Mumbai: A day after its deal with South African telecom operator MTN Group Ltd fell through, shares of Bharti Airtel Ltd, India’s largest wireless operator, vaulted to a four-month high on opening, before concerns of longer term growth amid rising domestic competition tempered the gains. Bharti shares rose 9.8% to Rs460 a piece, before closing at Rs435.35, a gain of 4.01% over the previous day, in what analysts described as a “relief rally”.
On Wednesday, India’s largest telecom operator had to abandon its talks to merge with MTN after the South African government refused to approve the deal, reluctant to give up the national character of MTN. This was the second time in 18 months Bharti had to call off talks with MTN.
“It (the calling off of the merger) lifts uncertainty and could trigger a relief rally,” said a Citigroup Global Markets report released on Thursday. “We believe disengagement 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.”
Hoping against hope: An Airtel showroom in New Delhi. Most analysts were plumping for the deal as they expected it to help Bharti expand in the African market and enable it diversify its revenues. Madhu Kapparath / Mint
The stock has underperformed the Sensex, India’s bellwether equity index, by 21% since the last of week of May when the deal was announced but analysts see limited upside with four of the seven analysts whose reports Mint had access to, reiterating their “reduce” rating or downgrading the stock.
Among other telecom stocks, Reliance Communications Ltd, also part of the 30-stock benchmark index, has underperformed the Sensex by 2.39% while Idea Cellular Ltd and Tata Teleservices (Maharashtra) Ltd have outperformed the index by 6.05% and 18.17%, respectively. “Calling off the deal won’t impact near term earnings but it raises concerns about longer-term growth visibility, in our view,” wrote Rajiv Sharma and Tucker Grinnan of HSBC Securities and Capital Markets (India) Pvt. Ltd.
Also See Analysts’ take (Graphics)
Most analysts were plumping for the deal as they expected it to help Bharti expand in the African market and enable it to diversify its revenues and maintain high returns even as the domestic market gets saturated.
Also Read | Bharti-MTN: Missed call (Timeline)
Analysts at Kotak Securities Ltd were positive on the deal since “it would have provided Bharti a timely diversification of revenues and use of expected free cash generation in an increasingly challenging phase in the domestic market”, said a report from the firm’s institutional equities arm.
India has been adding an average of 11 million subscribers every month this year , but analysts say that growth may be tapering off now in the 494 million users market. The pie is also getting divided among more companies with new ones offering aggressive tariffs in a bid to gain market share. These pricing wars could lead to a decline in the average revenue per user (which is already one of the lowest in the world at around $5, or Rs240), a key industry metric, and hurt profitability, predict analysts.
“With the hypergrowth phase of India’s 2G mobile market coming to an end, Bharti will find it difficult to maintain high growth and superior returns,” wrote Deepti Chaturvedi and Saurabh Mehrotra of securities firm CLSA, referring to the current so-called second generation telecom services.
Apart from the small chance of re-engaging MTN, Bharti clearly has two options before it—focus on the domestic markets or look for other acquisition opportunities abroad.
The second option is bleak, analysts say, since there are few telecom companies comparable with MTN in terms of its size, profitability and opportunity to tap new markets. Further, Bharti’s next target could seek a higher premium, realizing the Indian firm’s commitment to international expansion, they say.
“We expect Bharti to focus on protecting its turf with renewed zeal over the coming months,” said the Kotak report, cautioning that it may be bad for its peers.
So far, Bharti has not responded to the pricing wars, but “we expect a change in stance, sooner rather than later”, the report said. “This, in our view, could be a major negative for the sector.”
Bharti will focus on “pressing matters” in the Indian market, Citi’s Malhotra and Ramachandran wrote. “Diversion of minutes to new entrants in the urban markets probably needs more attention than tactical responses,” they said in their report titled “MTN episode ends again—clears uncertainty, back to basics”.
Even before the talks broke down, the media and market analysts began to speculate Bharti’s new target for acquisition but CLSA’s Chaturvedi and Mehrotra are not impressed by the potential targets. According to them, none of “potential target assets” are comparable with MTN in “size, profitability and opportunity”.
Himanshu Shah of Religare Hichens, Harrison Plc concurred with this view. “Finding a strategic fit like MTN in a high growth African market looks difficult and is a set back for Bharti. The possibility of Bharti grabbing Zain looks grim as there are many contenders.” While it is a setback for Bharti and MTN, the promoters of Zain can gain from this event, as it would provide it “pricing/negotiation power”, according to Shah.
Zain Telecommunication Network is a telco present in 24 countries across West Asia and Africa and serves around 70 million customers.
Shauvik Ghosh contributed to this story.
Graphics by Sandeep Bhatnagar / Mint