Under-performance for 2009 may now partly reverse: Bharti Airtel (Bharti) had significantly under-performed the market (YTD 60%, over last 12 months by 25%) due to uncertainty over Bharti-MTN deal and industry-specific issues.

With the Bharti-MTN deal now called-off due to non-acceptance of the deal structure by the South African government, we expect Bharti’s under-performance to partly reverse. Lack of clarity on the deal’s final structure and further sweetening of the offer by Bharti have been the prime reasons for its flat performance since the announcement of the deal on 25 May, 2009 as against the 23% return for the broader market since then.

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Bharti and MTN have left the doors open for a possible revival of the deal by resolving the regulatory hurdles and restarting talks. In our opinion, however, the likelihood of deal going through in the visible future looks dismal, post the failure of both companies to arrive at an amicable arrangement for the second time within a year. Regulatory and political decisions of the Indian and South African government would also be a decisive factor for the deal to go through in the future.

The Bharti-MTN deal, if materialized, would have been a strong strategic fit and a win-win arrangement for both companies, as the merged entity would have emerged as the world’s third largest telecom company.

This would have provided leeway for better economies of scale in equipment procurement, network, IT, and handset sourcing, attracting global talent and securing exclusivity deals.

Finding a strategic fit like MTN in a high-growth African market looks difficult and is a setback for Bharti. The possibility of Bharti grabbing Zain looks grim as there are many contenders for the same. Also, calling off of Bharti-MTN deal would provide pricing / negotiation power to Zain.


Bharti is among our top picks and we remain bullish on the company due to its leadership position, balance sheet strength, superior execution skills, best-in-class cost management, and reasonable valuations.

We reiterate our Buy rating on the stock with a target price of Rs478. At our target price, the stock would trade at an implied EV/EBITDA and P/E multiple of 9x and 14.2x FY11E. Competition remains a major plague for the industry and the market leader Bharti.

However, we believe 3G would provide Bharti a leeway to dent the competition to some extent.