Traders in Bharti Hexacom Ltd inventory have to be a happier lot vis-à-vis their counterparts in Bharti Airtel Ltd, the dad or mum 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 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 components why many brokerages, together with Motilal Oswal Monetary Companies that has lately initiated protection on the inventory, have a optimistic view on Hexacom. First, it stays a pure play within the Indian telecom business in contrast to Bharti Airtel, which has a worldwide presence, particularly in Africa. Second, decrease capital misallocation considerations.
Bharti Airtel’s chairman has spoken about the opportunity of 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 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 circulate may be totally accessible for dividend distribution. Plus, Hexacom may doubtlessly present larger 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 possible moderation in capex will drive Bharti Hexacom’s free money circulate progress from FY25, enabling it to get to web money by FY29; this will even support in accretion in fairness worth,” stated JM Monetary Institutional Securities in its Q3FY25 outcomes evaluate report.
True, Hexacom’s Q3FY25 common income per person, or Arpu, at ₹241 is decrease than that of Airtel by ₹4. Whereas a number of the hole might be owing to a decrease postpaid subscriber base, it may be as a result of Hexacom’s prospects haven’t any or low information plans.
Potential progress areas
Dwelling broadband is one other space the place Hexacom lags Bharti Airtel. Whereas simply 4% of Hexacom’s wi-fi subscriber base has house broadband, the corresponding quantity for Airtel is 7.5%. Maybe, the dearth of broadband availability, particularly within the North East area, is the perpetrator right here. There’s potential for larger progress in house broadband as fastened wi-fi entry (FWA) companies are made accessible in distant and rural areas.
Bharti Airtel’s house phase margin at 50% in 9MFY25 is way larger than Hexacom’s 32%. A number of the differential may be attributed to working leverage owing to the upper person base that absorbs fastened prices extra rapidly. Thus, there may be potential for this hole to shut sooner or later as Hexacom’s person 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 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 larger progress and higher RoCE, Hexacom has been buying and selling at a premium to its dad or mum, Bharti Airtel. Whereas the Bharti Group has not indicated {that a} merger of Hexacom right into a dad or mum entity is within the works, we observe a merger at an unfavourable swap ratio, may harm Hexacom’s shareholders,” stated Motilal Oswal.
Moreover, the Indian authorities holds a 15% stake in Hexacom, and a possible stake sale overhang stays.
