Indian election lifts SingTel price target from S$2.85 to S$2.90

We see limited tangible synergy benefits from the MTN-Bharti tie up. The biggest global telecoms conglomerate is Vodafone Group and we would argue that its individual country operations do not seem to benefit too greatly from being part of the Vodafone family. Roaming benefits, which are often quoted, would seem to be of limited value in the MTN countries. Some of MTN’s operations may be able to benefit from Bharti’s experiences in India where it has been one of the most successful and consistent emerging market operators, lifting its market share from 18% to 25% over the past 5 years despite ever increasing competition. However, this brings us back to a potential loss of focus in the Indian market at a particularly sensitive time.

Investors have wondered for some time about the strategic importance of SingTel on Bharti’s share register. In the early days Bharti benefited from SingTel’s mobile know how. But is Bharti still benefiting from SingTel now that it has proven itself in the Indian market? SingTel has always maintained that it is only interested in strategic shareholdings in associates where it can positively influence the associate company and add value. Should this transaction proceed, it would be clear that Bharti is placing more strategic importance in the MTN relationship than the SingTel relationship given MTN would end up with a 25% stake in Bharti while SingTel would end up with 19.5%.

SingTel may keep its 19.5% stake as a good emerging market investment but we doubt whether it can add much value to the enlarged Bharti-MTN group in the longer term. We also note that Bharti would be the primary vehicle for both Bharti and MTN to pursue further expansion in India and Asia. Bharti is already invested in Sri Lanka and SingTel has a presence in most of the major South East Asian markets. It would seem that Asian expansion for Bharti might be difficult without cutting into SingTel’s turf.

Like most Indian stocks, Bharti had a big run-up following the results of the Indian election. While this has been a general stock market theme there are high hopes that the Congress-led United Progressive Alliance’s return to power in the Indian election will help push through some much needed regulatory reforms specific to the telecoms sector. Under the previous government, the Ministry for Communications was lead by a DMK party representative, A Raja. With a UPA representative likely to be put in charge of the Ministry, we would expect better progress on such issues as 2G spectrum policy and 3G spectrum licensing. A listing of government-owned telco Bharat Sanchar Nigam (BSNL) is also now being mentioned as a stronger possibility.

Since we last wrote on SingTel following the FY09 result on 14 May, Bharti’s stock price has run up from Rs765 to Rs810 (despite the 5% fall in Bharti’s stock price on today’s announcement). This is the main driver behind the lift in our SingTel target price from S$2.85/sh to S$2.90/sh. Our valuation for SingTel is outlined on the following page.

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