Bharti Airtel Ltd’s shares rose by 1.7% on Wednesday, defying the fall of around 1% in the broad market, on news that the company will invest $600 million (around Rs2,826 crore) to grow Zain’s Nigerian business.

This is in stark contrast to the markets’ reaction when Bharti had announced that it has agreed to buy Zain Africa for $10.7 billion; shares had fallen by 13.7% in two trading sessions.

Also See Improving Prospects (Graphic)

Has the markets’ perception about Zain’s prospects changed? Not quite. Even during the time of acquisition, most analysts had said that Zain’s growth prospects are stronger vis-a-vis those of Bharti’s Indian business. The problem they had with the acquisition was the valuation. Zain was valued at around 10 times its earnings before interest, tax, depreciation and amortization (Ebitda).

According to analysts at Anand Rathi, assuming the fair value was eight times Ebitda, Bharti paid around $2 billion more than it should have, which works out to a value erosion of Rs25 per share. Bharti’s share price adjusted for this. In other words, a large part of the damage from Zain is reflected in the current valuation. Of course, there could be a further hit if the performance of the newly acquired assets is below par.

Mike Dunning, a managing director at Fitch Ratings in London told Bloomberg this week: “The next round of growth in Africa is not as profitable as the first stage, and the difference is quite dramatic. You hit a certain point where you’ve got all the juicy subscribers covered, and you have to mine the people who can’t really afford the service."

The key to growing earnings in African markets is cutting costs drastically, and the markets seem to be working on the assumption that Bharti would be able to replicate its Indian low-cost model in Africa.

Thankfully for investors, the prospects of Bharti’s Indian business has improved in recent months, with new entrants not causing considerable damage for incumbents. This has made up for some of the other negatives such as expensive 3G bids and unfavourable recommendations by the telecom regulator.

Graphic by Naveen Kumar Saini/Mint

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