Jefferies sees 15% upside for Bharti Airtel stock; lists three key takeaways for Bharti Hexacom IPO
- Jefferies examines Bharti Hexacom, Bharti Airtel's 70% subsidiary, after its IPO filing with SEBI. Jefferies maintains a 'buy' recommendation for Bharti Airtel with a target price of ₹1,300.
Global brokerage firm Jefferies delves deeply into Bharti Airtel's 70% subsidiary, Bharti Hexacom, which filed its Draft Red Herring Prospectus (DRHP) with the Securities and Exchange Board of India (SEBI) for an Initial Public Offering (IPO) last month. For those Bharti Airtel investors who are interested in knowing more about the subsidiary's operations, Jefferies has compiled a list of important details on Bharti Hexacom's business in its most recent research.
“We take a closer look at Bharti Hexacom, which forms 7% of Bharti's India ops. that in turn form c.90% of our SOTP,” said Jefferies in its report.
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The international brokerage has maintained its "buy" recommendation for Bharti Airtel and has left the target price at ₹1,300, which represents a 15% increase from ₹1,134.55 (market price mentioned in the report).
Let's take a look at the three key takeaways Jefferies outlined for Bharti Hexacom.
Presence in high-growth markets with higher consolidation
The brokerage claims that Bharti Hexacom, the 70% subsidiary of Bharti Airtel, operates in the North East and Rajasthan, two of India's 22 licence zones. In the last five years, these markets have expanded at a rate three percentage points faster than the whole India market, with a TAM of US$2 billion, or 7% of the country's mobile sales. Reduced penetration rates indicate these markets have better growth potential.
With the Top-2 operators holding 85% of the market compared to 79% of the market throughout India, Bharti Hexacom's markets are more akin to a duopoly. With a 43% market share, compared to 38% for all of India, Bharti leads the market inside Bharti Hexacom's rings. Greater concentration may result in greater pricing power and scale efficiencies, but it will also reduce the potential for additional market share gains.
Faster revenue growth with lower EBITDA margins
The brokerage claims that mobile services account for the majority of Bharti Hexacom's income, which makes up 7% of the company's operations in India. Due to its smaller postpaid customer mix, it has a somewhat lower subscriber mix than Bharti Airtel's whole mobile operations in India. This partially explains why its average revenue per user (ARPU) is 3% less than Bharti's mobile ARPU for all of India. While Bharti's Standard operations grew at a 16% CAGR over FY20–2023, Bharti Hexacom's revenue grew at a quicker 19% CAGR.
With its own network present in just two of the 22 licence regions, Bharti Hexacom's EBITDA margins are over nine points lower than those of Bharti Airtel's standalone operations, the brokerage added. This difference is mostly attributable to 10 points higher access charges.
Lower capex intensity has enabled lower leverage
During FY18–23, Bharti Hexacom's gross block grew at an 8% CAGR, which was less than the 11% CAGR for Bharti's standard operations. Although their EBITDA margins differ by 9 points, Bharti Hexacom's net debt to EBITda ratio has decreased due in part to lower capital intensity, which has also helped the company reduce its EBIT margin gap to only 2 points.
Disclaimer: The views and recommendations above are those of individual analysts, experts and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decision.
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