Friday, February 26, 2010

Bharti's African Safari


Bharti's entry into Africa, which has a huge untapped market, via Zain's African assets (ZAF) seems positive from a long-term perspective. It also reduces the risk that may have arisen because of the intense competition in the Telecom sector in India.

Bharti Airtel (BAL) has bid for ZAF (excluding Sudan and Morocco) at US$ 10.7 bn. The acquisition will give BAL control over ZAF and while valuations are at a premium, the strategy will pay rich dividends in the long term.

ZAF’s assets have been impacted in terms of growth and profitability by the currency devaluation and poor economic conditions. ZAF’s revenues declined 12% through 9MFY09 (annualised), but grew 5% based on constant currency. The ZAF acquisition is likely to lead to mild EPS dilution in the second year of acquisition and is expected to be EPS-accretive from 2013. The current fall in BAL’s stock price (11% post announcement) is a chance to accumulate since the performance will likely improve post more clarity on the deal structure and business fundamentals.

Though the current market situation and scope for profitability growth in Africa may look glum but post the credit crisis in ’08, African currencies significantly devalued 3-39%, with African nations highly dependent on natural resources (crude) and remittances. With current mobile penetration at 36% in ZAF’s markets of presence, Africa presents an opportunity similar to that in India in ’08 and will likely witness the maximum interest by global telcos in this decade.

Thursday, February 25, 2010

India Rising - Three Stalwarts' Views

The hype about the emerging economies, especially India and China, has picked up momentum in the recent past. But, this is not something new and probably have been happening for the past 25 years. The rise of the Indian middle class, the growth in per-capita income, literacy rates and slowdown of population growth rate are the few indicators of the Indian growth story. At our Alliance campus I had the privilege of interacting closely with three stalwarts in a span of roughly one month on this topic.

Dr. Jagdish N. Sheth, a renowned scholar and world authority in the field of marketing, was here on January 17. He was sharing his insights on global competition, strategic thinking and customer relationship management. He strongly believes that while the 20th century economics was driven by government policy of advanced economies, the 21st century economics will be driven by competitive markets of emerging nations. To his opinion this would be primarily achieved through 100% education, gender neutrality, and open to change. He says that the factors attributable for India's growth are:
- Change in the economic policies
- More advanced nations are ageing and ageing rapidly
- Economic pragmatism
To my opinion the public sector enterprises will play a major role since they already have the scale and just needs reforms and better governance.

I had a question for Zarir J. Cama, Deputy Chairman & CEO, HSBC Bank, Malaysia when he recently visited our business school on February 19. I asked him that can U.K or U.S.A continue to consume goods and services that are manufactured in the emerging economies without having the corresponding growth in earning capacity? He said that an economy like U.K. cannot continue with a deficit of 180% of its GDP very long, and the similar logic is applicable for the U.S. On the other hand the emerging nations like India and China cannot solely rely on the advanced economies for the market of their products and services; they will also have to start consuming their own produces. Referring to the recent financial crisis he opined that it is now clear that Asian banks are emerging stronger and more resilient from the crisis than the most. However, as Asia's economies and businesses grow, they will demand deeper and more sophisticated capital markets to ensure the efficient allocation of capital.

During my one-to-one interaction with Mr. V. Ravi Kumar, Executive Director, Bangalore Stock Exchange at our campus, on February 23, I had asked him "will the divergent growth rates in the U.S. and China finally erode the hegemony of the U.S. dollar?". In reply to my question he made a very candid remark - "all said and done don't forget that the U.S. is still the elephant in the room and will continue to be the same for years to come".

Though we cannot undermine the upward growth of the emerging nations and possibilities and outcomes of a trilateral relationship between the U.S., India, and China still there is a long way to go. We are excited about China's over 10% growth for the past 10 years but, are we sure that this growth rate is sustainable? In India only financial and monetary reforms cannot shape our future, the next reform we need is inevitably reforms in governance.