The Hindu Business Line : The route ahead

IN negotiating this deal, the Chairman of Bharti Tele-Ventures, Mr Sunil Mittal, may have, by a single stroke, pitted Vodafone against SingTel, Bharti's existing foreign partner, which holds a 30.8 per cent stake. The tussle for control over Bharti could unfold in three different ways:

The Indian promoters of Bharti could sell out their equity stake held, through Bharti Enterprises, in Bharti Telecom to Vodafone. Though the latest move initiated by Mr Mittal makes this plausible, the current shareholding pattern of Bharti Tele-Ventures leaves little leeway to execute this move.

The shareholding pattern (after the Vodafone deal) leaves just about 5 per cent for sale by the promoters to outside parties. The new FDI regulations specifically state that 26 per cent of the equity stake has to be with residents or the company in India. Though this is technically possible, it improves Vodafone's position only marginally.

SingTel may contemplate reducing or exiting the Indian operations by selling out its equity to Vodafone. Considering that SingTel had only recently increased its equity stake in Bharti and has shown interest in hiking its stake further, this may not happen immediately.

Vodafone remains merely a long-term passive investor, allowing Bharti and SingTel to keep the operations running. This seems unlikely, given that Vodafone will try to exploit the potential of India's booming mobile market. It has secured the right to appoint two directors on Bharti's board.

What to watch out for: The aggressive statements coming out from the Vodafone camp suggest that the jostling for control between Vodafone and SingTel has started. The Vodafone CEO has said that the 10 per cent equity in Bharti gives them "rights that are close to what a 30 per cent player (SingTel) has." Though it is premature to read much into this, Mr Mittal's move may have been triggered by 3 key concerns.

One, Vodafone can help Bharti deliver significant improvement in procurement efficiencies, especially in the area of mobile handsets. Vodafone's internal research shows that 70 per cent of the purchase decision for a customer relates to the handset and 35 per cent choose a handset before an operator.

If Vodafone can dovetail Bharti into its global procurement chain for handsets, this can contribute significantly to its economies of scale in operations. The bundling of handsets with airtime, which is a rage in the developed markets, could take off in a big way in India too. Some of Bharti's peers, such as Reliance Infocomm, enjoy a significant advantage on this front. Second, by associating with the Vodafone brand, the savings in capital expenditure on network build-outs can be substantial.

The co-branding initiatives that Vodafone can launch with Bharti too can be pretty significant. Right from the range of innovative service offerings of Vodafone, post-paid customer retention to roaming experience may improve under the Vodafone umbrella. That Vodafone operates out of 30 countries and has over 165 million subscribers can work to Bharti's advantage.

Since, in the next phase of growth, the Indian mobile market is expected to grow to 160-200 million in the next few years, Vodafone's experience in operating out of under-penetrated markets such as Egypt and a highly penetrated market such as Greece will influence Bharti's overall strategy.

Three, when the markets open for 3G (third generation mobile telephony) in India, Vodafone's 3G experience will come in handy for growth initiatives. This is expected to help Bharti get a first-mover advantage at competitive capex. Since speed, preparation and differentiation will be important in the 3G market place, Bharti will be able to build that ahead of its competitors.

Changing market dynamics: The implication for the rest of the telecom market may be equally dramatic. In our view, the mobile market will be dictated by the following moves:

The consolidation among players without a national footprint, such as Idea Cellular, Spice Telecom and Aircel, will happen faster than expected.

In Idea Cellular, where the Tatas and the Birlas recently bought out the equity stake from Cingular Wireless, the case for bringing in a strategic investor will become stronger. Spice Telecom and Aircel will have to re-examine their roles in a rapidly consolidating market-place dominated by Bharti, Bharat Sanchar Nigam, Hutch-Essar, Reliance Infocomm and Tata Teleservices.

The initial public offering from Hutch-Essar and Reliance Infocomm may happen faster than expected. As Vodafone steps up its equity stake in Bharti, the overall valuation for the sector will change too.

The stock call

WE reiterate our `Buy' recommendation made earlier this month for the Bharti Tele-Ventures stock. The entry of Vodafone as a strategic investor brings in a greater element of certainty and aggressiveness to Bharti's growth plans

Though in the long run there is a possibility of tussle for control over Bharti's shareholding between Vodafone and SingTel, the strong management structure will ensure that operations remain unaffected. In the event of a battle, Vodafone could gain control and that will be a positive for Bharti.

Investors can consider exposures with a one-to-two year perspective, but expect moderate returns.

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