Home >Opinion >Online-views >Bharti ends a difficult courtship

Shareholders of Bharti Airtel Ltd will heave a sigh of relief because their company’s impending nuptials with African giant MTN Group Ltd have broken off. Bharti’s stocks fell 8.5% from its closing quote on 5 May, when MTN first said that it was talking with the Indian telecom firm. The prices, however, moved up 2.4% last Friday in a falling market, probably on reports the deal will be called off.

In contrast, rival Reliance Communications Ltd’s (RCom) stock moved up 5.7% between 5 and 22 May. Bharti’s underperformance should now be corrected. Incidentally, Singapore Telecommunications Ltd, which was expected to partner Bharti in the deal, has also seen its stock fall 6.7% between 5 and 23 May, underperforming the Straits Times Index.

The market has been worried that Bharti would have to pay a steep price to buy MTN. The impact of the extra debt it would have to show on its balance sheet was another concern — with a market capitalization of around $38 billion, financing the acquisition would have been tough for Bharti, not the least because it has already planned sizable capital expenditure. The prospect of an equity dilution to fund the deal also weighed on the stock.

Given that MTN is the bigger company in revenues and subscribers, and has higher Ebitda (earnings before interest, taxes, depreciation and amortization) margin as well as a higher share in its markets than Bharti, the deal was unlikely to come cheap, with most analysts estimating a price of well above the 165 rand (about Rs920, or $22) per share that the initial Financial Times story had mentioned. Moreover, operational risks from regulatory and cultural hurdles would also have bogged down the stock. Bharti’s valuations would have been dragged down after the buyout, as MTN’s valuations are much lower. MTN has a history of flirting with potential acquirers, and persistent rumours have been one of the reasons for keeping its stock high. With most operators eyeing Africa’s under-penetrated markets, MTN is a likely target and the management has fully exploited that potential.

With its overseas dream postponed, the focus is back on Bharti’s “fundamentals". The stock had jumped on better-than-expected fourth quarter results, reaching a high of Rs950 a share before falling back. The company’s strengths are well known, and recent problems on allocation of radio spectrum have eased.

In short, there’s no reason for the company to quote at such a large discount on both price-equity, and economic value-Ebitda to rival RCom. Economic value, which is the assessed value of an asset based on its ability to generate income, remains high for Bharti.

Bhel’s final numbers no comfort

Engineering-equipment maker Bharat Heavy Electricals Ltd’s (Bhel) audited results for the March quarter show a 3.4% drop in net profit, while estimated numbers, announced at the beginning of April, had showed net profit fell 7.4%. Since then, the stock fell 5.7%, while the benchmark Sensex index on the Bombay Stock Exchange went up 5.4%.

However, the detailed results now made available provide cold comfort to Bhel’s shareholders. It’s partly because higher “other income" added largely to profits in the quarter that ended on 31 March. Deprived of that prop, earnings before interest, taxes, depreciation and amortization, or Ebitda, is down 14.1%.

Its management had blamed higher wage provisions and raw material costs for this. It’s true that employee costs have soared 29% in the March quarter, as the company made higher provisions based on the pay commission’s report. Ebitda margins are down to 18.9% from 22.9% in the same period a year ago.

Although margins fell in the power business, they expanded in the industry segment, which accounts for almost 30% of the company’s sales and 26% of its profits before interest and tax. But the chief reason for the dismal showing lies in the 4% growth in net sales. Apart from delays in commissioning power projects, a persistent shortage of components is responsible for poor execution.

The company has plenty of orders, and shows a backlog of Rs85,500 crore. It also expects to book orders worth Rs40,000 to Rs50,000 crore this fiscal year. However, orders are no guarantee of higher sales, and execution is the key issue. Bhel’s sales guidance for the current year is between 16% and 25%.

The silver lining is that the firm is yet to utilize all the additional capacity that came on stream last December, and the benefits should start flowing from the current quarter. Also, while the cyclical peaks are behind the company, there’s no reason for it to underperform the capital goods index on the Bombay Stock Exchange.

Write to us at marktomarket@livemint.com

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