Bharti Hexacom “Best Play” On Indian Telecom, Jefferies Says; Starts At Buy

Jefferies says Bharti Hexacom is the “best play” on the Indian telecom story and offers strong growth outlook
Bharti Hexacom “Best Play” On Indian Telecom, Jefferies Says; Starts At Buy

Global brokerage Jefferies initiated coverage on Bharti Hexacom Ltd. with Buy rating and a base case target price of 1,080 rupees per share, saying it is the “best play” on the Indian telecom story and offers strong growth outlook.

Bharti Hexacom offers a way to invest in those parts of Bharti Airtel's business that are growing faster, have higher ROCE (return on capital employed) and have better FCF (free cash flow) conversion,” Equity Analyst Akshat Agarwal and Equity Associate Ankur Pant said in an investor note.

Jefferies said the Indian telecom operator offers strong growth outlook, given that it operates in markets, which have lower tele-density and have witnessed higher translation of tariff hikes into average revenue per user (ARPU) in the past.

Key highlights from the brokerage’s view on Bharti Hexacom are:

Strong Growth Outlook

  • The company's aggressive network expansion and superior execution has driven hefty market share gains over FY20-FY24 and this trend is likely to continue.

  • Bharti Hexacom is expected to deliver a 16% CAGR in revenues, led by 12% CAGR in ARPU and 4% CAGR in mobile subscribers over FY24-FY27.

Healthy Margin Expansion

  • Strong topline growth along with high operating leverage should enable a 600 basis points margin expansion to 53% over FY24-FY27.

  • The assumptions imply incremental EBITDA margins of 64% over FY24-FY27 that is higher than Bharti Airtel, but reasonable given the absence of lower-margin enterprise business.

  • Healthy margin expansion should enable Bharti Hexacom to deliver a 21% EBITDA CAGR over FY24-FY27.

Strong FCF Generation

  • Bharti Hexacom is well-placed to deliver a 40% CAGR in free cash flow to equity, given its strong EBITDA growth and moderating capital expenditure intensity.

  • Bharti Hexacom does not have any spectrum liability for spectrum purchased before 2021, and its spectrum payments to the government will be lower from FY26. This will help boost its FCF margins by 4-6 percentage points in FY26-FY27.

  • Strong cash generation should drive deleveraging of 55 billion rupees (14% of market cap) and help reduce net debt-to-EBITDA ratio to 0.4x by FY27 and could potentially boost dividend payouts.

Lower Capital Intensity

  • Bharti Hexacom has lower capex intensity versus Bharti Airtel's India operations as spectrum prices are low in its markets and its network investments per site are 30% lower as it does not invest in its own fiber.

  • This has enabled 25% lower net/debt-to-EBITDA ratio and should also support higher ROCEs.

  • Bharti Hexacom's ROCE is expected to nearly double to 17.5% Over FY24-FY27, primarily due to 10 percentage points EBIT margin expansion over this period.

Jefferies has a target price of 1,250 rupees on Bharti Hexacom, based on its upside scenario assumptions. On the downside, it set the target price at 700 rupees.

The stock closed at 806.10 rupees on the NSE in Mumbai trading yesterday.

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