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.

Stock Views on Federal Bank, TRF, Bharti Airtel

Motilal Oswal on Federal Bank - Target of Rs 277

Motilal Oswal has maintained its buy rating on Federal Bank with a price target of Rs 277 in its report.

"Federal Bank’s 4QFY09 results were significantly below our expectations. NII growth was lower than we had estimated, tax rate was higher than we had expected. Strong tier-I ratio, higher provision coverage, and lower C/I ratio of 35% are the bank’s key strengths. We expect Federal Bank to report EPS of Rs 33 in FY10 and Rs 39 in FY11. We estimate 14% earnings CAGR over FY09-11. RoA should remain strong at1.4% over FY09-11. However, excess capital would restrict RoE at 13%. The stock trades 7.1x FY10E EPS and 0.9x FY10E BV of Rs 277. We have maintained buy rating on the stock, target of Rs 277," says Motilal Oswal's report.


Emkay Global on TRF - Target of Rs 692

Emkay Global Financial Services has maintained its buy rating on TRF with a price target of Rs 692 in its report.


"TRF gave positive surprise in Q4FY09 with better-than expected operational performance. Its revenues grew by 41% yoy to Rs 2.4 billion led by sustained pick up in order booking in Project division, operating margins up 210 bps yoy to 15.5%, net profit growth at 55% yoy to Rs 239 million. TRF is sitting on strong order backlog of Rs 13.6 billion, up 33.5% yoy basis. There is ‘Project’ to ‘Product’ mix of 98:2, in favor of Project Orders. We revise our consolidated FY10E earnings upwards by 10.7% to Rs 104.9/Share and introduce FY11E earnings of Rs125.9/Share. We maintain our ‘BUY’ rating with revised target price of Rs 692, valuing at 6X 1-year forward PER," says Emkay Global Financial Services' research report.


Angel Broking on Bharti Airtel - Target of Rs 903

Angel Broking has recommended an accumulate on Bharti Airtel with a price target of Rs 903 in its report .

"Bharti Airtel is India's leading provider of GSM-based mobile services with 96.7 million subscribers at the end of April 30, 2009. In fact, in May, the company crossed 100 million subscribers. Bharti Airtel, in order to acquire a 49% stake in MTN Group, would have to fork out a gross of USD 6.8 billion at ZAR 86 per MTN share. On the other hand, the company would see an inflow of USD 2.9 billion from MTN Group as part payment towards purchase of a 36% post-transaction economic interest in Bharti. Thus, the net cash outflow required would be to the tune of approximately USD 3.9 billion."

"MTN Group is a South Africa-based communication service provider offering cellular-based services and business solutions. MTN has operations in 21 countries across Africa and the Middle East and is one of the largest emerging market mobile operators globally. Bharti Airtel is likely to trade volatile until the final result of the discussions between the two parties is out. Nonetheless, we believe this is a bold and necessary move being attempted by Bharti and investors would have to be patient and take a longer-term approach to reap the fruits of such a deal. We recommend an 'Accumulate' on Bharti with a target price of Rs 903," says Angel Broking's report.