Please describe the nature of business because I don't get. Where's his biggest loss? Scratch cards, Mpesa, Connections, or Handsets?

Im not a fan either, but what scared me is that look on MJ's face when Zain announced 3 bob. It was like he had zero prepartion for this. I suupose when you are market dominator, you become complacent...

Everyone knows Bharti work on the minute factory model, where they churn volume at minimum cost. Surely someone must have seen this coming?

As for untapped market, they say by the end of 2010, every Kenyan above the age of 15 will have a mobile phone...how true is this?

I think profits will drop, must drop, its inevitable...and thus costs must drop also.

SIMPLE VALUATION OF THE SAFARICOM SHARE

Looking at the nature of the Safaricom business, i would classify it into 2:

Voice - About 75%

Others (Data,Mpesa): remaining 25%

EFFECT OF COMPETITION
A) Voice - Assume a 50% reduction in revenue (Calling rates from Ksh 8 to Ksh 3)
B) Others - Assume a 25% growth (growth especially in internet and MPESA but a flat trajectory in SMS revenue)

Thus, mathematically speaking:

0.75x X 0.5 = 0.375x
0.25x X 1.25 = 0.3125x
TOTAL = 0.6875x

This means that the Safcom profits may shrink by as much as 30%.

As such, the share price should ideally reflect this. A 30% reduction from Ksh 6 gives a fair value of Ksh 4.20.

For the foreseeable future, a price range of Ksh 4 - 4.20 represents a fair valuation of this share until the real impact of the new competition is known.

Happy hunting.

@ Much Know: True, the reduced calling rates will increase talk time. My estimate therefore represents the extreme of the pessimistic continum.The Morgan Stanley esimates must represent the other extreme (of the optimistic continum)
Please note that i have also not factored in the customer migration to the competitors. Anyway, mine is a very rough estimate. The true picture will be known in the Safcom first half results.

Happy hunting

Good one! but what of data and mpesa etc does not grow? I think the chances are it willr emain stable...most people have lots of choices when it comes to data...

A 40% dip in profits sounds right...

@Stocksmaster i belief the price wars/massacres began in the second half thus we will have to wait for full year results to know the full extent.

How to cut costs:

1. Put a hold on their 4G plans and extend the reach of the cheaper 2G and 3G (Reduce CAPEX to save on cashflows)

2. Cut on their advertising and promotions spend

3. Payroll has to be trimmed... sorry for employees

4. Not much can be done on their financing and network maintenance costs.

The assumptions are a bit farcical.
Are we assuming that the Ksh3 will hold for a year?

My fear is that Zain is not through with the price wars. It has nothing to loose and all to gain by a further price reduction to below Ksh 3 per minute.

The acquisition of 3G by Zain and Co. and extension of this price wars to internet services will leave the only significant growth area for Safcom as MPESA (which basically is a Vodafone product managed by Safaricom based on a five year agreement.Safaricom pays 32.5% of MPESA Revenue to Vodafone which may rise to 50% of revenue if MPESA grosses EUR 24M per year - Source: Page 132 of Safcom Prospectus.

A further Zain assault on Safcom may well push this share to the Ksh 3.5 range, a price that may well be supported by fundamentals.

The telecommunication companies need to borrow a leaf from the Kenyan banks...........despite the regulators low base interest rate, they work as a sector to ensure that the loan interest rates don't fall below a certain level ensuring a good profit margin.(Thats why i concentrate on bank stocks for investment in Kenya; their heart lies with the shareholder and maximising his/her return on investment)

At this rate, the telecom companies will surely haemorrhage financial by creating unsustainable business models all in the name of competition.

Happy hunting.

Bharti, being listed in India, how much loss can they absorb, say zainK dents the P/L line by 10B sh loss. Last time I heard, bharti was not such a collosal multinational in P/L, i think they made 150m USD. This kind of money has limit to what proportion can be haemorrhaged by a single(kenyan) operation.

its going to be interesting.

Its a full full conditioon!