Bharti upbeat on profiting out of Africa

For Sunil Bharti Mittal, the $10.7bn acquisition in June of most of the African assets of Zain of Kuwait was the culmination of more than a decade of trying to enter a market once dubbed “the hopeless continent” by the Economist magazine.

These efforts, which started 12 years ago with a bid by his group, Bharti Airtel, India’s biggest mobile operator, for a telecoms licence in Botswana, have turned him into a staunch believer in Africa’s growth prospects.
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“The next wave is Africa. Minerals and metals, resources – everybody is investing, China’s rushing in there, now Europe is rushing there,” Mr Mittal tells the Financial Times at his headquarters in New Delhi. “You are going to see a lot of action in Africa. It is to my mind the continent of hope.”

The 52-year-old telecoms entrepreneur, who built his mobile company from scratch into a company with nearly 134m subscribers and in the process created a personal fortune estimated by Forbes at $7.8bn, will need all the optimism he can muster for his African adventure.

If successful, the foray could prove visionary at a time when India’s domestic telecom market is suffering from intense competition and the high cost of third-generation spectrum. Bharti is battling proposed regulatory reforms that it argues are unduly burdensome on some of the largest operators.

But if Bharti’s African push is slow to produce results, the group could find itself burdened with debt and struggling to realise Mr Mittal’s ambition of becoming one of the top global telecom companies.

“The company’s leverage and cash-flow protection measures will deteriorate significantly following its largely debt-funded acquisition of Zain Africa,” Standard & Poor’s warned last month after lowering Bharti’s credit rating.

Yet, for Mr Mittal, the acquisition of Zain’s 15 networks in countries including Nigeria and Burkina Faso is not as adventurous as it might first appear.

The assets used to belong to a Sudanese businessman, Mo Ibrahim, who was a business partner of Mr Mittal during the 1990s and once held a stake in Bharti Airtel.

When Mr Ibrahim sold the African assets, then known as Celtel, in 2005, Bharti put in a bid but was trumped by Zain. In the intervening years, the Indian tycoon tried twice to buy South Africa’s MTN before clinching the Zain deal.

Since closing the transaction on June 8, Bharti has held a “leadership conclave” bringing together executives from the 15 African assets it bought. It has begun dispatching Indian executives to Africa. Mr Mittal says there will be up to 50 Indian expatriates out of a total workforce of 6,500 in its African operations.

The immediate challenge is to wring more minutes of usage out of the African networks, particularly in large countries such as Nigeria. In India, it costs below 1 cent a minute to make a call while in the former Zain networks it costs an average of 20 times that.

Mr Mittal said Bharti plans to use its economies of scale and relationships with equipment vendors to extend the coverage of its networks while lowering the cost per minute of calls to help generate more traffic.

Bharti wants to increase its African subscriber numbers to 100m by mid or end-2012 from 42m today and annual revenue to $5bn from $3.6bn now. He also wants to increase earnings before interest, taxation, depreciation and amortisation to $2bn from $1.2bn now.

The deal has been criticised as expensive by analysts, who say it will be earnings dilutive over the next few years.

While Mr Mittal admits Bharti’s debt has risen from minimal levels to just below three times ebitda, he says such levels are normal for most telecom companies. “One good thing is that the new debt we have picked up is at a very good rate, so in some sense our African acquisition costs us in terms of interest outflow every year $200m and that’s pretty comfortable.”

But while Africa offers challenges and hope in equal measure, Mr Mittal’s Indian home market is proving more troublesome. Bharti is fighting regulatory proposals that would require it to make retrospective payments on spectrum it holds and it must pay nearly $3bn for third generation mobile spectrum it acquired during a recent auction.

On top of this, Bharti faces intense competition from 14 rivals. The latest new entrant is India’s wealthiest man, Mukesh Ambani, who is planning to begin offering fourth generation mobile services in the next few years.

Mr Mittal, however, is sanguine about the prospect of more competition. “Competition is there. There are [already] 14 players, so if there are going to be 15 players, that’s fine.”

Grocery debate

Sunil Bharti Mittal has called for New Delhi to open up grocery stores and other retail formats to foreign direct investment, as the country’s largest business houses struggle to make progress in the sector, write Joe Leahy and Amy Kazmin.

India’s Congress-led coalition government is preparing to reopen public debate on allowing foreign investors into so-called “multi-brand retail” stores, which – like Walmart – sell goods from many manufacturers, as part of a battle against rises in food prices.

At least 30 per cent of Indian farm produce is ruined before it reaches consumers due to the highly inefficient supply chain – in particular a lack of cold chain logistics infrastructure.

“India’s cold chain logistics cannot be fixed unless large-scale investments come in and foreign direct investment [in retail] is one of the good sources for this,” said Mr Mittal, whose company Bharti Enterprises is Walmart’s Indian partner.

The Indian government is expected to soon release a consultation paper on foreign direct investment in retail to try to reach a national consensus on the issue.

Tens of millions of “middlemen”, traders who control the supply chain between farmers and retailers, have staunchly opposed FDI in Indian retail, as have millions of small shop owners who fear corporate retailers will put them out of business.

New Delhi has allowed foreign investors to own up to 51 per cent of “single-brand” retail stores, such as Marks and Spencer, but has restricted foreign companies to owning wholesale outlets only.

Bharti has joined up with Walmart in the wholesale, “cash-and-carry” segment but is keen to see its partner enter the high street.