Business Briefing 20/02

Venture into the Dark Continent; Plastic Nickel?

India’s largest telecom company, Bharti, is a restive giant. As the leader in the world’s fastest growing telecom market, its chairman, Sunil Mittal, knows better than most that the party won’t last forever. With nearly 15 players in the field, and more expected to enter soon, India’s telecom sector is probably the most competition-dense in the world. To stay ahead of the pack and constantly compete on pricing takes a toll on profitability, as Mittal experienced recently. Bharti could use its vast cash reserves to roll out 3G services, but given the regulatory mess, no one knows how and when that can happen. Therefore, Bharti’s desperation for growth is understandable. After a failed bid to acquire South Africa-based MTN, Bharti now wants to wed the African ops of Kuwaiti firm Zain Telecom, by forking out close to $10 billion. Nothing wrong with that strategy, given that Bharti is virtually a debt-free company. But the response to the move from the Street and from analysts has been brutal. They think Bharti is paying too much for the extremely low-value telecom users of Africa. They feel it’s the same mistake others, such as Tata Motors, Tata Steel, Suzlon and the AV Birla Group, committed by buying foreign firms when their valuations were at the peak. Last week, in a matter of two trading days, the company’s stock slipped, shaving off 12 per cent of its market value. A stung Mittal even launched an uncharacteristic broadside against analysts who rubbished the deal. “The criticism is utterly misplaced. Tell me, who in the world has the experience of selling Rs 50 pre-paid cards profitably? If Bharti can’t pull it off in Africa, few others can. Also, the quality of management is widely regarded as one of the best in India,” says a senior Bharti executive.

If you have run a debt of more than $1.5 trillion or roughly 50 per cent more than India’s GDP, how much can petty thrift help? But the US government is convinced tiny droplets make the ocean. It’s recent annual budget devotes scores of pages to ‘common sense’ savings and assorted cost-cutting measures (for example, increased use of video-conferencing to cut travel) that would make the finance head of a mid-size company proud. Chief among the Obama administration’s concerns is the rising cost of minting nickels and dimes. Thanks to the volatility of mint metal prices in recent years, it costs the treasury 1.8 cents to produce a copper penny and nine cents for a nickel. ‘The Mint’s primary cost driver is the price of metal, a factor over which it has no control. Daily spot prices of copper and zinc, the Mint’s two main metallic materials, have fluctuated in excess of 100 per cent, and the price of nickel by 500 per cent in recent years. Costs have exceeded the face value of these two coins by over $100 million in prior years. Using alternative coinage materials could save $150 million annually. The Budget enables the Department of the Treasury to explore, analyse, and approve new, less expensive materials for all circulating coins,’ the budget for financial year 2011 noted. President Obama is receptive to material alternatives.

BhartimintMTNSunil MittalZain Telecom