Bharti Airtel

Analysts say company's revenues and profitability can come under pressure in near future

INDIAN telecom czar Sunil Mittal’s dreams of forging a transnational alliance with Africa’s largest telco MTN have been shattered for the second time in less than two years, but analysts and market watchers view this only as a temporary setback. With domestic growth in India remaining steady and even as urban centres reach saturation levels, Bharti Airtel is set to explore global ambitions to expand its footprint and export the Indian business model of creating a ‘minutes factory’ — low cost and high usage — to emerging markets.

Bharti will continue to deploy a twin-pronged strategy — expand aggressively and retain its leadership position in the Indian market even as the Group Chairman Sunil Mittal and the telco’s director and former CFO Akhil Gupta chase deals similar to the size of MTN abroad.

At present, Bharti’s overseas operations include Sri Lanka, Seychelles and British Channel Islands. Even prior to MTN, Bharti had bid for licences across several markets in Africa and West Asia, an indicator that the telco views these regions as offering the most potential for growth.

While a section of the industry is of the view that Bharti would observe a cooling off period before it attempts another international venture, others share the opinion that India’s largest communications company will immediately look at smaller targets such as Kuwait’s Zain, Egypt’s Orascom, Dubai’s Warid Telecom and even Luxembourg head-quartered Millicom, all of which have operations across Asia and Africa and are looking for strategic partner.

Although expansion via M&A is still a possibility for Bharti, we believe that the company may have to screen smaller companies that might not be as appealing as MTN.

These smaller companies may be attractive considering that Zain and Orascom have reportedly been looking for partners over the last two years and, according to media reports, held talks with several global telcos, but were unable to clinch a deal with any potential suitor. Millicom is in the process of selling its Asian operations and Bharti is amongst the shortlisted bidders to buy-out its Sri Lanka operations.

At the same time, Bharti and MTN while calling off the talks, have not ruled out the possibility of salvaging the strategic alliance. Within 24-hours of the deal being called off, MTN’s second-largest shareholder, M1 Group, on Friday hinted that both telcos may work towards resolving regulatory hurdles and restarting talks. With time, Bharti confident to overcome any regulatory hurdles and achieve our longterm objectives. There was a lot of hard work invested in trying to combine these two entities into what would have been the leading emerging markets mobile operator.

Not all are convinced that Bharti will be third time lucky even if talks were to start again. Though Bharti’s media statement seems to leave some room for further engagement if/when the South African government reviews its stance, we see very little possibility of that happening.

Despite Bharti’s dominant position in India, a platform that will enable it to benefit from consolidation that is set to shake the domestic market over the next two years, analysts are also concerned that the telco’s revenues and profitability are set to come under increasing pressure in the immediate future. Calling off the deal won’t impact near-term earnings, but it raises our concerns about longer-term growth visibility, in our view. We believe that rising competitive intensity reduces prospects of near-term upside, and that medium- to longer-term growth may be hampered if pricing pressure continues longer than expected.

Dis-engagement with MTN would allow top management to focus on strategic issues revolving around tariff pricing, its ability to compete and eventually being able to drive a sustainable industry structure in the medium term. Also, money spent in acquiring Indian assets in an imminent consolidation (easing of M&A rules expected over the next three-six months) could generate better returns than geographical expansion.