The Hindu Business Line : <I>After the dust settles...</I>

Reliance Communications losing the bidding war for Hutchison Essar to Vodafone may be a short-term negative for the Reliance stock. Since the stock had not run up significantly in the homestretch to the deal, the downside risks may be limited. However, concerns arise on two fronts. One, from slower-than-expected grant of scarce frequency spectrum for execution of Reliance's GSM technology strategy (as opposed to its existing CDMA strategy), which it had articulated last year. Two, any slowdown in subscriber additions as Reliance changes its technology course may dampen market sentiment.

We recommend that investors consider taking an exposure in the Reliance Communications stock on weakness as the multi-year mobile expansion story remains intact and Reliance will remain a strong participant in it.

Reliance Communications will be disappointed with the Hutchison Essar outcome as, among the bidders, the company stood to gain the most from the acquisition. This would have fulfilled its aspirations of switching to GSM in a single stroke, with hardly any overlapping circles. Second, as an Indian company, Reliance Communications could have enjoyed the flexibility of buying out 100 per cent equity in Hutchison Essar, unlike Vodafone, which has to restrict its exposure to 74 per cent, under the FDI guidelines. Finally, the acquisition could have helped Reliance march past Bharti to garner a dominant market share.

Bharti Airtel: Focussed on ring-fencing its stake

Bharti Airtel's market share leadership remains intact, with Vodafone winning the Hutchison Essar bid. We recommend investors retain their holdings in the Bharti stock and use any price weakness linked to the broad market to build up fresh exposures.

With Reliance Communications involved in the build-out of its GSM strategy, BSNL struggling to resolve its mega GSM tender and Vodafone-Hutch caught in the integration process, Bharti will be well placed to strengthen its subscriber additions and extend its market share lead in the near term, before intense competitive picks up again.

Bharti has also extricated itself smoothly from a slightly sticky shareholding situation. Vodafone, which held a 10 per cent equity stake in Bharti Airtel, has granted a Bharti group company the option to buy 5.6 per cent equity at Rs 686 per share for $1.6 billion. The remaining 4.4 per cent will be retained by Vodafone, as an ongoing relationship with Bharti. The Bharti management's ability to enter into an infrastructure-sharing relationship with Vodafone may be a positive for the stock in the long run, as the telecom regulator is reviewing the need to share active network infrastructure.

Krishnan Thiagarajan