JPMorgan: Bharti Airtel -- Africa: more challenges than reflected

In this note we provide comprehensive feedback from our meetings with
Bharti's competitors in Nigeria, the regulator, infrastructure providers, tower
companies and others. We believe that Bharti in Africa will likely face more
challenges over the next 1-2 years than is being currently factored in, though
we continue to believe that the longer term growth potential in the market is
strong. We remain Neutral on Bharti within our cautious stance on the sector.
• Operational challenges aplenty: A poor electrical grid, security issues,
expense relating to expats and equipment issues translate into higher capital
and operating costs, suggesting little room for efficiency gains. Our sense
from conversations with most industry players is that Bharti may be
underestimating these challenges.
• Competition big and eager: Pricing has moved in several countries already
(Etisalat Nigeria, VOD Ghana, Warid Uganda, all in Kenya), while others
are ready to respond to Bharti. In Nigeria, relative to Bharti/Zain, MTN’s
revenue is 3x larger, its network is 1.5-2x bigger, distribution is its
advantage and it is well placed to invest more if required. Etisalat (#4) is
eager to protect/grow share in our view. On a positive note, usage is low in
Nigeria (1/3rd vs. Ghana) and elasticity is improving (~1 currently).
• Higher capex potential till infrastructure sharing matures: Tower
sharing conversations are becoming more common in Nigeria which we
believe is positive for Bharti. However, we expect this to take time to
mature, since MTN, for strategic reasons, currently prefers a barter system
or rural expansion opportunities.
• Market growth expected: On data, while it is still early days in Nigeria, we
expect lower access charges, better user experience and declining handset
prices to drive strong growth in the next few years.
• Forecast changes: We reduce our already conservative FY11/12E Bharti
Africa revenue by 2%/3% and EBITDA margin by 150bp/210bp. We also
reduce our Q2FY11 estimates slightly for the India business. The impact on
consolidated FY11/FY12 EPS is -6%/-5%.