Tuesday, February 16, 2010

BHARTI AIRTEL Research Reports

Although deal finalisation could take some time, we have cut our rating on Bharti from Buy to U/P for 3 key reasons: 1) prima facie deal valuations seem rich, 2) growth outlook for Zain’s African portfolio seems unexciting, &3) the potential deal could materially stress Bharti’s bal-sheet. Assuming debt-financing & no synergies, the potential deal could dilute Bharti’s EPS by ~10-15%.

We do not expect any funding concerns for BHARTI. Most of ZAIN customers are prepaid with ARPU around $5-7. We maintain our buy recommendation with a price target of Rs 340.

The declining Revenue and EBIDTA together with high capex at ~1x EBIDTA (v/s 0.5x for Bharti’s India operations) and also higher valuations make the acquisition unattractive. We believe that the deal appears to be very expensive and the funding of the same would strain the balance sheet and would hence result in overhang on the stock.

If this potential deal were to be completed over the medium term, we believe Zain could benefit from Bhartis: (1) lower procurement costs (particularly capex); (2) potential synergy benefits
on likely replication of Bhartis low cost business model.

Bharti was cautiously optimistic on recovery prospects for the industry and bullish on its own prospects for reasons for reach, scale, low debt levels and brand strength.

We believe the current ST weakness on the Bharti stock provides an attractive opportunity for long term investors to buy Bharti as we believe that the Indian mobile market is likely to consolidate in the next 18-24 months. Bharti is likely to emerge stronger post-consolidation.

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