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African Safari Part 3: Bharti vs. MTN: Growing with industry or competing?
Reiterate Buy on Bharti, MTN as industry growth remains strong
Following our recent meetings with Bharti & MTN and our recent visit to
Africa, we believe the concerns related to increase in competition post
Bharti’s entry are exaggerated, and believe both Bharti & MTN are well
positioned to show double digit revenue and EBITDA CAGR led by market
growth. We therefore reiterate our Buy on Bharti (on CL) and MTN. In this
report, we (1) discuss Bharti Africa and MTN’s strength/weakness and
strategies; (2) highlight case studies that show the impact on
incumbent/new operator profits due to increased competition; (3) flag the
key takeaways after our discussions with Bharti & MTN; (4) provide on-theground feedback from Nigeria – the key African market for both telcos; and
(5) analyze the risk-reward potential in case of worsening competition.
Conclusion: BRTI’s improvement not coming at MTN’s expense
1) Given both Bharti and MTN have been rational in their offerings, we see
less risk of any price wars, particularly in Nigeria (contributes 38%/49% of
Bharti/MTN’s Africa EBITDA); 2) Adjusted for recent macro headwinds, we
expect Bharti/MTN to show 2010E-2013E revenue CAGR of 12%/11% and
EBITDA CAGR of 19%/14%, driven by rising market penetration/economies
of scale. We see upside risks to our 3G/m-commerce applications uptake
estimate given the push from operators; 3) We believe Bharti’s
revenue/EBITDA improvement will be driven by addressing operational
inefficiencies, improving its distribution/network issues and not at MTN’s
expense; 4) In our view, Bharti’s recent initiatives in Africa may also benefit
MTN in terms of cheaper procurement from its vendors, with the
outsourcing market developing in Africa, and tower sharing picking up.
MTN is preferred Africa play, but more surprise potential for Bharti
Between Bharti and MTN, MTN stacks up well as a preferred Africa pick
given its track record in the market, higher revenue contribution from Africa
and attractive valuations (FY12E P/E of 9.2X vs. 12.7X for Bharti). Going
forward, we believe Bharti could be considered as a stock to gain Africa
exposure as Africa’s contribution to its FY12E NAV increases from
Rs11/share (3% of TP) to Rs87 in FY14E (15% of implied value), led by Africa
EBITDA contributing 28% of total EBITDA in FY14E from FY11E’s 20%. Bharti
has a unique advantage vs. its African peers in leveraging benefits from a
combined India and Africa scale. Our Bharti Africa revenue/EBITDA could see
upside risks if the company achieves its FY13 revenue/ EBITDA target.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
African Safari Part 3: Bharti vs. MTN: Growing with industry or competing?
Reiterate Buy on Bharti, MTN as industry growth remains strong
Following our recent meetings with Bharti & MTN and our recent visit to
Africa, we believe the concerns related to increase in competition post
Bharti’s entry are exaggerated, and believe both Bharti & MTN are well
positioned to show double digit revenue and EBITDA CAGR led by market
growth. We therefore reiterate our Buy on Bharti (on CL) and MTN. In this
report, we (1) discuss Bharti Africa and MTN’s strength/weakness and
strategies; (2) highlight case studies that show the impact on
incumbent/new operator profits due to increased competition; (3) flag the
key takeaways after our discussions with Bharti & MTN; (4) provide on-theground feedback from Nigeria – the key African market for both telcos; and
(5) analyze the risk-reward potential in case of worsening competition.
Conclusion: BRTI’s improvement not coming at MTN’s expense
1) Given both Bharti and MTN have been rational in their offerings, we see
less risk of any price wars, particularly in Nigeria (contributes 38%/49% of
Bharti/MTN’s Africa EBITDA); 2) Adjusted for recent macro headwinds, we
expect Bharti/MTN to show 2010E-2013E revenue CAGR of 12%/11% and
EBITDA CAGR of 19%/14%, driven by rising market penetration/economies
of scale. We see upside risks to our 3G/m-commerce applications uptake
estimate given the push from operators; 3) We believe Bharti’s
revenue/EBITDA improvement will be driven by addressing operational
inefficiencies, improving its distribution/network issues and not at MTN’s
expense; 4) In our view, Bharti’s recent initiatives in Africa may also benefit
MTN in terms of cheaper procurement from its vendors, with the
outsourcing market developing in Africa, and tower sharing picking up.
MTN is preferred Africa play, but more surprise potential for Bharti
Between Bharti and MTN, MTN stacks up well as a preferred Africa pick
given its track record in the market, higher revenue contribution from Africa
and attractive valuations (FY12E P/E of 9.2X vs. 12.7X for Bharti). Going
forward, we believe Bharti could be considered as a stock to gain Africa
exposure as Africa’s contribution to its FY12E NAV increases from
Rs11/share (3% of TP) to Rs87 in FY14E (15% of implied value), led by Africa
EBITDA contributing 28% of total EBITDA in FY14E from FY11E’s 20%. Bharti
has a unique advantage vs. its African peers in leveraging benefits from a
combined India and Africa scale. Our Bharti Africa revenue/EBITDA could see
upside risks if the company achieves its FY13 revenue/ EBITDA target.
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