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Bharti Airtel -Escape to Madagascar – benign competition
Action
Bharti is looking to spend US$50mn over the next two years in Madagascar to
expand coverage by 25% and increase its customer base from 2mn to 3.2mn.
Competition is relatively benign in Madagascar, and we estimate Bharti is the
second-largest operator with a 37% share, just behind Orange, which has a 40%
share. ARPUs are around US$3-4 and 3G/HSPA has been in existence since
2009; fibre rollout/international bandwidth should help accelerate data growth. We
currently build in only slight margin recovery to mid-20% levels by FY13F, but we
see upside risks to this forecast.
Catalysts
Operational improvements in Africa and progress on 3G/data would be positive
catalysts. Regulatory risks on MNP, USO and spectrum prices remain.
Anchor themes
The subscriber growth cycle is by no means over, but returns on incremental
subscribers are uncertain. 3G/data should offer further growth opportunities.
Escape to Madagascar – benign
competition
Country overview and competitive landscape
An island country in Africa, Madagascar weathered a political and
economic crisis in 2009; nonetheless, economic growth is expected to
resume in 2011, according to the IMF. At GDP per capita (PPP) of
US$900, it is one of Africa’s poorer nations.
Telecom penetration is still low at 25% and currently there are only
three players; Madagascar is one of the more benign competitive
landscapes in Africa. With a 40% share, Orange is the market leader
and Bharti is second with a 37% share, by our estimates. State-owned
player Telma is the third operator with a 23% share. We think Bharti
may have gained share over the past three quarters. A fourth player,
Madamobil, was unable to launch services in 2009 because of a
licence dispute. ARPUs in this market have declined to US$3-4, we
estimate. 3G/HSPA networks are available, though adoption so far is
likely low, but with recent domestic and international cable rollouts, we
believe that this will likely accelerate.
Significance to Bharti
Madagascar is a small market for Bharti, contributing only 1-2% of
revenues/EBITDA. EBITDA margins are currently at 20% levels,
having declined from mid-30% levels a few years ago. Bharti’s market
share has been broadly stable in recent years; but in recent quarters,
we think the company may even have increased its share as
coverage continues to expand. We do not believe Bharti has yet
reduced tariffs in this market. Bharti notes that at this stage most
subscriber acquisition activity is still focused on urban areas – but
similar to Orange, it is now looking to expand coverage by a further
25% (largely to rural areas) in 2011. It aims to increase its subscriber
base to 3.2mn from 2mn currently.
Economic overview
The political crisis in 2009 impacted the economy adversely in many ways; it led to the
suspension of external aid and this curtailed infrastructure investment and
development in the country. Growth in the private sector, as well as overall business
activity, was hampered by this crisis. Most importantly, the progress which had
previously been made in the areas of poverty reduction, education, and so on, was
undermined, according to African Economic Outlook.
IMF forecasts indicate that the economy is likely to have continued to contract in 2010,
with a potential recovery in 2011 underpinned by an improving political situation.
Agriculture (fishing and forestry) represents 25% of GDP and employs 80% of the population.
The World Bank estimates that 70% of Malagasy live on less than US$1 per day.
Madagascar is rich in wildlife and, by virtue of its being an island, most of its wildlife
species are unique and are not found elsewhere in the world; however, poverty, and
demand for agricultural land are now eroding its forests.
Key political facts
Madagascar gained independence from the French in 1960. Since then, its economic
progress has been volatile and mixed. The political situation appears unstable still,
with this round of instability beginning with a change in president in 2009. The previous
president, Ravalomanana, stepped down in early 2009 over disputes and protests, and
the presidency was conferred on the mayor of Antananarivo (Madagascar’s capital).
However, with the ongoing disputes there is currently a power-sharing agreement
between the two, which has yet to be resolved.
(Source: African Economic Outlook - http://www.africaneconomicoutlook.org and BBC
Country profile)
Telecom landscape
Madagascar is an island nation with a population of around 21mn, and wireless
penetration is still low at 27%, by our estimates. Madagascar has three key
operators: Orange, which is the market leader with a 40% share; Bharti is the
second-largest player, with a 37% share; and state-owned Telma (Telecom
Malagasy) has a 23% share. A fourth player was expected to launch in 2009, but
does not appear to have done so yet.
The market has 3G/HSPA. Telma was the first to launch 3G/HSPA in 2009, and at
that point was expecting to price 3G at the same levels as EDGE services. Orange
also notes that it offers 3G services and could look to expand coverage on key
cities. We do not believe Bharti has plans for 3G in this market at present.
Internet penetration is still very low; two new international cables were added in
recent years – Lion and Eassy and the operators are also investing in a national
fibre backbone for international bandwidth connectivity.
ARPU’s in this market were at around US$5 in 2009 (as reported by Zain). More
recent metrics from Orange suggest these could have declined to US$3-4.
Competition
With three players in the market, and a fourth one yet to launch, and penetration at
25%, we think competition may not be as intense as in some other African markets
we have reviewed. The fourth player, Madamobil, had planned to enter the market
with CDMA in 2009, but we understand that it has not been able to launch services
due to a government order suspending its license. This was contested by
Madamobil, but we believe that the company has not yet been able to launch
services. Nevertheless, Madamobil appears to have serious intentions for this
market and aims to invest US$300mn over the next five years. (Madamobil goes to
court over withheld authorisation, Telecom Paper, 12 April 2010)
We do not believe that Bharti has yet reduced tariffs in this market. Bharti notes
that at this stage most of the subscriber acquisition activity is still focused on urban
areas. (Bharti Airtel Says it Plans to Expand Madagascar Network Coverage by
25%, Bloomberg, 14th Dec 2010)
Significance to Bharti
Madagascar is one of Bharti’s smaller markets, contributing 1-2% of revenue and
EBITDA. EBITDA margins are currently at 20% levels, having declined from mid-
30% levels a few years ago; however, Bharti’s market share appears to have been
broadly stable for the past three years, potentially with some share gain in 2010, by
our estimates.
We understand that the company is planning to expand coverage by around 25% in
2011 by investing around US$50mn over the next two years, and over this period it
is in turn aiming to increase its subscriber numbers to around 3.2mn from 2mn now.
(Bharti Airtel Says it Plans to Expand Madagascar Network Coverage by 25%,
Bloomberg, 14 th Dec, 2010).
It is also looking at mobile banking opportunities in the country as it expands its
reach into rural customers.
About Orange Madagascar…
Orange Madagascar is 72% owned by France Telecom and started operations in
1997. It offers both 2G and 3G services and we estimate that it has a 40% share in
this market. As of 2009, Orange had around 65% population coverage, a
distribution network of 136 stores, and 25,000 retailers. The company states that its
strategy has largely been on offering low tariffs, while maintaining quality.
Orange notes that in addition to voice and SMS, services like mobile radio have
been successful. Orange has also recently extended its mobile banking offering –
Orange Money – in this market. Orange also offers business customers services
such as fleet management. (Orange Expands Mobile Money Platform to Three
More Countries, 25 May 2010, Cellular News)
Orange expects to focus on internet offerings and is investing in 3G and a national
backbone network to connect to international bandwidth through LION (operated by
a consortium including France Telecom).
About Madamobil …
Madamobil, which planned to enter this market with CDMA/EVDO services, is
owned by Life Telecom Holdings (a telecom investment and management firm
based in the Netherlands) in partnership with TECOM Investments (a subsidiary of
Dubai Holdings, one of the largest institutional investors in the Middle East).
Madamobil had noted that its first phase of network rollout was close to completion
back in 2009. The company had hoped to launch in the capital city and from there
expand services – though we believe this was delayed and it is not clear if they
have launched services at this stage.
Press reports suggest that there was a government order suspending its operating
license due to non-repayment of debts of the former holder of this license.
Madamobil has contested this, and this has essentially caused the delay in launch.
Madamobil has intentions in invest US$300mn over the next five years in this
market (Madamobil goes to court over withheld authorisation, Telecom Paper, 12 April 2010).
Valuation: Our DCF-based price target for Bharti is based on a
WACC of 9% and a terminal growth rate of 3%.
Risks to our price target include stronger-than-expected competition and unfavourable
regulatory developments related to various fees and charges. Upside risks include
benign competition and faster-than-anticipated stability in pricing.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Bharti Airtel -Escape to Madagascar – benign competition
Action
Bharti is looking to spend US$50mn over the next two years in Madagascar to
expand coverage by 25% and increase its customer base from 2mn to 3.2mn.
Competition is relatively benign in Madagascar, and we estimate Bharti is the
second-largest operator with a 37% share, just behind Orange, which has a 40%
share. ARPUs are around US$3-4 and 3G/HSPA has been in existence since
2009; fibre rollout/international bandwidth should help accelerate data growth. We
currently build in only slight margin recovery to mid-20% levels by FY13F, but we
see upside risks to this forecast.
Catalysts
Operational improvements in Africa and progress on 3G/data would be positive
catalysts. Regulatory risks on MNP, USO and spectrum prices remain.
Anchor themes
The subscriber growth cycle is by no means over, but returns on incremental
subscribers are uncertain. 3G/data should offer further growth opportunities.
Escape to Madagascar – benign
competition
Country overview and competitive landscape
An island country in Africa, Madagascar weathered a political and
economic crisis in 2009; nonetheless, economic growth is expected to
resume in 2011, according to the IMF. At GDP per capita (PPP) of
US$900, it is one of Africa’s poorer nations.
Telecom penetration is still low at 25% and currently there are only
three players; Madagascar is one of the more benign competitive
landscapes in Africa. With a 40% share, Orange is the market leader
and Bharti is second with a 37% share, by our estimates. State-owned
player Telma is the third operator with a 23% share. We think Bharti
may have gained share over the past three quarters. A fourth player,
Madamobil, was unable to launch services in 2009 because of a
licence dispute. ARPUs in this market have declined to US$3-4, we
estimate. 3G/HSPA networks are available, though adoption so far is
likely low, but with recent domestic and international cable rollouts, we
believe that this will likely accelerate.
Significance to Bharti
Madagascar is a small market for Bharti, contributing only 1-2% of
revenues/EBITDA. EBITDA margins are currently at 20% levels,
having declined from mid-30% levels a few years ago. Bharti’s market
share has been broadly stable in recent years; but in recent quarters,
we think the company may even have increased its share as
coverage continues to expand. We do not believe Bharti has yet
reduced tariffs in this market. Bharti notes that at this stage most
subscriber acquisition activity is still focused on urban areas – but
similar to Orange, it is now looking to expand coverage by a further
25% (largely to rural areas) in 2011. It aims to increase its subscriber
base to 3.2mn from 2mn currently.
Economic overview
The political crisis in 2009 impacted the economy adversely in many ways; it led to the
suspension of external aid and this curtailed infrastructure investment and
development in the country. Growth in the private sector, as well as overall business
activity, was hampered by this crisis. Most importantly, the progress which had
previously been made in the areas of poverty reduction, education, and so on, was
undermined, according to African Economic Outlook.
IMF forecasts indicate that the economy is likely to have continued to contract in 2010,
with a potential recovery in 2011 underpinned by an improving political situation.
Agriculture (fishing and forestry) represents 25% of GDP and employs 80% of the population.
The World Bank estimates that 70% of Malagasy live on less than US$1 per day.
Madagascar is rich in wildlife and, by virtue of its being an island, most of its wildlife
species are unique and are not found elsewhere in the world; however, poverty, and
demand for agricultural land are now eroding its forests.
Key political facts
Madagascar gained independence from the French in 1960. Since then, its economic
progress has been volatile and mixed. The political situation appears unstable still,
with this round of instability beginning with a change in president in 2009. The previous
president, Ravalomanana, stepped down in early 2009 over disputes and protests, and
the presidency was conferred on the mayor of Antananarivo (Madagascar’s capital).
However, with the ongoing disputes there is currently a power-sharing agreement
between the two, which has yet to be resolved.
(Source: African Economic Outlook - http://www.africaneconomicoutlook.org and BBC
Country profile)
Telecom landscape
Madagascar is an island nation with a population of around 21mn, and wireless
penetration is still low at 27%, by our estimates. Madagascar has three key
operators: Orange, which is the market leader with a 40% share; Bharti is the
second-largest player, with a 37% share; and state-owned Telma (Telecom
Malagasy) has a 23% share. A fourth player was expected to launch in 2009, but
does not appear to have done so yet.
The market has 3G/HSPA. Telma was the first to launch 3G/HSPA in 2009, and at
that point was expecting to price 3G at the same levels as EDGE services. Orange
also notes that it offers 3G services and could look to expand coverage on key
cities. We do not believe Bharti has plans for 3G in this market at present.
Internet penetration is still very low; two new international cables were added in
recent years – Lion and Eassy and the operators are also investing in a national
fibre backbone for international bandwidth connectivity.
ARPU’s in this market were at around US$5 in 2009 (as reported by Zain). More
recent metrics from Orange suggest these could have declined to US$3-4.
Competition
With three players in the market, and a fourth one yet to launch, and penetration at
25%, we think competition may not be as intense as in some other African markets
we have reviewed. The fourth player, Madamobil, had planned to enter the market
with CDMA in 2009, but we understand that it has not been able to launch services
due to a government order suspending its license. This was contested by
Madamobil, but we believe that the company has not yet been able to launch
services. Nevertheless, Madamobil appears to have serious intentions for this
market and aims to invest US$300mn over the next five years. (Madamobil goes to
court over withheld authorisation, Telecom Paper, 12 April 2010)
We do not believe that Bharti has yet reduced tariffs in this market. Bharti notes
that at this stage most of the subscriber acquisition activity is still focused on urban
areas. (Bharti Airtel Says it Plans to Expand Madagascar Network Coverage by
25%, Bloomberg, 14th Dec 2010)
Significance to Bharti
Madagascar is one of Bharti’s smaller markets, contributing 1-2% of revenue and
EBITDA. EBITDA margins are currently at 20% levels, having declined from mid-
30% levels a few years ago; however, Bharti’s market share appears to have been
broadly stable for the past three years, potentially with some share gain in 2010, by
our estimates.
We understand that the company is planning to expand coverage by around 25% in
2011 by investing around US$50mn over the next two years, and over this period it
is in turn aiming to increase its subscriber numbers to around 3.2mn from 2mn now.
(Bharti Airtel Says it Plans to Expand Madagascar Network Coverage by 25%,
Bloomberg, 14 th Dec, 2010).
It is also looking at mobile banking opportunities in the country as it expands its
reach into rural customers.
About Orange Madagascar…
Orange Madagascar is 72% owned by France Telecom and started operations in
1997. It offers both 2G and 3G services and we estimate that it has a 40% share in
this market. As of 2009, Orange had around 65% population coverage, a
distribution network of 136 stores, and 25,000 retailers. The company states that its
strategy has largely been on offering low tariffs, while maintaining quality.
Orange notes that in addition to voice and SMS, services like mobile radio have
been successful. Orange has also recently extended its mobile banking offering –
Orange Money – in this market. Orange also offers business customers services
such as fleet management. (Orange Expands Mobile Money Platform to Three
More Countries, 25 May 2010, Cellular News)
Orange expects to focus on internet offerings and is investing in 3G and a national
backbone network to connect to international bandwidth through LION (operated by
a consortium including France Telecom).
About Madamobil …
Madamobil, which planned to enter this market with CDMA/EVDO services, is
owned by Life Telecom Holdings (a telecom investment and management firm
based in the Netherlands) in partnership with TECOM Investments (a subsidiary of
Dubai Holdings, one of the largest institutional investors in the Middle East).
Madamobil had noted that its first phase of network rollout was close to completion
back in 2009. The company had hoped to launch in the capital city and from there
expand services – though we believe this was delayed and it is not clear if they
have launched services at this stage.
Press reports suggest that there was a government order suspending its operating
license due to non-repayment of debts of the former holder of this license.
Madamobil has contested this, and this has essentially caused the delay in launch.
Madamobil has intentions in invest US$300mn over the next five years in this
market (Madamobil goes to court over withheld authorisation, Telecom Paper, 12 April 2010).
Valuation: Our DCF-based price target for Bharti is based on a
WACC of 9% and a terminal growth rate of 3%.
Risks to our price target include stronger-than-expected competition and unfavourable
regulatory developments related to various fees and charges. Upside risks include
benign competition and faster-than-anticipated stability in pricing.
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