City slickers Vodafone has materially outperformed listed incumbents Bharti and Idea in metro circles::Ambit

City slickers
Vodafone has materially outperformed listed incumbents Bharti and
Idea in metro circles over the last three years gaining AGR market
share particularly at the cost of RCom. In our second edition of the
Deep Dive we review the competitive position of these companies in
the metro circles that are likely to be early drivers for growth in data.
We also look into the central African trio of DRC, Congo and Gabon,
where contrasting telecom landscape presents diverse challenges and
opportunities for Bharti. Finally, we analyse the impact of the first
phase of consolidation in India that has resulted in improving
economics through volume growth and EBITDA margins rather than
increase in realised national tariffs. We find superior profitability has
enabled incumbents to reinvest margin gains in growing their weaker
circles through a trade off between tariff realisations and volumes.

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As revenue growth in the lucrative metro circles has slowed down operator
focus has slowly switched to the underpenetrated category B/C circles.
However, the metros still remain key drivers of success for given the higher
ARPUs and dense populations that ensure higher profitability.
 Metro circles – time to maximise ARPUs: Amongst the highest ARPU
circles, Delhi and Mumbai present a key opportunity for the incumbents to
improve their flagging fortunes on the data front. Indeed, investments in
3G infrastructure in these areas has exceeded those in other circles.
RCom’s deteriorating standing has been leveraged well by Vodafone
through its ability to position itself as a premium player. Idea continues to
be a pretender in the region whilst Bharti’s ability to dominate has been
underwhelmed by poor marketing and communication.
 Central Africa – Contrasting landscape: The central African countries
of Gabon, Congo (Brazzaville) and DRC present divergent landscape with
penetration levels exceeding 100% in Gabon and below 25% in DRC. With
several strong incumbents (MTN, Vodafone, etc) operating in the region,
Bharti’s market share has been under threat in two regions. Revenues
from the region are likely to be driven by increasing penetration in DRC
and VAS services like data and money transfer. EBITDA margins are likely
to remain under pressure as termination rates rationalisation could hurt
Bharti disproportionately due to its leadership position in two countries.
 Indian industry consolidation – phase I: Although industry
consolidation has lowered competitive intensity resulting in fewer and
shorter promotions (STPs), headline tariff realisaitons are yet to recover. In
the wake of ongoing consolidation (Sistema/ Uninor’s contracted
footprint, Aircel’s financial troubles and exit of multiple operators), the
incumbents have witnessed strong traffic growth and expanding margins.
This industry consolidation has led to volume led EBITDA increases rather
than realisation led margin expansion, somewhat contrary to our and
consensus expectations. This is probably a more sustainable and positive
outcome as operators appear to have rediscovered the positive trade-off
between realisation discounts and volume growth that affords them an
opportunity to allocate their promotions to frontier areas which may keep
RPMs suppressed but result revenue growth through increasing traffic.
We continue to view the industry consolidation positively and expect both
incuments to gain. Bharti remains our key BUY idea, while we remain Sellers
on Idea due to valuations.