Why fall in oil prices is bad for Airtel Africa?

Why-fall-in-oil-prices-is-bad-for-Airtel-Africa?The fall in oil prices is positive for Indian telcos but it is not the same for Airtel Africa operations.

Indian operators spend close to 4.5 percent of their mobile revenues on diesel in order to keep their base stations running in the face of acute power scarcity. The fall in oil prices is positive for Indian operators as every 10 percent fall in diesel prices would lead to 1.2-1.4 percent increase in earnings before interest, taxes, depreciation and amortization (EBITDA) for large mobile operators as per Credit Suisse report.

Smaller operators focusing on urban operations are likely to see much smaller benefit in EBITDA increase as their diesel consumption is less vis-a-vis pan India operators like Bharti, Vodafone, Idea, BSNL, RCOM, Tata Docomo and Aircel who focus on pan India operations and has a large rural presence.

The fall in prices of oil and other commodities could add to Bharti’s woes in Africa as African currency basket has already fallen 4 percent versus rupee.

Falling oil prices put pressure on the currencies of several oil exporters, including Angola and Africa’s top producer Nigeria. Nigeria’s currency has touched a record low against the dollar on 25th November, a day after the central bank devalued it by 8 percent, complicating efforts to contain inflation.

Nigeria’s central bank has spent on an average $27.9 million a day in 2014 defending Naira, but it has still dropped by 11 percent so far this year.

“Bharti’s African currency basket has already fallen 4 percent versus rupee since 30th September and this will have a 1 percent hit on consolidated EBITDA for this 4 percent fall. This is before Nigeria devalued the Naira on 25th November, 2014. Also, this does not capture the impact on overall telecom spends,” said Sunil Tirumalai, vice president, Credit Suisse.

Airtel Africa is thus exposed not only to currency risks, but also economic events in Nigeria as it is one of the largest telecom market for Bharti Airtel.

Importantly, Nigeria’s devaluation of Naira or volatility in commodity prices has had adverse impact on telecom spends in some of these commodity dependent markets. For e.g. DRC where some regions saw 60-80 percent drop in telecom spends in the aftermath of commodity price drops in 2010. Overall, the weakness in commodity prices and African currencies adds to Bharti’s existing problems in the Africa business.

Things will only improve for Airtel Africa if oil and commodity prices surge in Nigeria and African countries which is not likely to happen in the short term.

 

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