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The Indian government and corporate leaders cheered Bharti Enterprises’ (Bharti) decision to acquire a 24.5 percent stake in BT Group, a major provider of telecommunications services in the UK. After the acquisition, Bharti will become the biggest shareholder in BT. The stake purchase is estimated to cost Bharti $4 billion, but Bharti is not immediately seeking to gain control of BT or planning to run it.

That makes BT's stake purchase a financial or a strategic investment for now. In the past, a magnitude of this investment by Bharti group was made by its listed subsidiary Bharti Airtel in Africa, considered a growth market. In comparison, BT operates in a highly competitive and matured telecom market.

The UK company is struggling to eke out growth. In fact, its revenues in FY24 are still lower than FY20 levels. Operating earnings increased by less than 1 percent per annum on average in the last four years. Its forecast of 0-1 percent revenue growth for the current fiscal year is nothing to be excited about. In contrast, Airtel's operating earnings have more than doubled in the four years to FY24 amid price hikes.

So, why is Bharti making a big bet on the UK telecom market? The acquisition price and prospect of a revival in BT’s earnings are two likely reasons. BT is trading at close to its book value and its market capitalisation is lower than its FY24 revenues. Key valuation metrics such as price to earnings and EV/EBITDA are way below Airtel's levels. BT's EV/EBITDA is pegged at 4.4 times vis-à-vis Airtel’s 11 times. EV is enterprise value and EBITDA is earnings before interest depreciation and amortisation.

The valuation gap makes BT an interesting bet. Growth challenges aside, BT is generating decent returns from its business. The FY24 EBITDA margin stood at 38.9 percent. It maintained dividends in FY24 and plans to pay more to shareholders in FY25. Its trailing dividend yield stands at 5.7 percent.

What’s more, BT is in the midst of a programme to lower costs and reorganise its business. It claims to be past its peak capital expenditure spending and is targeting a significant improvement in free cash flows by FY27 and FY30. While the prospect of an improved BT drove up its shares in the last six months, delivery of stated financial objectives can yield significant capital appreciation for Bharti. Latest gains notwithstanding, the BT stock is still way below its last historic highs in 2016.

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Moneycontrol Pro