Traders in Bharti Hexacom Ltd inventory have to 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 good points 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 constructive view on Hexacom. First, it stays a pure play within the Indian telecom trade 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 potential of abroad acquisitions within the medium time period. If that occurs, its traders 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 circulation will be completely obtainable for dividend distribution. Plus, Hexacom may doubtlessly present greater 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 probably moderation in capex will drive Bharti Hexacom’s free money circulation 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 overview 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 could possibly be owing to a decrease postpaid subscriber base, it is also as a result of Hexacom’s clients haven’t any or low knowledge 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 dwelling 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 greater progress in dwelling broadband as fastened wi-fi entry (FWA) companies are made obtainable in distant and rural areas.
Bharti Airtel’s dwelling section margin at 50% in 9MFY25 is way greater than Hexacom’s 32%. A number of the differential will be attributed to working leverage owing to the upper consumer base that absorbs fastened prices extra rapidly. Thus, there may be potential for this hole to shut sooner or later as Hexacom’s consumer base grows with the elevated availability. Even by way of 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 greater 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 word a merger at an unfavourable swap ratio, may damage Hexacom’s shareholders,” stated Motilal Oswal.
Moreover, the Indian authorities holds a 15% stake in Hexacom, and a possible stake sale overhang stays.
