Market reaction positive to Bharti dropping MTN

The share price of telecom major Bharti Airtel Ltd today rose 4.01 per cent to close at Rs 435 on the Bombay Stock Exchange (BSE) after the lengthy talks to acquire African telecom company MTN failed on Thursday for the second time. The stock today touched a high of Rs 467 and a low of Rs 434 on BSE.

The share moved up despite the fact that the broader market ended flat. The BSE Sensex closed the day with a marginal gains of 0.05 per cent.

According to Jigar Shah, senior vice-president and head of research at Japanese research house KIM ENG Securities, the stock can still witness over a 10 per cent rally.

"The Bharti stock had underperformed the Sensex by 15 per cent over the past three months, as the merger would have resulted in a 9 per cent dilution of earnings per share for financial year 2010. The company would also have had to issue significant new debt to fund the deal. The stock is currently trading at a price to earnings ratio of 14 times to financial year 2010, which is 20 per cent below the current price to earnings for the Sensex," said Shah.

"The cancellation of the deal will remove uncertainty and overhang investors had regarding the MTN deal. The concerns were on account of rumours about Bharti sweetening the deal, resulting in higher cash outflow and earnings dilution compared to the standalone entity. In the event of the deal, debt on Bharti's books would have gone up significantly, resulting in higher interest burden. All these factors have kept the Bharti's stock price under pressure. But the stock could now witness significant up move," said Mumbai-based research house Ambit Capital, in a note to clients.

According to the research arm of Citi Group Management, the focus would be back on more strategic issues, involving pricing. "However, the MTN deal window is not completely closed. I would expect the Bharti share to move beyond 450 levels," said Rahul Singh, research analyst at Citi Group.