The Leaning Mobile Towers

From business worries to managing the political environment, the telecom-to-retail magnate has plenty on his plate. Eight points:

1. Monstrous Debt Flagship Airtel in a tight financial spot, thanks to purchase of Zain in Africa; has debt of a whopping Rs 57,643 crore.
2. Slipping Patronage Political backing for Mittal has diminished. There have been several run-INS with government and telecom authorities.
3. Endless Cash Needs Mittal has huge financial needs over the next few years. Just this round of spectrum will put him back by up to Rs 18,500 cr
4. Bruising Battles Mukesh Ambani is within striking distance of Mittal’s telecom business with 4G play Reliance Jio, slated to start this year.
5. Desperate Moves Tie-up with Reliance Jio seen as a desperate move to generate revenue; overseas tower business is apparently on the block.
6. Poor Performance Barring Airtel, Bharti Infratel and Indus, most group firms yet to break even. Airtel registered its first quarterly profit growth in over four years.
7. Retail Woes His joint venture with Wal-Mart broke up late last year. Mittal’s huge investment in Bharti Retail are at serious risk.
8. Worrying Future Prospect of BJP-led government at centre worrying— his closeness to the Congress and differences with BJP are documented

***

The Bharti Group

• Bharti Airtel: Has revenues of Rs 80,000 crore, registered Rs 610 crore in profits in Q3 2013-14, the first profit growth in four years.
• Bharti Infratel: Has turnover of Rs 12,000 crore, earned profit of Rs 410 crore in Q3 2013-14. Has commanding share in the mobile tower industry.
• Bharti Retail: Has over 210 Easyday stores. Its future plans shaky after JV with Wal-Mart broke last year. Estimated revenues: Rs 2,000 crore.
• FieldFresh Foods: JV with Del Monte Pacific, markets processed foods, yet to capture the Indian market. Estimated revenue: Rs 250-300 crore.
• Beetel Teletech: Originally made push button and mobile phones, now also distributes phones and office products. Estimated revenue: Rs 1,500 crore.

***

For some time now, Sunil Bharti Mittal has been conspicuous by his public silence. It began four years ago, when the 56-year-old telecom-to-retail magnate came out unscathed from the investigations into the 2G spectrum scam following the outing of the Radia tapes. The joke was that if you wanted to hear what Mittal—head of Airtel, India’s larg­est private telecom network, with reve­­nues of Rs 80,000 crore—had to say, the only way was to catch him at an inte­r­­national telecom conference or at Davos.

Actually, Bharti Enterprises has been going through tough times of late, and that is making Mittal’s reticence more noticeable. Airtel, which accounts for over 90 per cent of the group’s revenue, has a huge debt burden of about Rs 57,000 crore. At Rs 308 on February 12, its stock price has fallen over 15 per cent from January 2012. If Airtel finally registered a growth in profits in the third quarter of 2013-14, it was for the first time in 16 quarters. And, as a senior source in the company admitted to Outlook, most of the other companies of the group are not as successful. Airtel and Mittal did not comment for this story.

More than the hard numbers, India’s policy and regulatory regime, under which Mittal flourished for years, has not been particularly supportive of him. That was evident when, last April, Mittal was summoned by a special CBI court in a case related to alleged excess allocation of spectrum in 2002. Last year, another partner, Wal-Mart, had a run-in with the law, which led to an inglorious break-up of a high-profile retail joint venture. Moreover, the imminent entry of Mukesh Ambani’s Reliance Jio in the 4G segment has posed a serious challenge to Airtel—and led to much speculation about the politics behind the rivalry between the two billionaires.

For now, with India set for general elections in a couple of months, there is speculation that Mittal will finally bite the political bullet and stand for elections. Mittal has pooh-poohed it all, but there’s no denying that politics comes to him as a legacy. His father, Sat Paul Mittal, was a two-time Congress MP in the Rajya Sabha. In fact, in 1992, Mittal and his father were accused of assisting stockbroker Harshad Mehta’s infamous attempt to allegedly bribe then prime minister P.V. Narasimha Rao (the allegations were never proved).

Mittal’s closeness to the Congress leadership was evident last year when Congress vice-president Rahul Gandhi kept referring to him by his first name at a meeting with the CII. All this makes it all the more intriguing that in recent times, Mittal has had several run-INS with the government and with the telecom authorities. By the end of 2013, there were at least eight cases in which  Mittal’s company was battling the government’s department of telecom (DoT). Even though some of regulator TRAI’s decisions have helped Airtel, a company source says the present TRAI regime has been “extremely rational and difficult to influence”.

Mittal with Sonia Gandhi. (Photograph by AFP, From Outlook 24 February 2014)

It wasn’t always this way. Mittal’s closeness to the powers-that-be helped him navigate the system. After all, without any telecom experience, he got India’s first licence for Delhi. Says business journalist Paranjoy Guha Thakurta, “After the government deregulated the telecom sector and systematically discriminated against BSNL and MTNL, who benefited the most? Who has been supported most by India’s telecom policy regime? There is no doubt it was Mittal’s Bharti Airtel.” That is why, when Mittal criticised India’s regulatory regime as the world’s worst, many eyebrows were raised.

Consider this recent flashback from the 2G scam. Mittal was uncomfortable when the DMK’s A. Raja was appointed telecom minister. That was because Raja made it clear he wanted to break the “cartel” of the big three telecom players—Vodafone, Airtel and Idea—who dictated everything in the Indian telecom industry. It is no secret that Mittal put his weight behind former telecom minister Dayanidhi Maran’s candidature for the top job and wanted him at Sanchar Bhawan instead of Raja.

And as India goes into election mode, Mittal may have the most to worry about, especially if a BJP-led coalition takes charge at the Centre, for Mittal’s proximity to the Congress and his differences with BJP ministers in the past are well documented. Take, for instance, his discomfort during the BJP-led NDA regime—there were numerous instances when then telecom minister Pramod Mahajan publicly chided Mittal.

Even in business, he has not made many friends within his core telecom sector. As revealed in the Radia tapes, he also has had issues with Ratan Tata. Although Vodafone, Mittal’s immediate competitor in the telecom area, should be his most fierce rival, his more publicised rivalry has been with the Ambani brothers. This rivalry has continued through the days of the 2G spectrum scam till date. His rivalry with Mukesh Ambani has sharpened with the latter’s entry into retail. Also, Ambani’s imminent entry into telecom with Reliance Jio’s 4G services—a segment in which Mittal’s Airtel has invested significantly—and also his inroads in Airtel’s bread-and-butter voice market.

Mittal at a Vibrant Gujarat meet with Narendra Modi

Operationally, Airtel faces many issues. Its Africa operations are yet to bear fruit and the coming events in the telecom arena, like the spectrum auctions, are certain to put enormous pressure on its bottomline. Even though top company executives term it as pure business decisions, some of Mittal’s recent “strategic” moves have shown signs of desperation. This includes his reported willingness to exit some of his tower businesses in South Asia, including Sri Lanka and Bangladesh. Recently, he even tied up with archrival Mukesh Ambani for a tower and network infrastructure sharing agreement. Many experts see this as a desperate move by a company in need of cash inflows.

Company insiders are confident and say that it will be able to square the debt in the next three to four years. Actually, Mittal’s problems are expected to multiply with the ongoing spectrum auction, in which prices have gone to unprecedented levels of over Rs 67,000 crore at the time of going to the press. Airtel’s Delhi and Calcutta licences will come up for renewal in November. The company’s other licences will come up for renewal between 2016 and 2020. This makes Airtel’s need for spectrum severe. Says Jaideep Ghosh, partner, KPMG, “Bharti Airtel is more desperate with its licences coming up for renewal. As companies will have to buy spectrum at market prices, it will surely put their business models under pressure.”

Perhaps Mittal’s biggest gamble was when he acquired Zain Telecom’s Africa operations for $10.7 billion. While this acquisition gave Mittal access to 17 countries, it also brought in tremendous fin­a­ncial strain for his company. Acco­rding to Airtel’s last quarter results, the company’s total debt amounted to Rs 57,643 crore and most of it was thanks to his African safari. So did he go wrong in Africa? Says Ghosh, “The Africa market is quite challenging. They tried the low tariff strategy, which did not work as the cost of operations is very high. There are also different regulatory regimes, which is not easy to manage.” And that is quite different from India which is governed by a single regulatory regime.

Lloyd Mathias of Green Bean ventures believes that barring Airtel and its  telecom towers business, Bharti Infratel, and Indus Towers, Airtel’s joint venture with Vodafone and Idea, Mittal’s other ventures have not seen great success. This includes Field Fresh, Bharti Realty, Bharti Axa Insurance and Centum Learning.

But perhaps Mittal’s biggest embarrassment was when his tie-up with Wal-Mart ended last year after a five-year affair. While officially it was forced by regulatory issues, the cracks were gradually becoming visible. Insiders say Bharti Retail’s expansion plans were getting severely affected as the foreign partner had stopped all expansions, as a result of which the group’s much-publicised expansion and plans to invest $2.5 billion by 2015 were getting stifled.

Now Mittal has the difficult task of justifying his investments in Easyday front-end stores, as Wal-Mart has retai­ned the back-end Best Buy cash-and-carry stores, normally the backbone of a retail operation. If he expands his retail operations, which he intends to, he has to bring in investments not just to incre­ase his store network but also to forge back-end linkages with existing cash-and-carry players, or open his own. And that would mean more investment, something the group is stretched for.

Mittal’s presence at Narendra Modi’s Vibrant Gujarat meet a few years ago and his praise for the Gujarat chief minister, who is now the bjp’s prime ministerial candidate, has not gone unnoticed within Congress ranks. Some would argue that it is normal business practice. But for Mittal, there’s too much at stake. It’s not business as usual.