Building assets outside the “home” country allows companies to hedge risks and maintain margins. This was a key driver for Indian operators like Bharti Airtel, Reliance Communications (RCOM), Tata Communications and Mahanagar Telephone Nigam Limited (MTNL) to expand their footprint beyond the Indian market during 2006-09. However, their approach to expand global operations has changed with various developments in the domestic market in the past two years. While some operators have been forced to scale down their global operations due to a huge debt burden and low margins, others are strengthening their international foothold to mitigate risks. For instance, Bharti Airtel has been strengthening its global business despite having struggled to keep its domestic operations profitable. The company has signed two agreements with UAE-based Warid Telecom for the acquisition of the latter’s operations in Congo and Uganda. Airtel has also bought the remaining 30 per cent stake in its Bangladesh subsidiary from Warid Telecom. These acquisitions will help Airtel strengthen its position, achieve scalability, gain access to telecom assets and increase its market share in these countries, thereby ensuring improved returns. The company was also looking to enter the Myanmar telecom market, but lost out in the last bidding round.

On the other hand, Tata Communications and RCOM are considering divesting a part of their international operations. Tata Communications is reportedly planning to sell its stake in loss-making South African subsidiary Neotel and RCOM intends to offload shares in its submarine cable unit Reliance Globalcom, which is a profitable business.

The contrasting strategies adopted by these players can be attributed to their current debt position and their long-term outlook for overseas businesses, apart from their performance in the domestic market.

RCOM, which had taken a large loan for acquiring 3G airwaves, has struggled to pare most of its debt. In fact, the operator added further liabilities, which resulted in a rise in its debt-to-equity ratio from 1.05 as of December 2011 to 1.37 as of June 2013. Meanwhile, Tata Communications’ debt burden has remained unchanged in the past few years. In comparison, Bharti Airtel, which had a debt of Rs 677.62 billion as of December 2011, has deleveraged its balance sheet significantly. The company’s debt-to-equity ratio improved from 1.38 as of December 2011 to 1.01 as of June 2013.

On the operations front, Bharti Airtel’s and RCOM’s service revenues have witnessed healthy growth on account of a decline in competition and an increase in ARPU. Meanwhile, Tata Communications’ revenues have increased owing to higher uptake of international long distance and managed services. But profit margins have been under pressure owing to high interest costs for these companies, more so for RCOM and Tata Communications. Declining profitability has significantly impacted the free cash flows  available to the operators, which has limited their ability to service debt. With a large debt on their balance sheets, RCOM and Tata Communications do not have significant scope for overseas acquisitions.

 Bharti Airtel strengthens international operations

Bharti Airtel is looking to expand its footprint in telecom markets across Africa, despite a high debt burden and continuing losses from African operations. The operator’s optimism is driven by an improvement in the performance of the African business, especially in the data service segment, in the past few quarters. Airtel’s earnings before interest, taxes, depreciation and amortisation (EBITDA) witnessed a compound annual growth rate (CAGR) of about 6 per cent to reach $301 million for the quarter ended September 2013 from $270 million for the quarter ended September 2011. Although the growth in operating profit for African operations has been significantly lower than that registered for the Indian business, the company’s EBITDA from African operations has been increasing.

But the biggest game changer in Africa has been the growing uptake of data and value-added services, which are considered the growth drivers for the telecom industry. Non-voice services, which include data offerings, accounted for about 18 per cent of overall revenues from African operations during July-September 2013, as compared to 13 per cent during the corresponding quarter in 2012. Moreover, data services’ share in non-voice revenues increased from 27.69 per cent for the quarter ended September 2012 to 36.87 per cent for the same quarter in 2013.

The company is also optimistic about its Bangladesh operations. It recently launched 3G services after the government awarded 5 MHz of spectrum in the 2100 MHz band. Bharti Airtel is betting big on the data segment, primarily on 3G services. At present, the company’s total mobile subscriber base is about 110 million, but only 30 million are internet users. Airtel is targeting this untapped potential. A major challenge for Airtel Bangladesh would be to attract customers. The company has a market share of only 7.5 per cent, as compared to Grameenphone’s 41.8 per cent, Banglalink’s 26 per cent and Robi Axiata’s 21.4 per cent respectively.

 Tata Communications and RCOM to reduce global footprint

Tata Communications’ decision to sell its stake in Neotel is surprising given that the latter’s business is in line with the former’s long-term strategy of expanding the business to segments such as cloud computing, mobile broadband and data centre services. Neotel owns 15,000 km of optic fibre networks linking major cities and a submarine cable landing station in South Africa; and has over 2,000 enterprise clients, which would steer Tata Communications towards its goal of becoming an integrated telecom company. Neotel also has access to digital dividend spectrum, which can be used to offer long term evolution services in the country. During the quarter ended September 2013, Neotel also achieved break even at the operating level, which should have encouraged Tata Communications to retain the stake for a while.

A possible reason for the stake sale could be that Neotel would command a high valuation for its business and the stake sale would enable Tata Communications to deleverage its balance sheet significantly. Given its telecom assets, Neotel is particularly attractive for telecom companies that intend to become integrated information and communication technology service provider. Another factor could be Tata Communications’ not-so-optimistic long-term view of Neotel due to the latter’s limited competitiveness in the South African telecom market and its low contribution to the former’s overall revenues. Neotel is largely a small fixed line service provider and has struggled to compete with state-owned telecom company Telkom even after seven years of operations. Telkom still dominates the fixed line telecom market, especially the residential segment. In the long term, Neotel would find it increasingly difficult to compete with other telecom companies that are transforming their business to provide converged services.

For RCOM, stake sale in Reliance Globalcom is crucial to its plan of reducing debt, which stood at Rs 384.64 billion. RCOM is targeting a valuation of Rs 45 billion to Rs 50 billion for its profitable submarine cable unit, which earned a net income of $78 million on the back of $325 million revenues for the year ended March 2012. However, RCOM has failed to close the deal. The company’s previous discussions with potential buyers hit a roadblock on account of differences over valuations. Nonetheless, RCOM is determined to sell the submarine cable unit to deleverage its balance sheet.

However, selling Reliance Globalcom could have a big downside as it earns all of its revenues in US dollars, which has been partly offsetting the impact of rupee depreciation on RCOM’s profitability. At present, about 66 per cent of RCOM’s debt comprises foreign loans. With the sale, RCOM would be devoid of dollar revenues, which would limit its ability to offset the effect of rupee volatility on interest costs.

 MTNL optimistic about overseas business

MTNL has decided to continue with its international operations in Mauritius and Nepal, despite incurring losses over the past several quarters and its leveraged balance sheet. MTNL seems to be optimistic about the success of its joint venture in Nepal – United Telecom – which has recently been granted a unified telecom licence to offer GSM services across the country. United Telecom is also likely to participate in the 3G spectrum auction, which will drive revenue growth in the future. Also, limited competition in the telecom markets of Nepal and Mauritius implies that there is significant scope for near-term growth for MTNL.

In sum, reducing the global footprint has become a priority for some service providers for deleveraging their balance sheets, while others remain optimistic about the potential offered by international markets. Which strategy will pay dividends in the long term remains to be seen.