Airtel Zambia, one of the leading telecoms operator in Africa’s copper hotspot Zambia with a 10.4 million subscriber base, is the sole listed telco on the Lusaka Securities Exchange (LuSE). Beyond telecoms, Mobile Network Operators (MNOs) play a critical role in advancing financial inclusion, especially in remote areas underserved by traditional banks. Through strategic partnerships with banks, MNOs have dominated mobile money payments, with transactions surpassing K452 billion (~$17 billion) in 2023, making it the preferred retail payment platform post-COVID. However, the sector faces mounting challenges from climate change, with prolonged electricity outages and rising petroleum costs significantly impacting network stability and operational expenses. Shrinkflation is the practice of reducing a products quantity without adjusting for price commensurately.
Manchester – Second quarter earnings (2Q 2024) revealed that LuSE listed telecommunications operator Airtel Zambia did face widened cost pressures, primarily driven by the autopsy effects of power rationing initiatives by the state power utility in the wake of deepening drought woes in Africa’s copper hotspot. This resulted in a profitability squeeze despite top-line growth and a larger customer base reported. As a consequence of threats to its strategy, the telco has implemented a ‘shrinkflation’ strategy—quietly in the quest to reducing the size of data service bundles while maintaining price points.
Corporate will face idiosyncratic pressures in this drought period as the deficit widens, currently at 1,280MW’s. In the absence of stable base load supply, most will improvise using fossil fuel propelled generators but at huge costs eroding earnings ultimately. Drought effects have evidently permeated to the telecoms sector that is a critical piece in the Zambian retail payment system.
Munyumba Mutwale Managing Partner at ZATU Financial Consultants
Key insights from 2Q 2024 Performance:
- Profits Down 32% YoY: Despite a 15.2% YoY increase in revenue, net profit dropped from K287 million in Q2 2023 to K196 million underscoring the weight of escalating costs on profitability.
- Cost Surge: Operating and sales costs rose 29.2% YoY, totalling K1.074 billion, with financing costs soaring 67% to K233 million. Increased expenses, particularly from powering cell towers (network masts) during power load management periods, have continued to compress margins.
- Customer Growth: Airtel’s subscriber in the period expanded 10%, from 9.52 million in 2Q 2023 to 10.47 million in 2Q 2024, demonstrating the company’s ability to attract customers even amid rising economic hurdles.
- Margin Compression: Net margins contracted from 20% in 2Q 2023 to 12% in 2Q 2024, while operating margins fell from 41% to 34% YoY highlighting the difficulty of converting revenue growth into profitability in an elevated cost environment..
Strategic Shift: Shrinkflation
Facing a quandary of cost push pressures, Airtel has opted for a shrinkflation approach rather than directly raising prices. By trimming the size of its data, minutes and SMS bundles without altering price points, Airtel effectively increases the cost per unit of service. This maneuver softens the impact of escalating operational overheads without risking the customer backlash associated with overt price hikes.
Investor Outlook
For investors (equity holders), this shrinkflation strategy could potentially stabilise margins in the coming quarters, as consumers may end up spending more to maintain their typical usage levels. However, Airtel’s success will depend on its ability to manage operational challenges, particularly load shedding, and rein in spiraling financing costs.
While this move offers a short-term buffer, the company’s long-term profitability will hinge on how effectively the telco will navigate its strategy around these cost pressures. Investors should watch closely for next-quarter earnings to gauge whether these strategic adjustments will drive stronger bottom-line performance.
Airtel Zambia continues to be a robust dividend-paying stock, having announced two dividend payouts this year. The stock is currently trading at K43.5 per share, maintaining a relatively flat trajectory over the past 12 months, with only minor fluctuations. The recent shrinkflation strategy is expected to bolster the company’s margins in the second half of 2024.
The Kwacha Arbitrageur
