Bharti's debt in Zain deal worries market

Bharti Airtel’s acquisition of Zain Telecom’s Africa operations would help the Indian telco in the long run, but mounting debts to fund the acquisition may affect its profits in the short term, say market analysts.

The view is tilted in favour of analysts having a buy or a hold recommendation on Bharti. There are some who are worried over the lack of clarity on Bharti’s gameplan of growing Zain’s operations in the continent post-acquisition.

“Initially there was concern on whether at Rs 50,000 crore, Bharti was over-paying for Zain. But, it was soon clear that the previous owners had paid the same amount. So, Bharti is getting Zain at a price to book value of 1,” said Manish Sonthalia, senior vice president (fund manager), Motilal Oswal Securities.

According to Bloomberg, there are 34 analysts who have either a buy or a hold rating on Bharti Airtel. On the other hand, only 15 analysts have a sell recommendation.

The consensus target price for the stock, according to Bloomberg, is Rs 330. On Tuesday, Bharti Airtel shares lost 3 per cent to close at Rs 306.80. The stock has gained more than 30 per cent in the last four months after touching a low of Rs 229.50 in November last year.

Analysts are worried about the debt on Bharti’s books. According to Edelweiss Securities estimates, Bharti’s raising of $8.3 billion of debt (based on the deal size of $10.7 billion) could hit the earnings of the company. Edelweiss estimates Bharti’s net profit to be Rs 8,912.2 crore for the year ended March 2011 and Rs 9,467.5 crore in March 2010.

“Our preliminary estimates show that Bharti’s debt-equity ratio would shoot to 1.1 from the current 0.4. Bharti would also face a challenge to expand Zain’s Africa operations,” said an analyst who did not wish to be named.

“However, we also need to factor in that globally telecom companies have a high debt-equity ratio,” he added.

There are analysts who think that the benefits will accrue post-integration in the long term. “Bharti is a master at cost reduction and if it can increase the incremental return on capital deployed to 20 per cent, the deal would be EPS accretive,” said Sonthalia. Motilal Oswal has a buy rating on Bharti.