Bharti's Act II With profitability, Mittal's vision has moved on to the company's next big objectives.

» Making Bharti a globally-admired telecommunication company » Institutionalising Bharti and creating a process-driven company » Enhancing revenues by leveraging growth and focusing on value added services » ...and, oh, yes, 25 million customers sometime in 2006 and a US listing, possibly in 2004

Things are a lot more relaxed now." Sunil Mittal, the 46-year-old Chairman and Managing Director of Bharti Tele-Ventures is trying to strike the at-ease pose Business Today's photographer wants him to, legs crossed at the knee, arms clasped behind his head, and body in a near-straight 40-degree angle-not the easiest of things to achieve on a bean bag. We are in The Banyan Tree, the recreation lounge at the company's corporate HQ in Delhi's Qutub quarter, a stone's throw from the Qutub Minar, an imposing 73-metre tall tower dating back to the late twelfth century (but only if you have a very strong arm). ''That edgy feeling we all had in 2003 is gone,'' continues Mittal, mechanically flashing a 60-watt-ceo-smile a fraction before the shot is taken, the consequence of being photographed too many times. "It's not that we are complacent or anything," he hastens to add. "Just that we are a lot more relaxed now." Click. Smile. Click. Smile.

For the benefit of those readers who do not track happenings in India's go-go telecom sector, 2003 was the year Reliance Infocomm and BSNL were expected to walk all over Bharti. The latter's business, largely built around offering mobile telephony services on the GSM platform would, analysts confidently predicted, implode from the pressure of trying to match the tariffs of competitors using the competing CDMA platform. Bharti was big, with revenues of Rs 3,049.9 crore and 3.4 million subscribers (3.07 mobile ones) on March 31, 2003, and there was a growing school of thought that it would fall hard. Well, the company has rewritten that script and how. "Bharti has emerged from the worst-possible period (of cut-throat competition and predatory pricing)," says Jaspreet Singh, an analyst at Mumbai-brokerage Prabhudas Lilladher.

The company's numbers for 2003-04 speak for themselves: revenues of Rs 5,002 crore; a net profit, its first ever, of Rs 619.46 crore (Rs 589.46 crore, should non-recurring income be excluded); and 7.14 million subscribers (6.5 million mobile ones) on March 31, 2004. In a year when mobile telephony tariffs dipped, the company's profit margins (before interest and taxes) in its mobile business increased from 10 per cent to 18 per cent. And the year was replete with milestones for the company: a revolutionary $400-million network management deal with Ericsson under which Bharti would effectively pay only for the network-capacity it used while the Swedish telecom equipment manufacturer would invest in upgrading and maintaining the network and an equally radical it outsourcing deal with IBM. The benefits of some of these will manifest themselves in the company's financial statements starting this year, but Mittal isn't one to speak about incremental operational efficiencies. Instead, the man who has always had an eye to the main chance has embarked on a quest to build the world's best-managed telco, repeat, build the world's best-managed telco. There are other subordinate goals and objectives-a listing in the US market, probably in 2004 itself, an organisation-wide six-sigma initiative (already, around 130 six sigma projects in the company's mobile business have saved around Rs 75 crore), a target of 25 million mobile subscribers by, or sometime in 2006, and growth in both revenues and earnings-but this, the creation of "a new model of management for a telecom company", is the big thing. "We want to become a globally admired telecom company," he says simply. And he doesn't smile.

MITTAL'S LEAGUE OF EXTRAORDINARY GENTLEMEN Over the years Mittal has assembled a crack team.

Manoj Kohli, President, Mobility Kohli, formerly of Escotel and Allied Signal runs the biggest of Bharti's businesses. He confesses that he has to "drive economies of scale very hard" and "leverage national size" to increase profit margins Badri Agarwal, President, Infotel Agarwal, formerly of Eicher, runs Bharti's fixed-line, access, and long-distance businesses. His focus is on what he calls "data-hungry" pockets across the country where customers will pay a premium for "world-class" service Anil Nayar, Director, Corporate Affairs Nayar, a Bharti long-timer serves as an elder statesman of sorts at the company's HQ. He believes the next few years are crucial because Bharti is undergoing "fundamental change that will make it a truly global company" Akhil Gupta, Jt Managing Director Gupta, Mittal's Man Friday oversees the finance function. He claims the company's size and its cash flows makes "funding easy". The Ericsson deal was his idea Rajan Mittal, Jt Managing Director Mittal's younger brother, he oversees the marketing function. That means "FMCG-style marketing and distribution" for the pre-paid segment and ''business-to-business style selling'' for high-value corporate customers Jai Menon, Director, Technology A whizkid from Bell South, he has created two committees, one comprising the company's execs, and the other that co-opts execs from vendors to discuss fundamental technology issues

A Shot At Global Greatness

The global bit is something of a refrain among Bharti's senior executives. Manoj Kohli, President, Mobility: "The next transformation at Bharti is the creation of a large, global, institutionalised telco." Akhil Gupta, Joint Managing Director: "The challenge now is much bigger-to be among the leading telcos in the world in the next two, three, four years." Anil Nayar, Director, Corporate Affairs: "We want to make Bharti a truly global company in terms of size, service delivery, and processes." And more quotes from more execs to the same effect. Someone has either coached Mittal's A-team (see Mittal's League of Extraordinary Gentlemen) in the run-up to a listing on NASDAQ or NYSE-the easiest way to follow the Securities and Exchange Commission's stricture on forward looking statements is to ensure that senior execs respond similarly to the same question, something that another company that touched $1 billion in revenues in 2003-04, Infosys Technologies, has perfected-or this (globalisation, institutionalisation) is what the senior management team discusses when it meets. Mittal insists that the latter is indeed the case and says that the obsession with institutionalisation and globalisation is driven by the needs of the business. "I want to take the excellent fire-fighting machine that is Bharti and institutionalise it," he says. The logic: In two to three years, Bharti will have around 25 million subscribers and "only a company where every function is driven by processes" can manage a business of this scale and complexity. "This is something I will personally oversee," stresses Mittal, rattling off an impressive list of work in progress. "Best practices, benchmarking, six sigma." "We are even opening up the company to consultants for the first time in our history," he laughs.

Simple: Incremental Returns > Incremental Expenditure

The company's decisions to outsource network management to Ericsson and it management to IBM were guided by the same logic. The way Bharti sees things, it would have had to hire 12,000 people over the next few years to manage 25 million subscribers; thanks to the IBM and Ericsson deals, it can get by with a fraction that number.

The Ericsson contract was revolutionary, explains Akhil Gupta, the man who originally thought up the idea, because it addressed the problem of "the vendor and operator always working at cross purposes''. Telcos require the capacity of their networks to be optimised, an effort to balance growth, service quality, and capital expenditure. Network equipment vendors have little to gain by helping in this process: their focus is on getting the telcos to buy more equipment. However, the equation changes if the network maintenance, management, upgradation, and optimisation is outsourced to them. This is exactly what Bharti has done, explains Gupta. "We have a service level agreement with Ericsson and we pay for the capacity we use (not for the entire infrastructure)." He adds that this has taken all the complexity out of the company's annual capital expenditure budgeting exercise. "Even a junior executive can now do this in a few minutes."

Equipment vendors such as Ericsson, Siemens and Nokia are increasingly looking to enter into such outsourcing arrangements: apart from ensuring 'stickiness' of the customer, these promise recession-proof revenues, what Indian managers like to call annuity. And they make telcos that much more operationally efficient. "Based on last quarter's results, Bharti's payback period-point when incremental earnings before interest, taxes, depreciation and amortisation exceed incremental capital cost-is a mere two and half years," says Sanjeev Prasad, Senior Analyst, Kotak Securities. Which could be one reason why Mittal believes managing growth isn't an issue anymore. "Last year, we invested around Rs 2,500 crore," he says, "and this year, we will do Rs 3,000 crore." "But the incremental returns we get on this will be much higher than what we did last year." Raising that money should not be a problem for a company that ended March 31, 2004 with Rs 1,430 crore in cash profit. Investors too are happy with the Bharti story. Pulak Prasad, Managing Director, Warburg Pincus, a private equity giant that has a 18 per cent stake in Bharti, lists some reasons for this: sharp focus, high standards of corporate governance, strategic outlook "as evidenced by their M&A capabilities", and rock solid execution capabilities.

Ensuring that incremental returns are higher than incremental expenditure is contingent on growth, or "revenue enhancement", as Mittal calls it. And that, in turn, is dependant on the company continuing to grow its base of mobile subscribers. The company may be an integrated telco, but mobile telephony remains, and is likely to remain, its mainstay. Other businesses, like long-distance and fixed-line telephony and data carriage may be more profitable (see Mobility Is The Key), but Bharti's success is largely built around its ability to increase its profit margins in a business where tariffs (read: cell-phone call rates) are as low as they can get. The good news for companies such as Bharti: they are unlikely to get any lower.

Smart Growth, Smarter Decisions

In 2003-04, India's mobile telephony companies such as Bharti, Hutch, Reliance Infocomm and Tata Teleservices added 13.5 million customers to the mobile club, a growth rate of over 100 per cent. Predictably, even the most conservative analysts believe India will boast 100 million mobile customers by 2007 (the aggressive ones expect the target to be reached in 2006). "The market for mobile services is very much like the fast moving consumer goods market," says Rajan Mittal, Jt Managing Director, Bharti. "A company's success depends on its ability to play in the mass market." That's something Bharti has managed to do very well, adds Manoj Kohli, pointing to Easy Charge, a scheme targeted at pre-paid customers (those who pay in advance for airtime, and they account for 80 per cent of any mobile telephony company's subscriber base) launched in early 2004 that allows them to buy airtime for amounts as low as Rs 50 as, at once, an example of the company's savvy marketing and its ability to learn from the larger network of telcos it belongs to, courtesy SingTel's 28 per cent stake in it. "We picked this up from a Philippines mobile company called Globe."

The threat from Reliance Infocomm and BSNL hasn't passed yet. The first is expanding operations to 4,000 towns this year and the second has just floated a tender for 15 million GSM connections. By 2005, says V.P. Sinha, Chairman and MD, BSNL, his company will have 25 million mobile subscribers. "I am not in a race for the #1 position," he smiles. "It is just that there is a lot of demand and I will satisfy that." Still, Mittal is confident that Bharti can grow, organically and through M&As such as its recent acquisition of Hexacom, the largest cellular service provider in the state of Rajasthan.

Growth will also come from the traffic the company's growing mobile base drives to its long-distance business. "This is perfect synergy," smiles Badri Agarwal, President, Infotel (the company's description for its fixed line, long-distance, and data businesses), explaining that this makes it possible for the fixed-line operation to focus on profitable growth by addressing "data-hungry pockets". To ensure optimal utilisation of its infrastructure, Bharti will almost certainly enter into more deals such as the Rs 500 crore one it has struck with VSNL. The Tata Group company will use Bharti's network for its domestic long distance telephony business. And growth will come from Bharti's 'future factory', a unit dedicated to increasing usage of mobile phones by offering value added services such as ring-tones, games, and high-speed data transfer.

The benefits of this growth, reasons Mittal, should manifest themselves in the company's profitability. Indeed, things seem to have come together for Bharti in the January-March quarter. "A combination of solid operational performance, despite revenue and cost pressure, and certain one-off gains have helped achieve this," says Rahul Singh, a telecom analyst at Mumbai-brokerage SSKI. Of the company's Rs 619 crore net profit for the entire year, Rs 303 crore came from this quarter alone. "Operationally, we're there," says Mittal, making the obvious calculation to suggest that the company's minimum net profit in 2004-05 will be around Rs 1,200 crore.

Jai Menon, the company's head of technology, would agree. The IIT-Delhi graduate watched as the company he worked for in the US, BellSouth, made a series of wrong it and telecom technology decisions. "It's a great feeling to be able to do things right in a company that is at the initial stage of its life, as Bharti is," he says. The right thing is an IT infrastructure that integrates customer-facing thingamajigs with those related to the company's own processes. It took Dr. Menon 18 months to get this right-he explains the whole thing with the patience of an academic, using coloured blocks that this writer hasn't seen since high school science lessons-and if the company bravely outsourced its it requirements to IBM, something no telco in the world has done, it is on the strength of this. "The Bharti deal is different from and an evolution over traditional it or business process outsourcing," explains Ashish Kumar, Country Manager, IBM Global Services, India. "It involves managing a business function."

WHAT BHARTI IS UP AGAINST There are only three companies that pose a threat to Bharti's integrated play.
Reliance Infocomm MUKESH AMBANI/Chairman/ Reliance Industries The company surprised analysts with a sub-Rs 400 crore loss figure for its telecom operation in 2003-04. As it expands to 4000 towns by the end of the year, it will find itself increasingly going head-to-head with Bharti
PRESENCE Pan Indian	MOBILE SUBSCRIBERS 7.2 million
TATA TELESERVICES RATAN TATA/ Chairman/Tata Group The Tata Group came late to the telecom party and is yet to figure out what to do with its stake in Idea Cellular. However, if Tata Tele can leverage its synergies with VSNL, and aggressively market its offerings it could be force to reckon with
PRESENCE 8 circles, but will soon become pan-Indian	MOBILE SUBSCRIBERS 0.6 million
BSNL V.P. SINHA/Chairman If the behemoth that benefits from the existing interconnect regime can figure out how to use its base of over 35 million fixed line subscribers, it could be more than a handful for the competition. P.S: It already is
PRESENCE Pan Indian	MOBILE SUBSCRIBERS 5.2 million

The right thing is also what Dr. Menon calls Macro Architecture Cube, MAC, another set of coloured blocks that represents the company's network infrastructure, replete with bells and whistles (read: applications). "This is a revolutionary model that can help telcos make the right technology decisions," gushes Menon who has cobbled together two committees, one comprising the company's senior management team, and another comprising representatives from the company's vendors to address fundamental technology issues. "Should we look at Wi-Max?" asks Menon, offering an example, referring to Intel's new technology that can serve as an overlay on top of existing cellular networks and offer high-speed connectivity up to 100 square kilometres - a sort of Wi Fi on steroids. "Should we go for 3G (third generation wireless technology) at all?"

Bharti Next

In four years time, Mittal will turn 50. He has always said he would no longer be running Bharti Tele-Ventures then. "Operationally, we are done," says Mittal. "In terms of strategy, we are 50 per cent there, and then, there's governance." He is hoping Bharti Enterprises, the group company that has announced its interest in participating in the privatisation of the Delhi and Mumbai international airports, will win the contract (the project is at the expression of interest stage right now). "It's not very different from telecom," he says. "It is operations-intensive, you will be serving a large number of customers, and it is a highly regulated area; we're very good in highly-regulated areas."

The Mittal family owns 36 per cent of the equity of Bharti Tele-Ventures and is comfortable with that coming down to 26 per cent. There's always an outside chance that a global telecom major like Vodafone-the company has announced that it is looking for an entry into India-could make a play for Bharti. Mittal says it would be difficult for him to say whether he would sell out if faced with such an offer, but adds that he wouldn't know what to do with the money. "We're very very bad investors," he laughs. Then, on a more serious note, he recalls a conversation with a member of India's Planning Commission who told him that telecommunications was one business where India's huge population could help the creation of a global company. "We're going to live that dream," says Mittal.

-additional reporting by Narendra Nathan in Mumbai. Additional inputs from Priya Srinivasan in Mumbai, Sahad P.V. in Delhi and Venkatesha Babu in Bangalore