Downgrade Bharti to ‘SELL’ with target of Rs 245: KIM ENG

MUMBAI: KIM ENG India Securities has downgraded Bharti Airtel to ‘Sell’ from earlier ‘Hold’ after the company entered into discussion to buy Zain Africa. It has set a target price of Rs 245/share on Bharti Airtel.

“Bharti Airtel said it would bid US$10.7bn for Zain Africa by 25 March (after due diligence, regulatory approvals). The stock may fall on EPS dilution (possibly 35%) and increase in D/E to 1.35x from current 0.05x (we assume leveraged acquisition).

Zain Africa generates net margin of only 2.9% (vs 20% for Bharti). Zain has subs growth rate of 20% (similar to Bharti). For the deal to be EPS accretive for Bharti, Zain Africa's PAT must increase by US$650m (US$122m in FY08), which we believe is unrealistic over next 18 months.

Bharti's margins are under pressure due to competition and the need to invest Rs 80bn in 3G. We downgrade Bharti to SELL from HOLD based on sum of the parts (PER of 12x FY10F on diluted EPS, Rs47/sh of value of tower business),” the report said.