Why it took Airtel nearly 13 years to cross its own high from 2007
While users are casually looking forward and asking questions about why HDFC went nowhere in the past 5 years, Airtel made its shareholders wait for 13 years till COVID hit in 2020.
The stock went nowhere while the business, the revenue, the customer grew the entire time.
I wrote a plain-English breakdown of one of the most counterintuitive stories in Indian markets, and I think it teaches a lesson every beginner gets wrong: a growing business and a rewarding stock are not the same thing.
Mouth 1: The African adventure (this one ate the balance sheet)
In March 2010 Airtel made the biggest bet of its life: it bought Zain's African operations for $10.7 billion, paid for almost entirely with borrowed money. Overnight it inherited ~42 million customers across 15 countries. The logic seemed sound. Airtel had already sold cheap mobile service to hundreds of millions in India, and Africa had a billion people and few phones. Same recipe, surely.
The recipe did not travel. Three problems, none of which went away:
- Currency mismatch. Airtel earned in local money like the Nigerian naira but owed the loan in dollars. Every time the naira weakened, the same African profit bought fewer dollars, so it covered less of the loan, while the loan itself never shrank.
- Higher running costs. Mains power 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, a permanent cost its Indian towers plugged into the grid never carried.
- The good customers were already taken. MTN and Vodacom had been there for years and happily cut prices rather than hand a newcomer any share.
Airtel tried to stop the bleeding (sold its towers and rented them back, exited the worst markets), but the core stayed broken: thin profit per customer sitting on a large pile of acquisition debt. The unit lost money year after year, and the Indian shareholder paid for every year of it. By
its 2019 London listing the African business was worth ~$3.9 billion, about a third of the $10.7 billion paid nine years earlier.
Mouth 2: The treadmill that never stops (this one ate the free cash flow)
This is the mouth people notice least, and it would have been there even without Africa. Telecom is the opposite of software. A software firm adds a million users at almost no extra cost because the product is already built. Telecom spends the enormous money first and earns later, and the spending never stops. Two halves to the bill:
- Spectrum. The invisible airwaves that carry your call belong to the government, which auctions slices of a fixed supply. Because every operator needs it and there is only so much, those auctions become bidding wars running into thousands of crores. And you pay again for every new generation of tech. Still digesting the African debt, Airtel had to bid billions for 3G in 2010, then billions more for 4G a few years later.
- The physical network. As India moved from calls to streaming video, data through the network exploded, and Airtel had to keep spending just to add capacity and stop it choking. This repeated spending on long-lived equipment is capital expenditure (capex), and in telecom it never ends because the next technology is always arriving.
Here is where profit and reality part company. A telecom company can report a healthy profit and still hand 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 pays for everything it needs just to keep running: free cash flow. Airtel's was chronically thin. So much was swallowed by auctions and network spend that little was left over, however respectable the profit line looked.
Mouth 3: The Jio Launch (this one ate the pricing power)
On 5 September 2016 Reliance Jio launched with free voice calls, months of free data, then near-zero prices after that. The most aggressive launch Indian business had seen, and designed to drag the incumbents into a fight they could not win.
How do you give a product away and survive? 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, 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.
Now stand in Airtel's shoes, because the position was genuinely impossible. Two doors, both bad. Keep prices where they were and customers walk straight to a free rival, shrinking the business Airtel spent a decade building. Or cut prices down to Jio's to keep the customers and watch the profit on each one collapse. There was no third door. Airtel chose the customers, betting it could outlast the war.
The choice shows up in one number: average revenue per user (ARPU), the money collected from each customer a month. It fell from about ₹202 in 2014 to roughly ₹104 after the war, and stayed down for years. The same customers, paying close to half as much. The whole industry bled together, and a field of about a dozen operators was crushed to three: Jio, Airtel, and a merged Vodafone Idea. Surviving that cull was itself an achievement, and it quietly planted the one thing that would matter at the very end: with only three left, prices might one day rise again.
Mouth 4: The regulatory bomb (this one ate the cushion)
Then a bill almost nobody had braced for. As a condition of their licence, telecom companies had agreed to hand the government a slice of their revenue every year, a running rent for the right to operate. The fight was over which revenue got sliced. Its name is adjusted gross revenue (AGR).
The companies said it should mean only what they made from phones, the calls and data. The government said it should mean almost everything they earned, including unrelated income like interest on cash in the bank. 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 going forward; 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.
Airtel had to set aside ₹28,450 crore in a single quarter, producing a ₹23,045 crore loss for July to September 2019, its largest ever and one of the biggest in Indian corporate history. Here is the tell: stripped of the ruling, the loss would have been ₹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.
Then the turn
The reward finally came, and not from growth. Around 2019-20, three things eased at once: the African unit turned profitable and its London listing raised cash to cut debt, the AGR shock was slowly managed down, and the price war cooled. With only three operators left, all 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.
In December 2019 the first real tariff hikes in years arrived (~30%), with more to follow. This matters enormously because the big costs were already paid. The towers, the spectrum, the network cost about the same whether a customer pays ₹104 or ₹135. So 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.
Only then, after 13 years, did the stock break out.
A rising top line is not a rising return. What actually reaches you is the cash a business keeps and its freedom to charge for what it sells, not the number of customers it counts. A fine, growing business with no power to price can keep you waiting a very long time.
The full version of the case study goes into more detail here.
How Airtel made its shareholders wait for 13 years
Other signals and patterns that train your brain:
Why does a stock get more expensive even when its earnings fall - The PE Paradox
How falling Crude Oil Prices affect Indian companies