Bharti will underperform in the near term: Jigar Shah

Jigar Shah, Sr. VP & Head of Research, Kimeng Securities India Pvt. Ltd.

Purely in terms of the opportunity that Zain opens up for Bharti and how the management is aggressively looking at it to get a foothold in the emerging market pack, at 278, do you believe there is upside on the stock because you have been seeing aggressive targets upward of 300 post the fall?

The negative aspect is known and has been exhibited in the marketplace since the time this deal has been announced, that is the EPS dilution, which could be anywhere 25-30% in the next year due to this acquisition.

However, the positive aspect is that the management of Bharti is well acclaimed for their ability to generate good returns on capital even under very competitive conditions, which is happening in the current year and the kind of EBITDA margins that they have been able to hold on to in the Indian markets despite the price discounting, it is a matter of time.

There is some more downfall left because the forthcoming quarters are not going to be good and there will be some amount of pressure on the earnings and margins as we move forward but perhaps if you are talking one or two years down the line or perhaps 18 months down the line, the situation would be quite different because Bharti has an expertise in putting up the Indian cost competitiveness in these operations and scaling them up.

That would be a very positive return but that will take time and in the near term, our recommendation is that the stock will underperform and basically it will stay a bit underweight on the stock at this point of time.