka and Bangladesh, with Africa accounting for about 46 million subscribers.

To counter the impact of deep tariff cuts on margins in India last year, the company and some competitors raised rates recently. "The earlier tariff structure was not sustainable," said Sanjay Kapoor, CEO of Bharti Airtel's Indian and South Asian operations. The company does not expect subscriber numbers to fall as a result of the increases, as the need for communications is very high in India, he added.

With some newer competitors saddled with issues such as delays in meeting rollout obligations, and investigations into alleged out-of-turn allotment of 2G spectrum, the larger players once again have the power to decide pricing, Bhatia said. The smaller competitors do not have the coverage and quality of service to take a risk and also raise rates, he added.

The company expects strong growth in the number of 3G subscribers, as many people in the country already have 3G-enabled handsets, Kapoor said. The company did not, however, disclose the number of subscribers it has for its 3G services. The current focus is not on acquiring numbers but on building the ecosystem to provide a good 3G experience that will attract customers, Kapoor said. Outside its service areas, the company plans to expand its 3G customer base by roaming tie-ups with operators that have licenses in these other service areas.

John Ribeiro covers outsourcing and general technology breaking news from India for The IDG News Service. Follow John on Twitter at @Johnribeiro. John's e-mail address is john_ribeiro@idg.com

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