Why Airtel made its shareholders wait thirteen years

Let's start with the puzzle. Across these thirteen years Airtel's revenue grew several times over and its customer base ran into the hundreds of millions. By any measure of size it was a success. The stock still sat still.

How can a business grow that much and reward its owners so little?

Two things have to be true before growth reaches a shareholder. The company has to keep some of the cash its growth throws off, instead of pouring it all back just to stay in the game. That cash is what investors call free cash flow. And it has to be able to charge enough for what it sells, what investors call pricing power, so that more customers actually turns into more money kept.

For most of this story Airtel had neither. Adding customers cost it enormous sums up front, and it was in no position to set its own prices.

Two questions run underneath the whole thirteen years. Keep them in mind through every chapter that follows:

Does Airtel get to keep the cash its growth produces, or is it all spent again just to stay in business?

Does Airtel get to choose its price, or is someone else setting it?

What follows are four mouths. Each one ate a share of Airtel's growth before it could reach you, and each one is really an answer to one of those two questions.

In March 2010 Airtel made the biggest bet of its life. It bought the African operations of Zain, a Middle Eastern telecom group, for $10.7 billion, paid for almost entirely with borrowed money.

And honestly, you can see why they did it. Overnight it inherited around 42 million customers and networks in fifteen African countries. Airtel had already shown it could sell cheap mobile service to hundreds of millions in India, and Africa had a billion people and few phones. The same recipe, surely, would work again.

But the price of the bet was the balance sheet. Before the deal Airtel owed almost nothing. After it, net debt swelled toward ₹60,000 crore, more than the entire company had been worth on its own, and that debt had to be serviced every year whether Africa made money or not.

The recipe did not travel. India was one country and one currency; Africa was fifteen governments and fifteen currencies, and those currencies kept losing value. Airtel earned in local money like the Nigerian naira but owed in dollars. Each time the naira weakened, the same African profit bought fewer dollars, so it covered less of the loan, even though the loan itself never shrank.

Running the network cost more than at home, too. A tower needs steady power, and mains electricity across much of Africa was unreliable, so Airtel had to bolt a diesel generator onto tower after tower and burn fuel around the clock. Thousands of towers drinking diesel was a permanent cost its Indian towers, plugged into the grid, never carried. The good customers, meanwhile, were already taken: MTN and Vodacom had been there for years and were happy to cut their own prices rather than hand anyone to a newcomer.

Airtel tried to stop the bleeding. It sold its towers to specialists and paid rent instead of owning them, and it exited some of the worst markets. Still, that fix didn’t touch the deeper hole: each customer barely paid enough to cover the costs piling up on its balance sheet, trapped on a mountain of debt. The unit kept losing money year after year, and every year of those losses and interest was paid for by the Indian shareholder, who saw nothing come back.

In 2019 the market finally put a number on it. Listed in London, the African business was valued near $3.9 billion, about a third of the $10.7 billion Airtel had paid nine years earlier. The listing did raise fresh cash to start cutting the debt, which mattered. But for most of the lost decade this deal only drained the owner.

Leave Africa aside; even at home, a telecom company can never stop spending, and this is the mouth people notice least.

It helps to hold it next to a different kind of business. A software company can add a million users with barely any extra cost, because the product is already built and each new user is close to pure gain. Telecom runs the other way round. Before Airtel can earn a rupee from new customers or faster data, it has to spend enormous sums building the thing that serves them. The investment comes first, the revenue only later, and the investment never really stops.

Start with the one thing a mobile network cannot run without: spectrum, the invisible airwaves that carry your call between phone and tower. There is only so much of it, and it belongs to the government, which rents out slices through auctions. Because every operator needs it and the supply is fixed, those auctions become bidding wars that run into thousands of crores. And you pay again and again, because each new generation of technology needs its own airwaves. Still digesting the African debt, Airtel had to bid billions for 3G in 2010, then billions more for 4G a few years later.

The airwaves are only half the bill. The other half is the physical network, the towers and antennas and equipment that send the signal. As India moved from making calls to streaming video, the data pouring through the network exploded, and Airtel had to keep spending just to add capacity and stop it choking. This heavy, repeated spending on long-lived equipment is called capital expenditure, or capex, and in telecom it never ends, because the next technology is always arriving.

Here's the strange part: a telecom company can report a healthy profit and still hand its owners almost nothing, because profit is counted before all that spending on spectrum and equipment. What matters to an owner is the cash left after the business has paid for everything it needs just to keep running and stay competitive. That leftover is free cash flow. Through these years Airtel's was chronically thin: so much was swallowed by auctions and network spending that little was left over, however respectable the profit line looked.

On 5 September 2016, a new rival arrived. Reliance Jio, backed by Mukesh Ambani, launched with free voice calls and months of free data, then near-zero prices after that. It was the most aggressive launch Indian business had seen, and it was designed to drag the established operators into a fight they could not win.

How does a company give its product away and live? Deep pockets and a long game. Reliance could afford to lose money for years to buy the market, and Jio's network was built only for data, which made it cheaper to run than the older networks its rivals were still patching up. Hook hundreds of millions on cheap data now, worry about profit later. Free was not generosity; it was a way to take the whole market at once.

Now put yourself in Airtel's management, because the position was genuinely impossible. There were two doors, and both were bad. Keep prices where they were, and customers would walk straight to a free rival, shrinking the business Airtel had spent a decade building. Cut prices down to Jio's and keep the customers, but watch the profit on each one collapse. There was no third door that spared the shareholder. Airtel chose the customers, slashing prices to hold its base and accepting that earnings would crater, betting that if it could just outlast the war, the war would eventually end.

The choice shows up in one figure, the money Airtel collected from each customer a month, which the industry calls average revenue per user, or ARPU. It fell from about ₹202 in 2014 to roughly ₹104 after the war, and stayed down for years, because Jio kept prices on the floor and Airtel had to keep matching. The same customers, paying close to half as much.

The whole industry bled together. Charging almost nothing, the weaker operators could not cover their costs, and a field of about a dozen mobile companies was crushed to three, as the diagram below lays out: Jio, Airtel, and a merged Vodafone Idea. Simply surviving that cull was an achievement. It also planted the one thing that would matter at the very end, though nobody was paid for it yet: with only three left, prices might one day be able to rise again.

Then came a bill almost nobody had braced for. Besides buying spectrum at auctions, telecom companies had agreed, as a condition of their licence, to hand the government a slice of their revenue every year, a kind of running rent for the right to operate. The more you earn, the more you owe.

The fight was over which revenue got sliced. Its name is adjusted gross revenue, or AGR. The companies said it should mean only what they made from phones, the calls and the data. The government said it should mean almost everything they earned, including unrelated income like interest on cash sitting in the bank. The government's version was far wider, and so far larger.

On 24 October 2019, after more than a decade in court, the Supreme Court sided fully with the government, and the ruling reached backwards. It did not just raise fees from then on; it let the government recompute some fifteen years of past fees on the wider definition and demand the shortfall, with interest and penalties, all at once. For companies that had paid on the narrower figure the whole time, the back-dues were staggering.

Airtel had to set aside ₹28,450 crore in a single quarter, producing a ₹23,045 crore loss² for July to September 2019, its largest ever and one of the biggest in Indian corporate history.

Here's the number that changes the story: the number tells a story once you see what the loss would have been without the ruling. Just ₹1,123 crore, small for a company this size. The everyday business was bruised but standing. Almost the entire record loss was one backdated government bill, landed overnight.

The reward finally came, and it did not come from growth. Airtel had never lacked growth.

Around 2019 and 2020, three things eased at once. The African business turned profitable and its London listing brought in cash to cut debt. The AGR shock, brutal as it was, was slowly managed down. And the price war finally cooled.

With only three operators left, the thing that had been missing all decade quietly appeared. When a dozen companies were fighting, no one dared raise a price, because a slighted customer had eleven cheaper places to go. With three left, all of them bruised and sick of losing money, each had every reason to raise prices at about the same time, and once they all had, a customer who disliked Airtel's new rate had nowhere cheaper to run to. That is pricing power, the freedom to charge more without being deserted, and Airtel finally had it.

In December 2019 the first real tariff hikes in years arrived, around 30 percent, with more to follow. A price rise matters enormously for a business like this because the big costs were already paid. The towers, the spectrum, the network cost about the same whether a customer pays ₹104 or ₹135 a month. So when the price rises, the extra rupees are not eaten by new costs; they fall almost straight through to profit. A modest-sounding hike, spread across hundreds of millions of customers who cost little more to serve, became a huge swing in earnings.

Revenue per user began climbing, and the data India had grown addicted to could at last be charged for properly instead of given away. Only then, after thirteen years of going nowhere, did the stock break out and begin the long run that rewarded the few who had waited.

What paid them was not the business getting bigger, which it always had been. It was the business finally being allowed to make money.

It is easy to read this back and say the answer was obvious. It was not. But three of the four mouths eating Airtel's growth were visible in ordinary public documents, years before the stock finally moved, and none of them needed a forecast. They needed a reader willing to open the cash-flow statement.

1. March 20109 years before the 2019 London listing valued Africa near $3.9 bn
   The Zain deal announcement, and the borrowings note in the annual report that followed
   Look upThe price, $10.7 billion, next to the borrowings line on the balance sheet. Net debt swelled toward about ₹60,000 crore. Then the finance costs line in the profit and loss account for the years after.
   It told youAirtel had bought its growth with borrowed money. From then on, the first claim on every rupee the business earned belonged to lenders, not owners. You did not need to know Africa would disappoint. You only needed to see that the interest bill was now permanent while the profits from Africa were only a hope.
2. Every quarter from late 20163 years of quarterly warnings before the record loss of Nov 2019
   Airtel's own quarterly results presentation, which reports average revenue per user
   Look upThe single figure Airtel calls ARPU, average revenue per user, meaning how much money it collects per customer per month. It fell from about ₹202 in 2014 toward about ₹104.
   It told youCustomers were still being added, and the money per customer was halving. That is the plainest possible statement that a company has no power to price. Growth in subscriber numbers was hiding a shrinking business.
3. Every annual report, 2010 onwardVisible continuously through the entire lost decade
   The cash-flow statement in Airtel's annual report
   Look upCompare two lines: cash generated from operations, and purchase of fixed assets plus spectrum payments under investing activities. Read them side by side for five years running.
   It told youA telecom network has to be rebuilt every few years, so the cash the business earns keeps going straight back into towers and spectrum. When the second line keeps swallowing the first, there is nothing left over for the owner, however fast revenue grows. This is the mouth that never closes, and it is arithmetic, not opinion.