With the upturn in the telecom sector seen over the last 3-4 quarters after years of downturn, Akhil Gupta, Vice Chairman, Bharti Enterprises sees a promising trend benefitting the entire tele space rather than a sole entity.
On the back of subscriber cost decelerating, realised rate on voice escalating along with strong data growth, Gupta sees data and voice realisation trends to persist. However, a steep hike in realisations are not intended. Realised rates will gradually increase to prevent negative elasticity.
Talking on Bharti's Africa business, in an interview with CNBC-TV18's Sonia Shenoy, Latha Venkatesh and guest editor Raamdeo Agrawal, he says capital allocation to Africa was the right decision considering it was a unique asset. Although the turnaround has taken longer than expected, clearer signs of Africa biz turnaround will be seen by the end of this fiscal.
Discussing the telecom major's balance sheet, the company is comfortable with leverage but says it is prudent to lower Airtel's debt
He dismisses the notion of payment bank as a business in itself.
Below is the transcript of Akhil Gupta's interview with CNBC-TV18's Latha Venkatesh, Sonia Shenoy and guest editor Raamdeo Agarwal:
Q: What is the sense you are getting about how much growth could come in into the India wireless business and from the overall industry growth what kind of a market share can Bharti enjoy?
A: It is pretty apparent that whenever there is an upturn the whole industry will gain and that is why it is not specific to any individual operator. In the last few quarters; at least three or four quarters, we are seeing a very promising trend and I must say that today from where we stand, telecom looks more promising than it has looked in the last three or four years ever and the reason why that is so is because one, the realised rate on voice are increasing for everyone, data as you mentioned has very strong growth and acquisition costs are coming down. I do see the strengths to continue, as the competition is getting healthy and more responsible.
Q: How do you see Indian telecom shaping up in the next five to ten years and who will be the winners and what will be required to be winning in this game?
A: If you see the history of Indian telecom every since the private sector came in in 1995 the growth story has really been wireless and that is the same today. So to that extent nothing has changed; the difference is that earlier wireless was a medium for carrying voice, today it is a medium for carrying voice as well as data.
Now the fundamental question which as you mentioned the world is going digital, the basic question is that even in a country like India where the internet penetration today is pretty low the question is how many years would it take for every Indian or every Indian who uses telecom to be connected to the internet. My guess is the arguments can be three-five years and the only way we can connect a common Indian to internet is through wireless and therefore in terms of the growth prospects this is one growth which is going to stay for a long time. In the foreseeable future we do see this growth continuing and perhaps multiplying because this always has a multiplier effect. The more you are able to supply the more the demand.
To your question as to who could be the winners, the winners would be the ones who would be in a position to roll out the networks very quickly because data networks would need additional layout vis-à-vis the voice networks and anybody who can invest in spectrum and in network in timely manner would emerge as the winner.
Q: In that case, what may be the potential downsides; the manner in which spectrum is sold, could policy be too greedy perhaps to squeeze out too much from the companies rather than squeeze from the monies they make by an exploding traffic, could that be a downside or could it be undercutting from your own peers there is a big competitor in Rel Jio, could either of these become dangerous enough? Can disruptive competitor spoil the show?
A: Yes, a disruptive competitor can definitely temporarily spoil the show before it goes down the tube but what I see in the market today is the fact that after the Supreme Court judgement what we have now are serious competitors and that is always a very healthy situation for an industry.
You spoke of Reliance Jio; I won't put Reliance Jio in the bracket of those disrupters for a very simple reason that this is a very responsible corporate. It has committed very large capital by their own admission. In the AGM they would have put in Rs 60,000 to 70,000 crore, that is over USD 10 billion before the start, which is roughly 25 percent of their market cap. It is a very big bet and therefore to take that bet, to disrupt everything it doesn't make sense.
So we don't expect anybody to be disruptive henceforth and as far as Reliance Jio is concerned we would rather welcome a competition which has always been there for people who are serious and who have long term goals like Reliance Jio.
Q: For people like us who have much shorter horizon in terms of investing than the entrepreneur himself would you say that Africa is not a bad capital allocation, it might be little difficult one, how would you see that, because at a combined level the return on equity (ROE) comes out to be single digit even when India is doing well?
A: First of all, let me clarify that in our mind the capital allocation to Africa was absolutely the right decision, something that we don't repent. In fact we believe it is such a unique asset that it is impossible to find an asset like this today. To your point that we have allocated much more to Africa and less to India is absolutely wrong because to my mind as an investor as well as an entrepreneur or as a company, running the businesses it is not important what did you put in on day one. In India, we have grown over a period of time but if I was to look at India as USD 1 billion investment, I will completely ruin the shape because I would expect returns only on USD 1 billion. The investment in India is manifold as compared to Africa and that is what we concentrate on return on capital employed.
As far as ROE is concerned in Africa, actually we just borrowed money, we did not put in any equity by raising any equity and therefore the moment Africa turns profitable which hopefully we have done the heavy lifting in the last three years and I would expect that to start turning around the moment it starts adding massively to the ROE. So, in nutshell Africa was a great decision, we are not disappointed. Yes, it has taken perhaps a little longer than what anybody would have expected but it should be alright over a period of time.
Q: For somebody who tracks the sector, tracks the stock for the last many quarters it has been a slow and steady grind to the bottom for Africa. If you look at the margins just in this quarter itself, it has been the lowest in the last 14 quarters at 24-25 percent for the Africa business. So in terms of a timeline do you have any timeline on when the Africa business can see a recovery because even the EBITDA has been sort of in that USD 270-300 million bracket for the last many quarters now?
A: Yes, it is about time that Africa started turning and I personally believe of course unfortunately we don't give any specific guidance but I definitely believe that this year things should start showing a positive trend and by the last quarter of this year, we should see very clear signs of Africa going on to the right track.
Q: One of the disappointment which I have always told you about the dividend coming from Bharti itself, now since cash flow has improved, your free cash flow is now robust despite African challenge, would you see the dividends flowing to the minority shareholders would be significant in the years to come?
A: The dividend must always be a function of how much excess cash a company has. Now as you know at Bharti Airtel we do have debts, we have a leverage which we are comfortable but surely it would be prudent perhaps to bring it down a little more over the next one or two years but as we see we have been stepping up the dividend both at Airtel and at Infratel, so that journey should continue. But I would say big dividends which you expect from Airtel should come once the leveraging is at a very comfortable level.
Q: Infratel has been a fantastic earnings growing story yet the ROE has been that high and hence you have adopted not to hold back the profit and pay out massive amount of money. The dividend policy at Infratel and Bharti has been very contrasting but coming back to Infratel's business in this digitally intensified kind of era when the Jio and all those guys come in, do you see the occupancy ratio going up big time?
A: Well, very clearly data rollout would require may more towers especially for a player like Jio who will have to take new tenancies wherever they go. So we do expect that over a period of time data rollouts will contribute to a faster growth in the sharing factor, no question about that and in this business as that goes up the cash flows do increase but as you see we already have a very robust dividend policy. We have been trying to find out ways to return some excess cash. There are some company law clarifications which we are requiring and I guess the moment we are able to do that or deploy this cash for some acquisitions which as you can imagine I am being very prudent that merely because we have cash we must not do some silly acquisitions at some silly valuations but the moment we can correct that the ROE should improve.
The return on capital employed as you can see is much higher in case of Infratel than ROE which only shows it is a matter of time that the ROE will jump up quite nicely.
Q: Are you interested in the payments bank, will it boost your current mainline business, will it be a business in itself very lucrative how do you look at it. I am sure you are throwing your hat in the ring?
A: It will not be a business in itself because we have no intention at this point of getting into banking per se but yes, the payment bank from whatever I have read should be helpful to our business in terms of Airtel money and so on but unfortunately, I haven't gone very deeply into it as yet but I can confirm that we have no intention of competing with the banks in the banking sector.
Q: If you could just give us an indication of the growth trajectory from here on specifically for the RPM growth, how much headroom do the incumbents have at this juncture to increase RPMs further before negative elasticity kicks in?
A: Negative elasticity really would not be kicking in because firstly, what is never intended is a steep hike at any point of time. Secondly, there are still in the market many irrational promotions and discounts which need to be taken off over a period of time. I expect that gradually, the realised rate per minute would go up in a manner that it doesn't bring in negative elasticity and there is a big scope for this to continue and there may not be any need in the foreseeable future for any hike in the headline rates for telecom.
Disclosure: Network 18, which publishes moneycontrol.com, is now part of the Reliance Group that also owns Reliance Jio.
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