Buyers in Bharti Hexacom Ltd inventory should be a happier lot vis-à-vis their counterparts in Bharti Airtel Ltd, the mum or dad firm holding a 70% stake within the former. Hexacom’s shares have gained as a lot as 66% since its itemizing day’s closing worth of ₹813.30 apiece on 12 April 2024. Compared, the positive aspects in Airtel’s shares over the identical interval stand at about half of that (up 34%).
Each Bharti Airtel and Bharti Hexacom function utilizing the Airtel model. Hexacom operates cell and landline companies in Rajasthan and North-East circles. Now, there are two key elements why many brokerages, together with Motilal Oswal Monetary Providers that has not too long ago initiated protection on the inventory, have a optimistic view on Hexacom. First, it stays a pure play within the Indian telecom business not like Bharti Airtel, which has a world presence, particularly in Africa. Second, decrease capital misallocation issues.
Bharti Airtel’s chairman has spoken about the potential for abroad acquisitions within the medium time period. If that occurs, its buyers would have motive to fret. In any case, they’ve already waited a very long time for a better dividend payout. Recall that Bharti Airtel’s Africa acquisition took some time to repay.
Hexacom has no such ambitions of acquisitions. Thus, its considerably improved free money movement could be totally out there for dividend distribution. Plus, Hexacom might probably present increased progress because the circles wherein it operates have a comparatively decrease tele density and decrease web penetration versus different components of India.
“Arpu progress aided by possible moderation in capex will drive Bharti Hexacom’s free money movement progress from FY25, enabling it to get to web money by FY29; this can even assist in accretion in fairness worth,” mentioned JM Monetary Institutional Securities in its Q3FY25 outcomes evaluate report.
True, Hexacom’s Q3FY25 common income per consumer, or Arpu, at ₹241 is decrease than that of Airtel by ₹4. Whereas among the hole may very well be owing to a decrease postpaid subscriber base, it may be as a result of Hexacom’s clients don’t have any or low knowledge plans.
Potential progress areas
House broadband is one other space the place Hexacom lags Bharti Airtel. Whereas simply 4% of Hexacom’s wi-fi subscriber base has residence broadband, the corresponding quantity for Airtel is 7.5%. Maybe, the shortage of broadband availability, particularly within the North East area, is the wrongdoer right here. There’s potential for increased progress in residence broadband as mounted wi-fi entry (FWA) companies are made out there in distant and rural areas.
Bharti Airtel’s residence section margin at 50% in 9MFY25 is far increased than Hexacom’s 32%. A few of the differential could be attributed to working leverage owing to the upper consumer base that absorbs mounted prices extra shortly. Thus, there’s potential for this hole to shut sooner or later as Hexacom’s consumer base grows with the elevated availability. Even when it comes to current broadband Arpu, Hexacom can catch up provided that its reported 9MFY25 Arpu at ₹494 is decrease than ₹568 of Airtel.
Motilal Oswal has arrived at a goal worth of ₹1,625 primarily based on 13x of EV/Ebitda for Hexacom primarily based on FY27 estimates, which is on par with its Airtel India valuation. Hexacom’s shares closed at ₹1,357.40 apiece on Wednesday.
Among the many dangers, “Given barely increased progress and higher RoCE, Hexacom has been buying and selling at a premium to its mum or dad, Bharti Airtel. Whereas the Bharti Group has not indicated {that a} merger of Hexacom right into a mum or dad entity is within the works, we notice a merger at an unfavourable swap ratio, might damage Hexacom’s shareholders,” mentioned Motilal Oswal.
Moreover, the Indian authorities holds a 15% stake in Hexacom, and a possible stake sale overhang stays.
