11 March 2012

MTN GROUP Growth pangs in Africa ::Edelweiss

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MTN Group (MTN) announced CY11 results and reported constant currency
revenue growth of 9.7% YoY. EBITDA margin, adjusting for its tower deal,
remained stable at 43.9%. We discuss below the company’s performance in
markets relevant for Bharti Airtel (Bharti). Nigeria, a key market for both
MTN and Bharti, saw aggressive tariff wars with relatively lower elasticity.
Competitive pressures in Africa
MTN competes with Bharti in some key markets like Nigeria (33% of Airtel Africa
revenue), Uganda (18%), Zambia (10%) and Ghana (3%). The company provides financial
details on Nigeria and Ghana (35% of its revenue). The company’s business in Nigeria was
impacted as the regulator imposed stringent KYC norms. Its Airtime and subscription
revenues rose 3.7% and EBITDA margin declined 120bps due to 25% increase in diesel
costs. Its ARPU declined 5.3% in constant currency as aggressive tariff wars (led to 23%
reduction in RPM) failed to produce the desired elasticity with outgoing MOU increasing
by just 15%. Subscriber base grew 7.7% to 42mn in 2011. It incurred capex of USD880mn
(USD650mn in 2010) in Nigeria. Bharti is reported to have spent USD600mn in 2011. MTN
expects to add 4mn customers in 2012, implying subscriber growth of 10%.
In Ghana, subscriber growth was 16.5%, leading to 14% growth in airtime and subscription
revenue. In local currency terms, ARPU rose 3.5%. While RPM declined 4% in USD terms,
MOU increased 4% exhibiting perfect elasticity. But, EBITDA margin declined 620bps to
38% as it lost market share, which led to higher net inter‐connection costs. The company
expects to add 950,000 customers in Ghana in 2012, implying a growth of 10%.
CY11 results in a snapshot
It reported consolidated revenue of USD17bn, EBITDA of USD7.4bn and net income of
USD3.3bn. While consolidated revenue grew 9.7% YoY in constant currency, it was aided
by strong handset sales in South Africa (added 1% to the 6.3% reported currency revenue
growth) and 55% increase in interconnect revenue in Nigeria. It generated FCF of USD
1.4bn, holds cash of USD 5bn and has raised dividend payout to 70%.
Outlook: Arduous journey for Bharti in Africa
Bharti management gave a guidance of achieving revenue of USD5bn and EBITDA of
USD2bn by 2013 in Africa based on expectation that affordability would drive usage. The
expected elasticity has not played out and Bharti plans to tweak its business model. We
believe, Street expectations are moderate and the company is expected to achieve its
targets in FY15. Thus, there is no significant risk of disappointment. Maintain ‘BUY’.

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