Traders in Bharti Hexacom Ltd inventory should be a happier lot vis-à-vis their counterparts in Bharti Airtel Ltd, the mother or father 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. As compared, the features 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 lately initiated protection on the inventory, have a constructive view on Hexacom. First, it stays a pure play within the Indian telecom business in contrast to 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 cause to fret. In any case, they’ve already waited a very long time for the next 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 move may be totally out there for dividend distribution. Plus, Hexacom may doubtlessly present increased progress because the circles through which it operates have a comparatively decrease tele density and decrease web penetration versus different elements of India.
“Arpu progress aided by doubtless moderation in capex will drive Bharti Hexacom’s free money move progress from FY25, enabling it to get to web money by FY29; this may also help in accretion in fairness worth,” mentioned JM Monetary Institutional Securities in its Q3FY25 outcomes assessment report.
True, Hexacom’s Q3FY25 common income per consumer, or Arpu, at ₹241 is decrease than that of Airtel by ₹4. Whereas a few of the hole might be owing to a decrease postpaid subscriber base, it is also as a result of Hexacom’s prospects don’t have any or low information plans.
Potential progress areas
Residence 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 dearth of broadband availability, particularly within the North East area, is the offender right here. There may be potential for increased progress in residence broadband as fastened 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 way increased than Hexacom’s 32%. Among the differential may be attributed to working leverage owing to the upper consumer base that absorbs fastened prices extra shortly. Thus, there may be 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 on condition that its reported 9MFY25 Arpu at ₹494 is decrease than ₹568 of Airtel.
Motilal Oswal has arrived at a goal worth of ₹1,625 based mostly on 13x of EV/Ebitda for Hexacom based mostly 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 mother or father, Bharti Airtel. Whereas the Bharti Group has not indicated {that a} merger of Hexacom right into a mother or father entity is within the works, we notice a merger at an unfavourable swap ratio, may harm Hexacom’s shareholders,” mentioned Motilal Oswal.
Moreover, the Indian authorities holds a 15% stake in Hexacom, and a possible stake sale overhang stays.
