Entrapped!

The Bhartis revolutionised telecom, and they now seek to enter areas like agriculture and airports. Can Sunil Mittal's innovative pioneering really catapult the Bharti group to newer heights? Or are these new businesses plain entrapments?

The Tatas did it, so did the Ambanis, and now we have the Bhartis doing it further. No, we are not talking about telecom. It's life insurance! On August 24, 2005, Sunil Bharti Mittal, Bharti group chairman, declared a tie up with AXA Asia Pacific in life insurance. But does this, and other diversificationmoves by Bharti signify that something's not well in their telecom business?

Following closely on the diversifications into fresh foods exports, health sciences and the plans to provide maintenance services to Indian airports, is insurance a truly path breaking initiative? Perhaps. A clear move by the Bharti group towards a conglomerate entity?

But is it the way to go for the Bharti group, first generation entrepreneurs, instrumental in bringing a revolution in India's telecom sector, who still have substantial ground to cover? If, and only if, a question like this had had a simple, straightforward answer.

After all, quite a few of India's top companies, which are leaders in their respective industries, are taking the diversification route towards new lucrative businesses. Reliance was always a conglomerate structure before the split; and after the split, Anil Ambani has already planned acquisitions in the fields of textiles (Celebrity Fashions Pvt Ltd), entertainment (Adlabs) and insurance (AMP Sanmar) in a very short span of time.

Bharat Petroleum has announced plans for foraying into DTH. But companies like Larsen & Toubro and distribution giant Hindustan Lever Ltd learned the hard way that diversification without process and structure support would only fail. And for a family run business like the Escorts group, the changing times did not even offer a chance.

The Bharti Burden?
Those were the good old days before 1991, when everything was so simple, including India's GDP growth; also infamously called the Hindu rate of growth. Truly, the era of the family run giants like Tatas, Birlas and Godrej to name a few. But these companies were products of India's license raj, which made them birds of a different feather.

They derived monopolistic statures from the Indian government's protectionist policies, which made them conglomerates more by chance; until of course, liberalization brought in the competition much required by the Indian economy. Dismantling of old legacies and burdens has since become an unavoidable imperative for these companies as well. Professor Tom Kirschmire, London School of Economics, has tremendous faith in the Indian model of growth, more so than in China; but feels that the "conglomerate structures themselves result in capital getting blocked."

How true this analysis would be with respect to Bharti remains connected to the question of how dynamic and vibrant would the Bharti group continue to remain, given the new, and yes, the old Despite the Bharti group's structure (see chart below), it is Bharti Tele-Ventures, with the Airtel brand, with Rs.79 billion 2005 sales and with 12 million customers, which is the flagship brand.

But it was Bharti TeleTech, with the Beetel branded telecom equipment, which first consolidated Bharti's presence in the telecom sector. Telecom Seychelles (providing Airtel telecom services in Seychelles), Bharti Telesoft (selling value added products and services), TeleTech Services (a JV with TeleTech USA offering customer management call center services) and Field Fresh Foods (a JV with the Rothschild Group to export agricultural products) are the other key Bharti group companies.

But truly, despite diversifying into new areas, Bharti .rmly believes in outsourcing non-core processes. In late August 2005, Bharti Tele-Ventures outsourced contracts of its call centre operations to four companies: Hinduja TMT, IBM Daksh, Mphasis and Teletech Services; with Nokia providing technology support to these four.

This deal is costing Bharti Rs.10 billion. Bharti also signed up a deal with Nokia to expand its cellular operations in eight circles; costing Bharti Rs.5.8 billion. These strategic outsourcing alliances have also helped Bharti gain customers outside the standard retail segment. For example, in August this year, the Finance Ministry selected Bharti group, along with IBM, to jointly network all the Income Tax offices across the country, a deal worth billions of rupees for Bharti.

Telecom: Where it all Started
The Bharti group has definitely sustained a dominating position in the mobile services industry through Bharti Tele-Ventures. It gained a first mover's advantage into this once seemingly non-lucrative segment by bidding for, and winning the license to become a mobile service provider in New Delhi. Its manufacturing initiatives into landline phones under the Beetel brand name through Bharti TeleTech, and its vision for the future, have made it a market leader in this segment as well.

But in the scenario where mobile phone and landline penetrations in India are still very low, and the potential for growth and the competition still very intense, Bharti has critical decisions to take on charting the course for the future. On the manpower front, as it is, poaching be done in a proactive manner.

TRAI (Telecom Regulatory Authority of India) undertook the movement to the new telecom policy in 1999 towards free interconnection between fixed, cellular and other telecom operators. The decision by TDSAT (Telecom Dispute Settlement and Appellate Tribunal) to allow basic telephone operators to offer WLL services which was heavily protested by the COAI (Cellular Operators Association of India) was another adverse effect for players like Bharti.

According to a CII report, uncertainty in policy changes still affects the investment plans of the players. Furthermore, being an industry with a longer gestation period, access to capital markets is limited for the telecom industry. TRAI has just not been satisfied by the kind of growth in the industry since liberalization.

Recent measures to improve competition have been introduction of CPP (Calling Party Pays) and reduction of ADC (Access Deficit Charge) to 10%. A result of competition and growth is a consistent decline in average revenue per user; but the turnovers have also increased significantly, according to a TRAI report.

The Future Called Bharti
As far as Bharti's position in the market is concerned, its subscriber growth rate from September 2004 to March 2005 of 26.21% has surpassed the industry subscriber growth rate in mobile services of 21.47%. Major competitors like BSNL, Reliance, Hutch and Idea, however, are close on the heels of Bharti.

In terms of landlines, evidently there is a lot more ground to cover for Bharti in services, although in manufacturing of landline phones, Bharti is the market leader without doubt. Rakesh identifies Bharti's core strength to be manufacturing and services, and he feels their past expertise can be utilized in these new forays.

As far as entering the mobile phone manufacturing segment is concerned, Rakesh Mittal says, "This would directly bring us in competition with global giants like Nokia, Motorola, Samsung and LG." A typical life cycle for a mobile phone model in the market is 180 days from the date of launch, and Rakesh opines that volumes within this period have to be very high to justify the cost of manufacturing. He further reiterates that no Indian company has the wherewithal to take such a plunge.

Bharti has plans to increase its base stations to 20,000 in the financial year 2005-06, from around 10,000 currently; as well as to further penetrate into 5000 towns and cities - from 2800 currently; with investments to the tune of Rs.40 billion. Rakesh has a very positive view of the potential of fixed lines in India, since penetration levels are not even one tenth of those in developed nations.

Moreover, he expects further growth to be driven by the internet penetration, particularly for the broadband segment. Bharti has extended its reach into broadband services. The Bharti group also plans to ride the impending growth in Direct To Home through manufacturing of set top boxes.

New Grounds
Perhaps one of the most interesting forays for Bharti is the export of fresh fruits and vegetables. Although India is a producer of 14% of the world's fruits and vegetables, India manages to export only 1% of production due to inadequate processing amenities.

The government has eventually decided to offer incentives for companies getting into this area. Contends Sunil Mittal in an article in Newsweek, "Even if 100 big corporate houses like mine jump into agribusiness, there will still be room for more." Already, the group has bid for maintenance services in Delhi and Mumbai airports, as a part of a consortium with Singapore's Changi Airports.

On that particular occasion, Sunil had said, "Having successfully commissioned telecom projects across India and linking India with Singapore through i2i undersea cable, we have developed the expertise in executing national and international infrastructure projects."

The Dynamic Endgame
Commenting on Bharti's various industry entries, Jack Trout states, "Companies which are successful in one area should not really shift focus to new areas, especially if they operate in highly competitive markets." But then, probably one of the compelling reasons Bharti should get into new growth areas is for hedging the risk in the telecom segment.

Changing government rules have debilitated many a visionary plan in this segment; and Bharti should now expand its focus beyond such vagaries. With huge cash reserves, this is the appropriate time for Bharti to diversify. As has been seen in Indian conditions, conglomerates, as well as core-focused companies, have been able to equally and creditably improve shareholders' value over the past few years (refer B&E Special Feature, Core versus Conglomerate).

Consequently, riding on its network and past expertise, Bharti group de.- nitely has the potential to do an encore once more, and in the process, one hopes, to make a di.erence yet again; surely, for its shareholders, if not for India.

Battle against the Regulator

The year 2002 was a watershed period that saw Bharti weather a storm in the mobile services segment, along with other GSM players, against Wireless in Local Loop (WLL) players. The WLL group had literally threatened to spoil the party, with price competitiveness and convenient usage of TRAI norms by bypassing stringently high license fee requirements that had been earlier met by GSM players. With MTNL leading the WLL brat pack, the government seemed more than condescending to allow WLL players to enter the cellular arena without these new potential entrants having to pay up.

Active lobbying helped Bharti, and other cellular service providers, to overcome that imbroglio. In fact, since then, the sector has seen various con.icts, both in courts and out of them, between the regulator and players. More action is now expected though, once the new proposal to allow customers to switch service providers with changing numbers (called 'number portability') goes through.

Bharti, like other .rms in the industry, is totally against implementation of this proposal, till the time other basic services are set up transparently. Undoubtedly, intensity of competition will increase manifold if number portability were to be introduced as customers would then be free to conveniently change service providers.