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Business News/ Market / Mark-to-market/  Why Bharti Airtel should exit Africa entirely
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Why Bharti Airtel should exit Africa entirely

The African misadventure has turned off investors, and one clear way to win their favour back will be to exit the region and focus on the mainstay India business

According to analysts at Nomura Singapore, the African business has a negative return on invested capital (ROIC) of 2%, which has played a large role in dragging down the company’s overall ROIC. Photo: Pradeep Gaur/MintPremium
According to analysts at Nomura Singapore, the African business has a negative return on invested capital (ROIC) of 2%, which has played a large role in dragging down the company’s overall ROIC. Photo: Pradeep Gaur/Mint

Bharti Airtel Ltd announced that it has concluded the sale of tower assets in five African countries for $1.3 billion ( 8,255 crore today). Deal talks in two other countries fell through last month, and the process is on for the sale of tower assets in six other countries.

All of these are good steps, although they’re clearly not enough. The proceeds from the tower sales will help the company reduce net debt by about 9%. Bharti Airtel’s net debt is now around 90,000 crore, after accounting for payment commitments for the radio spectrum auctions. The company should cut its losses in the African region.

According to analysts at Nomura Singapore Ltd, the African business has a negative return on invested capital (ROIC) of 2%, which has played a large role in dragging down the company’s overall ROIC. “After four years of operations, it is still hard to have much confidence if and when this turns around... perhaps it makes more sense for Bharti to cut its losses and invest (and focus) more in the domestic wireless business," they wrote in a note to clients recently.

An analyst at a domestic institutional brokerage concurred, although he admitted that an outright sale may not be feasible as it may not fetch the company the right valuation.

Earlier this week, Bloomberg TV India reported the company is in talks to sell its mobile business in four African countries, which together account for 14% of its Africa revenue. Bharti Airtel, of course, hasn’t confirmed this, although such a strategy of disposing of its African assets will be welcomed by investors.

Since the time Bharti Airtel announced the acquisition of Zain’s African assets in February 2010, its shares have risen at a glacial pace of 6% annually, while shares of Idea Cellular Ltd have more than trebled in value. The African misadventure has clearly turned off investors, and one clear way to win their favour back will be to exit the region and focus on the mainstay India business.

Nomura’s analysts say Bharti Airtel is unlikely to recover anywhere close to the $15 billion it has invested in the region so far. The enterprise value of the African business could be between $5 billion and $9 billion, they say. However, staying invested could potentially mean further losses. Last year, operating cash flow was just about enough to meet capital expenditure needs; although in the past five years Bharti has had to pump in $5 billion into the operations.

Nomura’s advice to cut losses and run seems like the best bet.

The writer does not own shares in the above-mentioned companies.

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Published: 02 Jul 2015, 07:59 PM IST
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