Dial D for Discount

10/21/2009 9:41 am EST

Focus: GLOBAL

Yiannis Mostrous

Editor, The Capitalist Times

Shares of Indian wireless giant Bharti Airtel are a bargain after the recent selloff, writes Yiannis G. Mostrous in The Silk Road Investor.

Earnings in Asia haven’t declined as much as they did in 2001 or even the 1980s recession; now that recovery is under way, analysts are in a frenzy to upgrade earnings expectations.

The debt-to-equity ratio for Asian companies as a whole (excluding Japan) is now around 26% to 27%, which, though not as low as the 24% registered in 2007, is low by global and regional standards. In other words, Asian companies enjoy extremely clean balance sheets, and will have the opportunity to lever up when they so decide.

And Asian companies will have to do something with all this cash. Expect to see an up tick in mergers and acquisitions, as well as increased dividends in some sectors. Until then, long-term investors will be better off building positions in companies that not only offer superior growth opportunities but have the cash to support expansion. At current levels, energy, telecommunications, financial, industrial, and material companies appear to be the cheapest in Asia.

Indian telecom company Bharti Airtel (India: BHARTIARTL) has underperformed the market this year and recently lost more than 20% of its market capitalization in just four sessions after one of its competitors introduced a flat-rate calling plan. Bharti has said that it will not follow suit, and the market regards this as a big negative.

With a market share of 25%, Bharti Airtel is one of India's leading telecom firms; its mobile services group provides GSM mobile services throughout India, while its broadband and telephone division offers services in 100 cities. Singapore Telecom owns a 31% stake in Bharti Airtel. [Bharti Airtel was recently thwarted in its attempt to merge with South Africa's MTN Group in a deal that would have created the world's third-largest wireless carrier—Editor.]

Bharti offers a good risk/reward profile at this juncture, as the market’s response strikes me as an overreaction. Bharti has built a strong brand, enabling the company to charge a premium. And the scale of its operations makes Bharti a cost leader; efforts to compete with the company on price aren’t likely to work as well as some analysts anticipate.

The stock trades in Indian rupees and on the National Stock Exchange of India, the country’s second largest exchange. [Users] can purchase these shares through Interactive Brokers, which now offers access to this market.

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