Axiata bails on Nepal as earnings take a hit

The disclosure was made in a third quarter financial report that didn't offer much by way of explanation.

Axiata said simply that "the outlook in Nepal is increasingly challenging, thus the board has decided to exit Nepal and accordingly reclassify Ncell as [an] asset held for sale. We believe this move will place Axiata in a much stronger position to deliver on our strategic priorities and is in the best long-term interest of all our shareholders."

Nepal officially entered recession in April, amid diminishing foreign currency reserves, a slowdown in multiple sectors of the economy, and a government deficit reportedly of around 400 billion Nepalese rupees ($3 billion). According to economic data firm Trading Economics, inflation currently stands at 7.5 percent.

Unemployment is reportedly on the rise, and the Republic's government faces growing opposition from a pro-monarchy movement led by political activist and medical businessman Durga Prasain.

Telcos have weathered worse storms than this though, and far from leaving Nepal, Axiata seems to have spent at least some of this year trying to get bigger.

In April, the government seized control of market minnow Smart Telecom after it failed to pay its fees. It proposed to auction Smart's assets and operating licence, inviting Nepalese companies to participate.

Ncell was named as the early favourite to acquire them. In September though, the Annapurna Express reported that the government still hasn't begun the process of valuing Smart Telecom, so that auction doesn't look like it's going to happen any time soon. And now the frontrunner is heading for the exit.

Even without consolidating its position by acquiring Smart, Ncell appears to be on pretty solid ground.

It served 16.6 million mobile customers at the end of Q3, down from 17.2 million a year earlier, but still good going in a country with a population of 29 million and two other operators to compete with. The decline was driven by the prepaid business, offsetting growth in more valuable postpaid subscribers.

Revenue declined to NPR9.32 billion from NPR10.02 billion, while EBITDA came in at NPR4.47 billion, down from NPR5.05 billion. Not great, but not bad considering the economic situation.

The economy isn't the only factor playing into Axiata's thinking though.

Following the merger of its Malaysian arm Celcom with Telenor's Digi, reports earlier this year claimed it was considering a strategic review as part of a plan to streamline its operations, pay down group debt, and steer the group towards digital telecoms, businesses and infrastructure, rather than pure-play mobile services.

As for likely buyers, NepaliTelecom claims the most likely suitor is Axiata's local partner, Sunivera Capital Ventures, which already holds 20 percent of Ncell.

Whoever does end up buying Ncell, it will bring to an end Axiata's eight year stint in Nepal, which kicked off in 2015 with a $1 billion agreement to buy it off TeliaSonera.

The effect of all this on Axiata's balance sheet is already being felt.

The decision to reclassify Ncell as an asset held for sale incurred an impairment charge, which – together with a lower contribution from CelcomDigi following the merger – drove group net loss wider to MYR797.4 million ($171.4 million) from MYR52.4 million in Q3 2022.

Group revenue was up slightly though to MYR5.7 billion from MYR5.4 billion, while operating income before finance costs increased to MYR693 million from MYR605 million.

"The group continues on its value creation journey despite the significant macroeconomic challenges this year. We remain focused on adapting our strategy, refining our investment portfolio and cultivating the right strategic partnerships to position the group for long-term success," said Axiata chairman Tan Sri Shahril Ridza Ridzuan.

"I am pleased to highlight that operational performance of our continued operations has been strong and we remain on track towards meeting our 2023 headline KPIs," added Axiata CEO Vivek Sood. "While concerns of macroeconomic volatilities persist, we believe risks will subside as interest rates start to lower in 2024. Our assets will continue to grow as market structure improves, price stability prevails and demand for mobile, digital and enterprise solutions remain."