Credit Suisse, Bharti Airtel: pricing power to return soon

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Bharti Airtel Ltd. -------------------------------------------------------------- Maintain OUTPERFORM
Notes from the AIC: pricing power to return soon


● We hosted Bharti group CFO Mr. Manik Jhangiani and corporate
treasurer Mr. Harjeet Kohli over a series of investor meetings at
our Asian Investment Conference in Hong Kong last week.
● Management explained that the pricing environment has remained
stable over the last 2-3 quarters. Continued stability should help in
margin improvement. Management expects pricing power to
return over the next 12-18 months, leading to RPM increase.
● Initial response to 3G launch has been encouraging, with 30%
3G-enabled phones already accessing 3G services in the
company’s subscriber base. Management expects US$3-4 ARPU
uplift from 3G services based on the initial usage patterns.
● African operations are moving towards meeting the CEO’s FY3/13
targets. Bharti has regained 1% revenue market share over the
last nine months. Various outsourcing contracts are progressing.
● We expect Bharti Airtel to benefit from stable fundamentals in
India and improving operations in Africa. Retain OUTPERFORM.

Bharti group CFO Mr. Manik Jhangiani and corporate treasurer Mr.
Harjeet Kohli met with investors in a series of meetings last week at
the Credit Suisse AIC in Hong Kong. Below are our key takeaways
from the meetings.
Stable pricing environment
Bharti management explained that the last 2-3 quarters have seen
pricing flattening out in India. The ability of new operators to compete
on price is going away. There is a virtual consolidation taking place in
the consumer’s mind, and this could be followed by actual
consolidation once the government comes out with its new telecom
policy.
Going forward, management expects the stable pricing to reflect in
improving margins. Further, pricing power should return in another 12-
18 months, resulting in RPM increases.
Initial response to 3G launch encouraging
Bharti Airtel has launched services in phases across circles, and
expects to complete rollout in the top 40 cities by end March 2011. Its
target for March 2012 is to reach 400 cities.
In the circles where 3G has already been launched, 30% subscribers
with 3G-enabled phones have started using 3G services. Initial usage
patterns show around 250 MB download per month and US$3-4
incremental ARPU on 3G services from these users.
While currently around 12-15% of Bharti’s subscriber base has 3Genabled
phones, this number could go up sharply in the coming
months. In about 12-18 months, management expects entry-level 3Genabled
phones to cost US$30-40 from the currently-seen US$100
levels.
Africa strategy under implementation
The African operations are directionally moving towards the CEO’s
targets for FY3/13, explained the management. The initial task postacquisition
was to arrest the decline in operations and market share.
Over the last nine months, Bharti Africa has clawed back around 1%
of revenue market share. The net profits are expected to turn positive
in a couple of quarters. In key markets such as Nigeria, there has
been a marked improvement in network quality over the last nine
months.
The IT outsourcing contract with IBM is under implementation, with
eight countries already transitioned as of December 2010. The
remaining countries are expected to transition by March 2011.
Similarly, 12 countries would have transitioned to the recently-signed
call centre outsourcing contracts by March 2011. The managed
network services contracts are also progressing on a similar pace.
Over the next 12-18 months, Bharti will be working on revamping its
distribution network across Africa. The recently-launched easy
recharge system in Nigeria and DRC has seen encouraging uptake,
explained management.