PROJECT ON BHARTI AIRTEL LIMITED

Submitted to Prof. Biswatosh Saha IIM Calcutta

Submitted By Diptiman Banerji APSM - 03

CONTENTS
Acknowledgment Page 3

Executive Summary

Page 4

Introduction (Company Overview)

Page 5

Background Mobile Telephony in India

Page 6

Strategies taken

Page 11

Latest Moves

Page 18

Present Outlook

Page 22

Bibliography

Page 23

ACKNOWLEDGEMENT
I am particularly indebted to Prof. Biswatosh Saha, who, through his in-depth analysis of different topics on Strategic Management during our class-room & satellite sessions, arose in me a curiosity and a genuine interest for the subject. Thanks are also due to Prof Sushil Khanna & Prof Prarthan Desai, who also influenced my thinking on Strategic Management.

EXECUTIVE SUMMARY

Bharti Airtel Ltd (henceforth also referred to as BAL) started with single circle operations in 1995 and has steadily grown to be the most dominant Telecom player in India today. Along the way, it has encountered numerous challenges, strong competition which is at par with the best in the world and various regulatory road-blocks. How Bharti Airtel managed to be the No 1 in the Indian Telecom space is an interesting journey in itself and the same has been presented in the following pages. The Indian communications scenario has transformed into a multiplayer, multi product market with varied market size and segments. Within the basic phone service the value chain has split into domestic/local calls, long distance players, and international long distance players. Apart from having to cope with the change in structure and culture (government to corporate), BAL has had to gear itself to meet competition in various segments basic mobile services, basic land-line services, long distance (LD), International Long Distance (ILD), Broadband Services, and Direct-To-Home (DTH). This report on Bharti Airtel is done as a narrative to describe how Bharti Airtel Ltd grew over the last 15 years in the dominant position that it is in today. Objectives of the study are: What strategies & innovations Airtel has taken over the years, to defend and increase the market share. Analysis of the competitors of the Airtel and what strategies Airtel is implementing to beat its competitors. Outlining the various innovations undertaken by Airtel, which have helped it to continue to be the market leader in India.

INTRODUCTION (Company overview)

Bharti Airtel Ltd was incorporated on the 7th of July, 1995 as a Public Limited Company & one of the first companies to enter the Telecom Services business in India. As on date, Airtel provides mobile services in all the 22 telecom circles in India, Sri Lanka and Bangladesh. It was the first private operator to have an all India presence. Airtel provides Telemedia services (fixed line and broadband services through DSL) in 89 cities in India, DTH and IPTV services also. Sunil Bharti Mittal, the founder-chairman of Airtel, began his journey manufacturing spare parts for bicycles in the late 1970s. His strong entrepreneurial instincts gave him a unique flair for sensing new business opportunities. In the early years, Bharti Airtel Ltd established itself as a supplier of basic telecom equipment. Mr. Sunil Mittal jumped at the opportunity provided when the government opened up the sector and allowed private players to provide telecom services. Bharti Airtel Ltd accepted every opportunity provided by this new policy to evolve into India's largest telecommunications company and one of India's most respected brands. Airtel was launched in 1995 in Delhi and is today present in all of Indias 22 telecom circles. Airtel had gross revenues of Rs. 396,150 million1 (for year ended March 31, 2010-Audited) & a customer base of 131 Millon2 customers as of 31st March 2010. Airtel is a fully integrated telecom player offering end to end solutions: Wireless Services o 2G/3G o Rural Market o Sri Lanka o Bangladesh Telemedia Services o Fixed Line o Broadband o IPTV DTH (Direct-To-Home) Media Enterprise Services o Carriers o Corporate Passive Infrastructure Services
1&2

Source http://www.airtel.in/wps/wcm/connect/about+bharti+airtel/Bharti+Airtel/Investor+Relations/Conferences+and+Events/P G_IR_ConferenceEvents2010_2011

BACKGROUND - MOBILE TELEPHONY IN INDIA

The mobile telephony revolution started in India when the government decided to allow private sector participation in the Indian telecom sector. In 1994, the Department of Telecommunications (DoT), Government of India (GoI), issued licenses to private Bharti Airtel to start mobile services in the four Metropolitan cities of Delhi, Mumbai, Chennai, and Calcutta (now Kolkata). In August 1995, 19 more circles obtained mobile licenses. Kolkata became the first city in India to get a mobile network when mobile services were started there on July 31, 1995, by Mobile Net, a joint venture between the Modi group of India and the Australian company Telstra. In the initial days of mobile telephones being introduced, they were out of the reach of most Indians as airtime charges were extremely high. But all this changed when the government introduced the revenue sharing method in the National Telecom Policy announced in 1999. Companies such as BAL lobbied heavily for the introduction of a revenue sharing policy. On October 19, 2002, BSNL became the third operator to start mobile services in the country by starting its cellular services in the country. The market became more competitive with the entry of more players into the sector. The subscriber numbers started to swell with tariffs falling due to the intense competition among the players and the reduction in the license fees paid to the government. In 1999, the fixed service telecom operators were allowed to provide mobile services over a limited area using CDMA technology. A bitter legal conflict arose between the fixed service operators and the cellular operators when Reliance Infocomm Ltd. (now a part of Reliance Communications Ltd.), a fixed service operator, started to provide virtually complete mobile services using CDMA-WLL (Wireless in local loop), without a cellular license, allegedly by misusing the loopholes in the telecom policy of 1993. Eventually the GoI stepped in and cleared up the mess by introducing the Universal service telecom license in 2004. The Uniform telecom license did away with the practice of issuing separate licenses for fixed, cellular, ISP, long distance etc. and introducing a single license whereby the service providers could provide any service using the technology of their choice. This further fuelled the growth in the sector with almost all the fixed service operators (including Tata) starting to provide cellular services. The number of service providers increased to six in almost all the circles. This also fuelled a convergence in the telecom services being offered as the service providers started providing all the services. The number of mobile phone users overtook that of landline users in October 2004, going up to 44.9 million. With competition intensifying in this sector, small players like RPG cellular and Fascel sold out to bigger players and exited from the sector as they could not infuse the capital needed. This resulted in consolidation of the telecom sector, with only a few big players remaining in the market. During the same period, some foreign players like AT&T exited the Indian telecom 6

market citing reasons such as lack of clarity in the policy regarding foreign investment in the sector and the falling Average Revenues Per User (ARPU). As of March 2009, mobile subscribers accounted for 86% of the telecom subscribers in India. The mobile subscriber base grew from 22 million in 1999 to 429 million by 2009 (Refer to Figure below for Growth of Mobile subscriber base in India).

Growth of Subscriber base from 1999 to 2009 (in million) (Source TRAI Annual report, 2008-2009, page 5)

The growth of Tele-density from 2004 to 2009 also shows a marked increase, as depicted by the following graph.

Growth of Teledensity from 2004 to 2009 (Source TRAI Annual report, 2008-2009, page 32)

In addition to the huge population and high growth rates, the attractiveness of the Indian telecom market stemmed from the fact that mobile tele-density in the country still remained quite low as compared to developed countries or China. Though there was still scope for further growth in urban areas, the huge rural population in India provided the companies with a big growth opportunity. As of end-2007, rural consumers accounted for just 21%. According to leading information technology research and advisory firm, Gartner Inc. (Gartner), the Indian mobile services market would witness a huge growth by 2012, with the subscriber base increasing to more than 737 million and revenues exceeding US$37 billion. By this time, rural telephony was expected to grow by four times. The GDP of the country was growing at a sound pace and the per capita income of India stood at US$ 797 for the year 2006-2007 while it was US$ 460 in 2000-2001. Analysts felt that this boded well for the companies operating in this segment. The rise in income of the people in India coupled with the fact that call tariffs were the lowest in the country were expected to help the market grow further. The blended ARPU per month for GSM operators stood at Rs. 275 while that of CDMA operators stood at Rs. 173, as of January 2008. The ARPU was expected to fall further in the future with the major telecom companies constantly engaging in price wars to drive up volumes at the cost of margins. The market was also expected to witness many changes with the introduction of new technologies such as WiMAX and 3G22 in 2009 and mobile number portability some time later. Moreover, with the developing market in the West reaching high levels of saturation (70% in US and 100% in some European markets), many global telecom operators were looking toward emerging markets for their growth. And with India witnessing the fastest growth in this sector, and the country increasing the limit on foreign investment in it to 74% in 2007, many of these companies were eyeing the market keenly. However, analysts felt that the multinational companies entering India would find the ground realities of operating in this market rather challenging. The Indian companies operating in this market had a good understanding of the market and many of them were being led by powerful people who had immense clout in India. Analysts felt that these people would have no qualms about manipulating the public policy to their advantage. BHARTI AIRTEL LTD. The foundations of the Bharti Enterprises (Bharti) were laid when its Chairman and Managing Director (CMD) Sunil Bharti Mittal (Mittal) started a bicycle-parts business in 1976 in his home state Punjab. In 1980, he sold off this business and moved to Mumbai. Mittal entered the telecom equipment manufacturing business in 1985 when he established Bharti Telecom Limited (BTL). In the same year, BTL entered into a technical collaboration with leading German engineering conglomerate Siemens AG (Siemens) for manufacturing push button telephones. Bharti entered the telecom industry in 1995 when it launched its cellular services in Delhi. The telecom business of the group was run by the group company Bharti Tele-Ventures (BTV). BTV initially offered cellular services through its subsidiary Bharti Cellular Ltd. (BCL) under the brand name Airtel in Delhi. BTV redefined the way in which cellular services were being marketed in 8

the country. Through the Airtel brand, it set many benchmarks in the Indian cellular industry. It was the first cellular operator to set up exclusive stores for mobile phones. The company opened its first store Airtel Connect in Delhi in late 1995. Airtel Connect was a one stop store for mobile phones where customers could purchase handsets, get new connections, subscribe to various value-added services (VAS), and pay their mobile bills. BTV later entered other telecom circles by securing licenses for them as well as through acquisitions. Some of the major acquisitions that it made were JT Mobile (Andhra Pradesh and Karnataka), SkyCell (Chennai), and Spice Cell (Kolkata). BTV started offering fixed line services in 2001 under the brand name Touchtel. It also entered the long distance services in the same year under the brand name IndiaOne. BTV launched Internet Services under the brand name Mantra in the year 2001. Its cellular services expanded very rapidly with the introduction of the revenue sharing system between the GoI and Bharti Airtel under the New Telecom Policy (NTP) of 1999. Though BTV initially focused on the premium segment of customers, it rapidly reduced the tariffs and made the cellular services affordable to the masses. It went in for an Initial Public Offer (IPO) in 2002 through a 100% book building process. This helped bring in the funds that proved vital in expanding the companys business in India. Analysts felt that BTV had revolutionized the mobile telecom services market in India through its innovative marketing strategies, adoption of new technologies, offering the latest VAS, and efficient customer service. BTV introduced wireless Internet access services in 2003 for its corporate users with the introduction of its GPRS26 network. In 2004, BTV discontinued its multi-branding strategy for its various services and brought all its telecom services under the Airtel brand. BTV was renamed Bharti Airtel Ltd (BAL) in 2006. The parent company, Bharti, has since its inception, diversified into other sectors such as Agrobusiness, Retail, Insurance and Broadcasting. NEW CHALLENGES AND COMPETITORS When Vodafone acquired Hutch, BAL faced the first major threat to its supremacy in the Indian mobile market since the entry of Reliance into this market. Reliance was not able to overtake BAL as the CDMA technology it had adopted did not do too well in the Indian telecom market. Vodafone entered the Indian telecom market with high growth plans as the developed markets in which it operated were becoming saturated. It wanted most of its future growth to come from emerging markets like India. Vodafone said that it would invest US$ 2 billion over a period of two years to introduce services in new circles where Vodafone Essar was not operating and also to expand its services in rural areas. It also said that it would roll out 3G mobile services in India as and when the GoI declared its policy for 3G mobile services. Vodafones mobile services were offered only in 16 circles while BAL was providing services in all the 23 telecom circles in India.

But Vodafones application for the allocation of spectrum to start services in six more telecom circles where it already held licenses was cleared on January 11, 2008. This put BAL in a neckand-neck position with Vodafone Essar. Vodafone Essar started offering low-priced selfbranded entry level handsets to expand its services in rural areas. Many industry experts said that the entry of Vodafone would bring about dramatic changes in the Indian telecom market. They felt that it would increase competition; bring global practices and better services to the domestic market. Analysts said that Vodafone Essar could easily close the gap with BAL in terms of reach and subscriber base once it started operating in all the 23 circles in the country. Meanwhile, the GoI allowed the telecom companies to offer mobile telecom services using both CDMA and GSM technologies in October 2007. This helped CDMA players like Reliance and Tata to provide mobile services using GSM technology. Reliance, which had been lobbying heavily with the government to allow CDMA Bharti Airtel to operate mobile telecom services using both CDMA and GSM technologies, was allotted a spectrum to offer nationwide GSM services on January 11, 2008. Analysts said that the main reason for Reliances entry into the GSM mobile telecom services was to target the lucrative high-end mobile customers whom it was losing due to the scarcity of feature rich CDMA mobile handsets. Reliance said that its GSM rollout would enable it to effectively target the fast-growing subscriber additions of 6 million GSM subscribers every month. The entry of cash rich players like Reliance and Tata into the GSM mobile telecom services was expected to break the oligopoly of the existing GSM players in the market. Analysts said that Tata and Reliance would have an advantage over the pure GSM players as the combination of CDMA and GSM would give them an edge in both voice (using GSM) and data (using CDMA) services. In January 2008, BSNL, the only operator which had traditionally had a presence in both GSM and CDMA, said it would offer roaming services to its CDMA WLL customers. BSNL, which had been offering only limited mobility services using CDMA till then, rolled out an investment plan of US$ 500 million for its CDMA services. The GSM players, such as BAL and Vodafone Essar, did not have any plans to start CDMA mobile telecom services as it needed further heavy investments. Reliance said that with its entry, it would further lower the tariffs of the GSM mobile services, which were already among the lowest in the world. With the existing players earning good profits, the Indian government too was keen to further reduce the mobile telephony tariffs by allowing in more players. Companies such as Videocon, Unitech, and Russias Sistema were trying to enter this market while AT&T was trying to stage a re-entry. But Mittal dismissed the threat from new entrants, saying that minor players could not play the volumes game in the telecom business. He said, Only six or seven Bharti Airtel, amongst whom two-three are still struggling, will share more than 90 per cent of the market. That leaves little scope for a dark horse. But the confidence shown by BAL notwithstanding, analysts felt that the telecom operator was facing real threats to its leadership position. BAL also had to face a steady fall in its ARPU and the ARPU of the Indian telecom market was expected to decline to US$ 6.79 by 2008-2009.

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STRATEGIES TAKEN
Network expansion BAL focused on expanding its network coverage all over the country before other players could expand on a big scale. In February 2008, it announced an annual investment plan of US $ 2 billion to expand its network over the next 3 years. This was substantially higher than its average annual investment plans of US$ 1.5 billion. BAL planned to add an additional 30,000 base stations to its existing 40,000 base stations for the fiscal year 2007 and thereby cover 70% of the country. Nearly 50 to 60% of the future expansion was to be in the rural areas. BAL also planned to cover 97% of the country by 2010. In July 2007, BAL entered into a memorandum of understanding (MOU) with leading telecommunications solutions company Nokia Siemens Networks (NSN) for an end-to-end network expansion across all of BALs mobile, fixed, and intelligent network platforms. As part of the MOU, which was worth US$ 900 million, NSN was to expand BALs GSM network in 8 circles under a two-year project. It was one of the largest GSM expansion deals in India. BALs main aim of expanding its GSM network under the MOU with NSN was to increase its footprint in rural areas and increase its overall network capacity to face competition from the new players. Commenting on this major expansion deal, Kohli said, The expansion and integration exercise across mobile and fixed networks will help us in augmenting our service delivery capacity. As part of the deal, NSN was to also deploy 1.8 million next generation network ports across BALs national long distance and international long distance networks. Targeting All Segments On the value added services (VAS) front, BAL planned to launch new cutting edge VAS such as Mobile Payment Services and Mobile Money Transfer Services. BAL also planned to roll out complete mobile commerce (m-commerce) services which would facilitate services like online purchases with handsets. BAL entered into a tie-up with Nokia in 2007 to offer entry-level handsets to its customers. BAL was to offer Nokia handsets bundled with its connections at subsidized prices. This tie-up was aimed at countering the self-branded handsets offered by Bharti Airtel such as Vodafone and Tata and also to facilitate its expansion in the rural areas. As part of the tie-up, the two companies were also to combine their advertising and marketing initiatives to tap the lower segments of the market. BAL also did away with the practice of using a single marketing strategy to target all the customers. It categorized the customers based on ARPU and adaptability to new VAS and technologies. High-end customers were segmented into a separate category called funsters. Industry experts said that as the mobile telecom market matured in India, the days of using a single marketing strategy for the whole mobile market were over and proper segmentation of the market would be the key for better targeting. BAL planned to focus its marketing efforts on these tech savvy heavy VAS users who were generally in the age group of 18-35 years. To improve its revenues and deal with the steadily falling ARPUs, BAL decided to get into tieups with leading manufacturers of high-end hand-held devices such as High Tech Computer

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Corporation (HTC) and Research in Motion Ltd (RIM). Through these tie-ups, it offered products like the HTC Touch and the BlackBerry, which provided features such as push email, document support, and touch screen interface. These products were aimed at high-end corporate users whose ARPUs were high. BAL hoped to increase its falling ARPUs through a slew of such high-end offers. BAL also reduced its overall tariffs to woo its low-end users. On January 15, 2008, BAL reduced its tariffs to Re. 1 (around 2 cents) for its lifetime prepaid users -- a reduction of 50% when compared to the previous rate of Rs. 2 per minute. It even reduced the fixed charges for lifetime validity for prepaid subscribers to Rs. 495 from Rs. 999. BAL also introduced a number of postpaid plans like the Airtel Supersaver-399 which provided users with free talk time equal to the value of monthly rental paid by them. This brought the effective recurring monthly rental charges to zero. BAL aimed at removing the entry barriers and reducing the recurring maintenance charges for consumers so as to create a whole new customer base to feed its growth. The reduction in the tariffs and the lowering of the fixed and recurring charges were intended to increase the user base by further expanding the market. Analysts said that reduction in the entry as well as monthly recurring charges was the key to expanding in the rural markets. BAL also started new advertising campaigns to reposition the Airtel brand. Wooing the Rural Masses Analysts felt that increasing rural penetration was a very challenging task. Not only did the telecom companies have to contend with low ARPUs as most of the people living in rural areas had low incomes, but they also had to face other challenges like getting power connections and supply and having to build more and higher towers as population density in rural areas was low. This only added to the costs. India being a diverse country, there were various languages and dialects with some even not having alphabets and this made targeting the groups speaking these languages or dialects and providing mobile services to them that much tougher. In what analysts saw as another innovative approach to rural markets, BAL started to tie up with shop owners in remote areas of India and bundled information on issues important to the rural population (such as weather, crop yield, fertilizers, etc.) with the mobile phone. It also began providing economical plans (with handset bundling) to rural people to increase uptake. Our next 50 million will largely come from rural India as our plan is to reach 5,200 census towns and over five lakh (500,000) villages, covering 96 per cent of the Indian population, said Kohli. In 2008, BAL launched a joint venture company, IFFCO Kisan Sanchar Limited (IKSL) with Indian Farmers Fertilizer Cooperative Ltd (IFFCO) to provide VAS and voice services to farmers throughout India. In addition to the low tariff of Rs.0.50 per minute between IFFCO members, it planned to offer economical handsets bundled with the mobile connection. The VAS platform was to broadcast 5 free voice messages daily on mandi prices, farming techniques, weather forecasts, diary farming, animal husbandry, rural health initiatives, fertilizers, etc. The farmers would also have access to a dedicated helpline manned by experts in various fields to answer

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their queries. BAL said that the initiative would help in the development of the community as well as the rural economy. Differentiation strategy BAL had focused on differentiating itself in the Indian telecom market by ensuring customer delight and a cost-effective business model a business model of being profitable despite having the lowest tariff in the world. Building a Strong Brand Right from its early days, the company focused on building a strong brand through innovation in sales, marketing, and customer service. BAL adopted some innovative promotional strategies for its products. It enrolled celebrities as its brand ambassadors to take mobile services to the masses. It initially used Indian cricket star Sachin Tendulkar to promote its services. It also made Hindi film actors Shahrukh Khan and Kareena Kapoor its brand ambassadors to promote its products and services. The promotion of BALs services by Shahrukh Khan proved very successful, especially for its erstwhile prepaid mobile services brand Magic. BAL later used Shahrukh Khan in its ads for the launch of many of its other services. It also got noted Indian music director AR Rahman to compose special ring tones for its Airtel brand. Campaigns such as Express Yourself launched in 2003 went a long way in making Airtel a big brand in India. By the mid2000s, the company had gone on to become one of the biggest advertisers in India, with total expenditure on marketing, distribution, and advertising of Rs. 12.55 billion (Rs.4.02 billion on advertising alone) in 2006-07. Business model innovation BAL also focused on remaining a lean organization. It was one of the first telecom companies to outsource its network deployment (to Ericsson and Nokia), IT services (to IBM), and customer contact centers (to IBM Daksh / HTMT). It utilized different payment models from revenue per share to cost per all, depending on what worked for the parties involved. According to analysts, this helped the company save on capital expenditures and lower its operational expenses. According to management consulting firm Oliver Wyman, BALs operating expenses as a share of revenue had declined 8% annually since 2003.28 Analysts felt that this had helped BAL in offering customers its services at low cost and also to focus on its core business while handling any changes in consumer demand in a flexible way. With the price of calls per minute becoming lower by the day, it became important for the company to control costs if it wanted to invest in building a sustainable business. We were seeing people laugh at us, saying how can you give away your lifeline to vendors? We were very clear that the technology was not something we need to focus on. Technology is something we buy to sell to the customers. Ericsson, Nokia, and IBM do technology for a living, so lets give it to them because they know best. It has made the business model of Bharti very, very sustainable, said Mittal. In addition to this, analysts felt that the company had negotiated the challenges posed by new entrants into the mobile phone market rather deftly. Competing with BSNL in the early 2000s was particularly tough. After entering the mobile phone market, BSNL introduced free incoming calls for its mobile phone users. This was a first in the Indian telecom market. BSNL also made use of its then strong fixed line user base -13

incoming calls made to its mobile phone users from its fixed line users were free. Private players like BAL, on the other hand, could not afford to provide free incoming calls to customers as they had to pay interconnection charges. But BAL later lobbied heavily through the COAI to get the GoI to reduce the interconnection charges and made the incoming calls free across all Bharti Airtel and the services offered. New advertising strategy Since branding played an important role in telecom, BAL also started a new advertising campaign to reposition the Airtel brand. From early 2007, it began to roll out some new promotional campaigns, one of the important ones being the Kuch Bandhan atoot hote hain [Some bonds are unbreakable] campaign launched in March 2007. The campaign stressed the wide coverage that the nationwide mobile network of BAL provided. The advertisement featured a divided family reuniting after a gap of 22 years. The ad depicted a young man, who comes to his ancestral village to meet his grandparents for the first time. His father had left the village 22 years ago apparently due to some differences with his father, never to return. The grandfather refuses to talk to the boy first but relents later after speaking to his son on the mobile phone with BALs network. Not being purely emotional like its earlier Express Yourself campaign, the new advertisement campaign highlighted the capabilities of BALs mobile telecom network. BAL launched another major advertising campaign in December 2007 called Barriers break when people talk. The theme of the new advertisement was that communication dissolved boundaries and barriers broke down when people started communicating. The advertisement was shot in Morocco and the characters in it spoke a French dialect. The ad was based upon the story of two boys separated by border fencing. When one of the boys starts playing with a football it falls on the other side of the fence. Hearing the sound, the boy on the other side of the fence comes out of his house. The first boy persuades him to kick the ball over the border fence. Eventually, the two boys crawl under the fence and start playing football with each other. No celebrities were used in the film and the two protagonists in the advertisement were picked up from the streets of Morocco. This new advertising campaign from BAL was considered one of the most creative advertising campaigns in the Indian telecom sector. Marketing experts said that the main aim of this new advertisement campaign was to bring iconic status to its Airtel brand. As BAL was expanding into foreign telecom markets, the ad campaign also aimed at projecting Airtel as a global brand. The campaign aimed to achieve this by making the advertisement in a foreign land. The need to project Airtel as a global brand was felt more urgently as it had to face competition from global brands such as Vodafone, they said.

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SUSTAINED GROWTH BALs various initiatives helped it attain a dominant position in the market (Refer to Table below for the top mobile telecom Bharti Airtel in India as on 31st Jan 2008). According to a report published by management consulting firm Oliver Wyman, BAL had been the best performing communications, media, and technology (CMT) company for five years (2001-2005), in terms of Shareholder Performance Index. In 2007, a leading business magazine Business Week ranked BAL third in their ranking of infotech companies in terms of shareholder return.
Company Bharti Airtel Reliance Comm Vodafone Essar BSNL Tata Tele Services Idea Cellular Spice Comm MTNL Shyam Telelink Subscriber Base (million) 60 44 44 33 24 21 3.5 3 2.5 Approx. Valuation (US$ billion) 40 30 28-30 55 16 18 1.5 3 0.116 Revenue (Rs. billion) 185.20 48.74 NA 397.50 NA 56.94 285.22 12.20 1.6

HFCL Infotel 0.4 0.090 NA Top Mobile Telecom Bharti Airtel in India from M Rajendran, The Great War, www.businessworld.com, February 15, 2008.

In addition to fuelling high growth, Airtels marketing strategy and its business model attracted the admiration of many industry experts. In 2007, it was recognized as the Best Indian Emerging Market Carrier in the prestigious Telecom Asia Awards 2007. In 2005 and 2006 too, it received awards such as the Best Indian Carrier at the Telecom Asia Awards 2006 and the 2005 Indian Mobile Operator of the Year by Asian MobileNews. In 2006, in the Frost and Sullivan Asia Pacific ICT 2006 awards, BAL bagged the awards for Wireless Service Provider and the Competitive Service Provider of the Year, while its CMD, Mittal, won the CEO of the Year award. Its business model too attracted the attention of industry experts and competitors. In 2005 and 2006, this model received three awards from Asias leading IT management magazine MIS Asia MIS Asia IT Excellence Award for Best Change Management in 2005; the MIS Asia IT Excellence Award for Best Bottom Line IT in 2006; and the MIS Asia IT Excellence Award for Best Knowledge Management in 2006. In 2006, it also received the Nasscom IT Innovation Award for the Business Model Innovation. Besides, BAL had been ranked among the top innovative infotech companies by BusinessWeek magazine since 2004. For instance, in 2006 and 2007, it was ranked 10th and 14th respectively in the list of top 100 infotech companies, ahead of many illustrious infotech firms.

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For his contribution to the development of the Indian telecom sector, Mittal was awarded the GSM Association Chairmans Award 2008, the highest honor in the global telecom sector. Analysts felt that he had built up BAL from scratch with a business model that had become the benchmark for emerging markets. They felt that the BAL business model had generated a lot of interest among competitors and MNCs venturing into the emerging markets had a lot to learn from it. Some of its competitors, particularly the Indian ones, had even started imitating this model. READY TO TAP OTHER EMERGING MARKETS? By early 2008, BAL was not only the dominant player in the Indian market but also had an international presence in Seychelles through its subsidiary Telecom Seychelles Ltd., and Europe (Channel Islands) through its subsidiaries Jersey Airtel Limited (JAL) and Guernsey Airtel Limited (GAL). It has been providing telecom services in Seychelles since 1998. In 2006, it became the first Indian telecom operator to launch 3G services as it started its 3G operations in Seychelles. In May 2007, JAL and GAL entered into a partnership with Vodafone to launch mobile services in Channel Islands under the Airtel-Vodafone brand. The following month, mobile services were launched in Jersey. The services in Guernsey were launched in March 2008. In mid-2007, BAL also made a foray into neighboring Sri Lanka, which had around 4.5 million mobile users by the end of 2006. The company entered into an agreement with Sri Lankas main foreign investment promotion body to invest US$150 million in the country. BAL was expected to roll out its operations in Sri Lanka in 2008. In what was viewed as BALs attempt to make its first major foray into international markets, BAL and Africa-based MTN Group (MTN), which had a presence in 24 African and Middle East countries, initiated talks on BALs possible takeover of the African telecom major in February 2008. In May 2008, the companies announced that they were considering a deal valued at US$40 billion, the biggest in the emerging market. Analysts said that the deal would propel the merged entity to the sixth position among the top telecom companies in terms of subscriber base, which would touch 130 millions with MTN bringing in 68 million subscribers. Madhudusan Gupta, telecoms analyst at Gartner, said, This would give the combined entity a footprint in one of the least penetrated mobile markets. With the market in Africa experiencing high growth (and projected to grow at 11% through 2010, according to Gartner), and there being a huge disparity in income like in India, analysts expected that BAL could replicate the success achieved in India in Africa. However, on May 24, 2008, BAL pulled out of the deal, as MTN allegedly went back on an inprincipal merger agreement and proposed that BAL become a subsidiary of MTN instead. Earlier, BAL had pushed for a 51% stake in MTN, but MTN insisted on a 100% buy out. It was then agreed that 50% of the deal amount (US$40 billion) was to be paid in cash and the rest in share-swaps. Analysts felt that BAL would face regulatory hurdles in India as such an arrangement would lead to the merged entity exceeding the foreign stake allowed in the sector (74%). But later, with MTN changing its terms, BAL pulled out of the deal saying that it would 16

not be in the interests of its minority shareholders. BALs vision of transforming itself from a home-grown Indian company to a true Indian multinational telecom giant, symbolizing the pride of India, would have been severely compromised and this was completely unacceptable to Bharti Group, said Mittal. According to some industry experts, the other roadblocks in the merger attempt were decisions such as the degree of control to be vested with both the parties, location of the headquarters, and the price component. DOMESTIC CHALLENGES Analysts felt that its success notwithstanding, BAL faced challenges to its leadership position in the Indian telecom market. It had to focus on devising aggressive strategies to continue its dominance and grow at the same rate at which it had been growing. Industry experts said that the key to future growth lay in making the Airtel brand attractive to both the tech-savvy urban population and the rural masses where the bulk of the future growth was expected. This in itself was a big challenge. Gopal Vittal (Vittal), Director, Marketing and Communication, BAL, said, The challenge before us was in having just one brand that had to address many different customer profiles, from peons to executives, from rural to urban. The entry of youth-specific telecom brands into the Indian market such as Virgin Mobile, which entered India in March 2008 under a brand franchise agreement with Tata, too put heavy pressure on BAL to tone up its branding strategies. Finding alternate revenue streams in view of the rapidly falling ARPUs was one more significant challenge that lay before BAL. The company also had to expand in other countries to achieve scale and compete with global players like Vodafone. Many analysts predicted that BAL would maintain its leadership position in the Indian telecom market despite the fact that the sector was on the verge of another round of consolidation. But there were others who were skeptical about it. They felt that the market was still in its early stages of maturity and the real challenge lay in competing with new entrants into the market. BAL, however, said that it was prepared to meet the challenge. Regarding the competition from Vodafone, which was being viewed as the biggest threat to BALs leadership position, Mittal said, I will say that (Vodafone CEO) Arun Sarin has already won his quarter-final and semi-final matches, as Vodafone has emerged as the number two cellular operator in India. But his final match is with us and I am sure to win that. As regards its plan for international expansion, BAL said it was on the look out for an acquisition target in the developing and emerging markets. It was looking for a firm with the right fit and over US$500 million in size. BAL felt that its extensive experience in India coupled with its unique business model would help it tap the opportunity provided by other developing and emerging markets and create value for its customers.

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LATEST MOVES
FORAY INTO NEW TECHNOLOGY The next generation 3G services were another area on which BAL decided to focus so as to retain its dominant position in the Indian mobile telecom services market. It also planned to start the next generation 3G mobile services as and when GoI declared its policy and allotted the spectrum. Analysts said that 3G could help BAL to increase its revenues in view of its steadily falling ARPU and that 3G could also be a new growth engine in saturated circles like the big metros. Mittal said, Bharti wants to be an early player in 3G and as and when the auction for spectrum is announced, Bharti will participate in the process. Bharti Airtel participated in the 3G spectrum action announced by the GoI in May 2010 and won the highest no. of circles won by any single operator thirteen. The cost was however a stupendous Rs. 12,290 crores. The thirteen 3G licenses bagged by Bharti Airtel cover 59% of India's cellular subscribers and 61% of revenues this is the maximum 3G coverage any telecom operator has managed. Data released by sector regulator TRAI reveal that regions where Bharti has bagged 3G spectrum contributes about 70% of its revenues. Put simply, Bharti Airtel has protected a big chunk of its 2G footprint. Heres another way to look at how well Bharti has defended its fortress in the nine circles where Bharti has lost the license, its average revenue per user (ARPU) is 15-20% lower than the national ARPU. In other words, Bharti has defended its most lucrative markets. But theres one glitch in these nine circles (where Bharti has lost the license), Bharti is still among the top three. That position may now erode as customers may switch to rivals who have won 3G spectrum in these circles. Industry watchers say its 3G bid is equivalent to six months of its revenues in these 13 zones the lowest in the industry. Moreover, its total bid amount is only 12% of its current market cap, easily the least amongst all listed telecom companies who were successful in the auctions. In metro markets, about 10% subscribers account for about 35-40% of revenues. A large number of them would already have 3Genabled handsets that will enable incumbents such as Bharti to quickly transition these subscribers to its 3G network. This will allow for a quick build-up of traffic on its 3G network and allow Bharti to extract the cost efficiencies of a 3G network, research analysts Srinivas Rao and Amyn Pirami at Deutsche Bank said in a note on Wednesday. Bharti executives point out that large parts of its networks are already 3G-ready as the telco had begun upgrading its networks over the last 24-months a step that will enable it to deploy 3G speedily and with minimum capex. What strategy can Bharti Airtel take to break-even on 3G? Bharti Airtel needs to be very careful in the selection of its strategy options as the stakes are very high now. BAL needs to work with the other ecosystem players to ensure that the total cost of ownership is as low as possible and that the relevant content is available to attract users

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to 3G. Here are some of the actions that can be taken by Bharti Airtel to break-even faster than what most of the analysts think: 1. Replicate Minute Factory Model: The Bharti Airtel have been innovative in bringing the costs down in 2G by changing the measurement metrics from ARPU to margins per minute. They have considered their business as a Minute Factory where minutes are sold at a certain price and there is a cost to the minutes. As long as the realized rate per minute is higher than cost per minute by 30-35%, they are okay. Their entire effort has been to bring down the cost of minutes and have looked at network outsourcing, lower tariffs among host of other things. Even in 3G, Indian Bharti Airtel would need to follow the same Minute Factory Model in their efforts to attract higher number of 3G users. However, this action is likely to result in lower ARPU which would in turn mean higher 3G users required to break-even. 2. Indirect bundling of handsets/ Upgrade schemes with handset vendors: Handset bundling in India is not very strong as the ARPU levels are low which means that the handsets costs cannot be recovered even in two years time. Also, BAL has focused on keeping the costs low and hence has not indulged in any kind of handset subsidy. However, this should not prevent them from looking at innovative ways of indirect handset bundling. They should be willing to offer network minutes for free in return for tie-ups with handsets companies. BAL should tie up with handset vendors to upgrade the handsets of its subscribers who are on the verge of replacing their handsets by proactively targeting subscribers with over 18 months old handsets. Studies have shown that after upgrading their handsets, the users tend to experiment more with mobile services resulting in higher ARPU. Handset vendors should also work with BAL to keep the aspiration levels high as well as keep the 3G handset prices low. Bharti Airtel should now decide to focus on music & videos and other VAS and the handset capability needs to be changed accordingly. 3. Focus on Non Voice Devices: Bharti Airtel should aggressively focus on non voice devices like data cards, net books and other devices needing connectivity. This would ensure higher revenues and faster break-even. In the coming years, the popularity of net-books, eBook readers and handheld tablets is bound to increase and hence the need for connectivity. 4. Ensure fair Revenue share: For the success of 3G, it is important to have the right content and Value Added Services (VAS) / applications for the users. The ecosystem would be more vibrant if all the players get a fair revenue share. Fair revenue share would ensure higher developer interest in developing new applications. Unlike the other markets, the revenue share in India is heavily skewed in favor of telcos, which needs to change for quality content to be developed and mobilized. Once the users begin to shift to 3G, the 2G network would get decongested and Bharti Airtel would be able to offer GPRS/EDGE plans on 2G network to their subscribers, which is difficult to offer now due to network clogging. Subscribers should first experience internet and then would demand better speeds. Hence, GPRS can be a good stepping stone to complete 3G transition. It is therefore important for the Bharti Airtel to continue to focus on increasing GPRS penetration. 19

TAKEOVER OF ZAIN AFRICA Mr. Sunil Bharti Mittal had a cherished dream that of transforming itself into an emergingmarket multinational. On 8, June 2010, Bharti Airtel, in the largest ever telecom takeover by an Indian firm completed a deal to buy Kuwait-based Zain Telecom's businesses in 15 African countries for $10.7 billion. However Zain will continue to hold its operation in Morocco and Sudan. Sunil Mittal said, "We are delighted at the closure of this transformational deal for India and Bharti Airtel. The transaction is the largest ever cross-border deal in an emerging market and will result in combined revenues of about $13 billion. Zains business in Africa has lined a path for Bharti Airtel to enter into African markets. With this acquisition, it makes Bharti Airtel to take fifth position in the world for its operating system in mobile industry. The total cost of the deal is 10.7 billion dollars, where 8.3 billion dollars will be paid in cash towards equity right after takeover, 1.7 billion dollars is the debt takeover from Zain Africa & 700 million dollars will be paid one year after the deal closure. The deal ran into hurdles after the government of the central African nation of Gabon had come out against the deal, but later approved the sale. The government of Congo Republic had also said Bharti-Zain deal broke law. There was also a dispute about minority ownership of Zain's operations in Nigeria, the biggest market in the deal. Minority shareholder Econet was seeking to overturn a 2006 deal by Zain - then called Celtel - in which it bought a majority stake in Nigerian mobile operator Vee Networks Ltd, now Zain Nigeria. The Nigeria ownership dispute has since then been settled. After the deal, Bharti now has combined sales of 13 billion dollars and clients in 15 African countries from Burkina Faso to Zambia. Under the agreement, Bharti, which already has 131 million Indian subscribers, would get 42 million new clients in Africa, making it the worlds seventh-largest telecom company. Key Positives Zains African operations enjoy a average blended ARPU of ~$7 vs ~$5 for Bharti in India 6 out of 15 countries covered under the deal have penetration levels of less than 25%. Competition levels are lower than that in India with average 4.5 Bharti Airtel per country. Average per capita income USD 1075 for 15 countries, slightly higher than USD 1070 for India. Countries in which Zain operates have average mobile penetration of 31% (excluding two countries with penetration levels of 75% and more) vs close to 48% in India. Bharti could replicate its successful network outsourcing strategy in Africa and cut costs vigorously. EBITDA of Zain at 32% could inch up to Bhartis levels of 40% once Bharti gets involved in network and other costs management. Zain's subscriber base grew 13% year on year at the end of Sept 2009. Bharti has the potential to cut down call charges and expand the African subscriber base by introducing its Indian model. Call rates in the continent are nearly double the rates in India. Africa is characterised by low minutes of usage currently; Bharti is likely to transport its low-cost model to Africa which has the potential to improve usage significantly.

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There is room for improvement in Zains processes which could make it a turnaround candidate subject to improvement in efficiencies and potential management change

Key Concerns Zain Africa is emerging out of a series of challenges, including depreciating African currencies (impacting its revenues and PAT for year 09) and poor management. Operating expenses could be higher for Zain as Bharti Airtel has to cover an entire continent, ten times the size of India, to cover as many people under its network as in India. Managing African assets is a very challenging job, due to corruption, bureaucracy, and crime. Notably, Zain acquired Celtel, Netherlands in April 2005 for US$3.4bn, giving it presence in 13 African countries. Later, Zain made several more acquisitions in Africa, including Nigeria. In August 2008, the Group rebranded all its 14 African country operations to Zain and also launched Ghana operation in late 2008. Bharti may need to make additional investments to upgrade/expand networks, and license renewals are due in five countries by 2013, thus increasing the acquisition cost. At least seven countries in which Zain operates are geo-politically sensitive. Congo (Democratic Republic), Chad, Kenya, Niger and Zambia are classified as very high risk on the Economist Intelligence Units (EIU) Political Instability Index. For year 09, reported revenues declined 12% y-o-y. However, on constant currencies, revenues from the African business grew 9%. Post September2009, most currencies have continued to depreciate albeit at slower pace. We believe currency risks and issues on repatriation of money from African markets may aggravate investor concerns. Significant management effort and capital will need to be devoted to turn Africa PATpositive when India itself is under pressure

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PRESENT OUTLOOK
On 9th June, rating agency Standard & Poor's lowered Bharti Airtel's credit rating, in view of its concerns regarding Zain deal, 3G spectrum and BWA spectrum funding. S&P lowered Bharti's long-term corporate credit rating to 'BB+' from 'BBB-' but said the outlook is stable. ICRA has also assigned a negative outlook to the long term ratings on 24th June. However, both the rating agencies maintain a stable outlook on the company from market position perspective.
What has got both the rating agencies worried? One look at the debt burden on the company and the reason for the concern is clear. The debt funding for Zain is around $9 billion or Rs 42,000 crores at current exchange rates. Add to that, funding required for 3G auction is Rs 12,290

crores & for Broadband Wireless Access (BWA) Spectrum auction is Rs. 3,314 crores; additionally the debt on the books of BAL ending March is over Rs 1,200 crore. While the acquisition would enable Bharti Airtel to benefit by way of diversification into under-penetrated African markets which present scope for future growth, the company`s ability to successfully implement its low cost business model in these markets would be critical for its future profitability. ICRA is also concerned with the heightened competitive environment in the domestic telecom business at a time when company`s funding requirements for acquiring third generation (3G) and broadband wireless access (BWA) spectrum and related capital expenditure are expected to remain high. The company has acquired 3G licenses in 13 circles for Rs 122.95 billion and BWA licenses in 4 circles for Rs 33.14 billion. Though in the long run, 3G and BWA licenses would aid to enhance the data revenues of the company and provide it with a differentiating tool for retaining and acquiring high average revenue per user (ARPU) customers however in the short to medium term it would further impact the financial profile of the company.
Bharti Airtel is committed to deleverage its balance sheet and is planning to raise around Rs 90

billion in its infrastructure subsidiary - Indus Towers - in the next two quarters. ICRA would closely monitor this development. The other rating sensitivity factors are ability of the management to integrate Zain`s operations with the Indian entity, steps taken by the management to augment Zain`s profitability and rationalize its capital expenditure; initiatives to build up significant 3G subscriber base in Indian entity and augment its data and value added services revenues. Notwithstanding the business challenges and increased leverage, the ratings derive comfort from Bharti Airtel`s integrated telecommunications operations, pan-India network presence, market leadership position in the domestic mobile services market, its strong free cash flow from operations and Singapore Telecommunications 30.5% effective ownership in the company, all of which speak highly about the company.

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BIBLIOGRAPHY
The following sources have been referred to while putting together this project.
1. 2. 3. 4. Bharti Airtel website specially the section on investor relations http://www.airtel.in/wps/wcm/connect/about+bharti+airtel/Bharti+Airtel/Investor+Relations/?WCM_Pa ge.ResetAll=TRUE&CACHE=NONE&CONTENTCACHE=NONE&CONNECTORCACHE=NONE&SRV=Page TRAI website specially the section containing its annual reports http://www.trai.gov.in/traiannualreport.asp & the one containing Govt Policies & guidelines. Manish Sinha, Segmenting Indias Mobile Market, www.imediaconnection.com/asia/index.asp?listpage=25, Mar 18, 2008. Across, the world. GSM (acronym for Global System for Mobile Communications) is the most popular mobile telecommunications standard used in the world. The GSM Association (GSMA) is the global trade association representing over 700 GSM mobile phone Bharti Airtel. Its website www.gsmworld.com was particularly helpful in getting different data & facts. Bharti Airtel Crosses 60mn Customer Mark, http://www.moneycontrol.com/news/BhartiAirtel/business-BTV-year2008-8-16-next-1.html, Feb 13, 2008. Cellular Bharti Airtel Association of India (COAI) is the industry body for GSM Bharti Airtel in India. Its website www.coai.com has valuable data on Cellular Statistics and Study Papers & Reports. M.Rajendran, The Great War, www.businessworld.in/index.php/Telecom/The-Great-War.html, Feb 15, 2008. Cellular services revenue to cross $37 bn: Gartner, http://www.allvoices.com/news/775661-servicesrevenue, July 02, 2008 Shobhana Subramanian, Spectrum: Why Reliance Comm has an Edge, http://www.rediff.com/money/2008/jan/19guest1.htm, January 19, 2008 Mobile Industry Overtakes FMCG in Advertising, http://economictimes.indiatimes.com/features/thebig-story/Mobile-industry-overtakes-FMCG-in-advertising/articleshow/2623545.cms, December 15, 2007 Leaping Tigers, Roaring Dragons: Emerging Market Companies Take the Lead in Oliver Wyman Study of Communications, Media, and Technology Industries, http://www.oliverwyman.com/ow/pdf_files/OWJ24.pdf, 01 Jul. 2008. Bharti Airtel wins NASSCOM IT Innovation Award 2006, www.moneycontrol.com, Feb 9, 2007. Bharti Airtel 10th in Global 100 Infotech List, www.domain-b.com, June 27, 2006. Vodafone to Invest US$ 2 bn in India, www.thetribuneonline.com, Feb 14, 2007. DOT Clears 2G Line for Vodafone, Aircel, Idea, www.economictimes.indiatimes.com, Jan 11, 2008. Airtel Chants its Affordability Mantra to the Masses, www.moneycontrol.com, January 23, 2008. Bharti-MTN Tie-up a Win-Win for Both Companies: Analysts, http://economictimes.indiatimes.com, May 8, 2008.The Economist, Eyes on Africa, www.economist.com, May 6, 2008. Prabhakar Sinha, Bharti's MTN Chase Hits Hurdle, http://timesofindia.indiatimes.com, May 17, 2008. Success starts weighing down Bharti Airtel, www.livemint.com/2009/07/24000659/Success-startsweighing-down-B.html, July 24, 2009

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6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18.

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20. Shauvik Ghosh - Will Bharti Airtel, MTN ring in a deal finally, or talk some more?, http://www.livemint.com/2009/07/30215936/Will-Bharti-Airtel-MTN-ring-i.html, July 30, 2009 21. Airtel bows to competition, joins tariff war, www.livemint.com/2009/10/30225824/Airtel-bows-tocompetition-jo.html, Oct 31, 2009 22. Bharti Airtel: Nervousness all around, http://www.equitymaster.com/detail.asp?date=12/4/2009&story=2, Dec 04, 2009 23. AfricaNext Investment Research African risks in Bharti-Zain deal, http://www.africanext.com/blog/?tag=zain, March 26, 2010. 24. Nikhil Pahwa, Indias 3G Auction Ends; Operator And Circle-Wise Results, http://www.medianama.com/2010/05/223-3g-auction-india-ends-provisional-winners/, May 19, 2010

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25. Mohit Agarwal, 3G Auctions Over What Next? , http://www.telecomcircle.com/2010/05/3g-auctionsover-what-next/, 25 May 2010 26. NDTV Profit Post-Zain deal: S&P lowers Airtel's credit rating, http://beta.profit.ndtv.com/news/show/post-zain-deal-s-p-lowers-airtel-s-credit-rating-72807?cp, June 9, 2010 27. ICRA assigns negative outlook to long term ratings of Bharti Airtel, www.icra.in/files/PDF/Pressreleases/June%2024,%202010-bharti-Airtel.pdf, 24th June, 2010

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