Bharti Airtel is unlikely to merge its data centre business-Nxtra-with tower provider Indus Towers, as the company would prefer flexibility by keeping the assets unbundled, top executives of the country’s second-largest telecom operator said in a post-earnings call on Tuesday.
Bharti Airtel is the largest shareholder in the Gurugram-based Indus Towers.
Managing director and chief executive officer Gopal Vittal said that Airtel had stated that it would dilute its holdings in Nxtra at some stage, but it’s not going in the direction of merging the assets at the moment.
“It has many considerations, the go-to market capability that it brings, the quality of the management and the teams that actually understand the space, much of it needs to be addressed. So, it’s highly speculative for me to comment on,” Vittal said in response to question on whether Nxtra would be merged with Indus Towers.
He added that with Vodafone Idea raising equity and debt to fund network expansion, the receivables for Indus have improved and industry stability had also improved, which was different from a few quarters ago when Airtel raised its shareholding in Indus.
“As of now, Nxtra is an independent company within the portfolio, as a subsidiary. We’ve always mentioned that data centres will be something that we will dilute and this is an asset that we could look at once we believe the timing is right. What is the destination of that dilution is a question that we will come to at that stage. So right now, it’s too premature to even go down that path,” Vittal added.
Noting that Indus Towers had two or three large clients, referring to telcos, while data centre companies had a mix of clients including hyperscalers and enterprises, that have varied cycles of sales and delivery, joint managing director Harjeet Kohli said that the necessity of the combination had to be ascertained. “It’s always good to keep assets a little more flexibly unbundled. It always helps both delivery as also any times when cycles to the markets are not running in favour,” Kohli added.
Airtel will broadly spend ₹5,000 crore on data centres over the next few years, Vittal said, which is similar to the capex it had outlined in 2021 for three years.
Having postponed its call for a ₹15,000-crore rights issue due to strong cash reserves in the business, the Sunil Mittal-promoted carrier will look at paring expensive debt and distributing dividends to shareholders, as a mix to channel the future free cash flows.
The telco paid ₹24,250 crore high-cost spectrum dues from the 2012 and 2015 auctions. Cash flows are also likely to get a leg up once the real impact of the June tariff hikes begin to show in the September-December period.
While noting that it was too early to talk about the full impact of the tariff hikes, Vittal said that some SIM consolidation has been seen in the 2G user base in the early weeks of the tariff hikes, but the shift towards lower costing data plans was little, in line with its expectations. SIM consolidation refers to consumers letting go of their second or third SIM cards and cutting the spending on these extra connections.
He reiterated that reasonable returns on investment would be achieved only once the average revenue per user, or Arpu, reaches ₹300. “I want to underscore that the industry needs a minimum of ₹300 Arpu for long-term sustainable investment and respectable return ratios… Tariff repair, we believe, should support improvement in financial health and a modest improvement in return ratios,” he said.
5G monetization and challenges for Airtel
Airtel’s Arpu increased sequentially to ₹211 for the quarter ended June, from ₹209 in the March quarter. In comparison, India’s largest telecom operator Reliance Jio’s Arpu was flat sequentially. Airtel leads the market with the highest Arpu, which is a key metric of profitability for a telecom service provider.
“Our business’s return on capital is still hovering around 9% at the India level, which is abysmally low. Consequently, because we are a fixed-cost business, we are capital-heavy. It’s not good enough, but it certainly improves from where it is. And once you get to ₹300, there’ll be reasonable returns in the industry,” Vittal added.
With 90 million customers using 5G on its network, Vittal said that 5G monetisation had begun with entry-level 5G plans after the tariff hikes, but the real monetisation remained a problem as there were no major use cases globally. Fixed wireless access or FWA services were a ‘modest’ use case, he said.
Vittal added that Airtel will launch FWA service by the end of this month or next month on a national basis on SA network, while mobile users will remain on the NSA network. Overtime, with 4G traffic moving to 5G, it will switch mobile users to SA network without spending on acquiring expensive SA or sub 1 Ghz spectrum.
SA refers to standalone architecture in which 5G network does not rely on 4G or lower technology layers as a fallback while NSA refers to non-standalone architecture where 5G is built on top of 4G technology layer. Airtel uses NSA for its 5G network while Reliance Jio has deployed its entire 5G network on SA.
“The incremental capex to run 5G SA is modest. All our radios and core networks are SA radio; we need software to enable it. When we launch SA by August or September, we will be available nationally,” he said.
Airtel posted a net profit of ₹4,160 crore for the quarter ended June, doubling sequentially and up 158% compared to the same period last year, mainly due to exceptional gains from a favourable tax judgement, and divestment of from its Sri Lankan operations.
Airtel clocked a consolidated revenue of ₹38,506 crore, up nearly 3% year-on-year, while earnings before interest, tax, depreciation and amortisation (Ebitda) was at ₹19,944 crore, up 1%. Ebitda margin declined to 51.8%.
