Bharti Hexacom: JM initiates coverage ahead of stock listing, sees 39% upside

Ahead of Bharti Hexacom’s stock market debut, JM Financial has initiated coverage on the scrip with a ‘Buy’ rating and a price target that suggests 39 per cent upside over the IPO issue price. JM Financial said it sees Bharti Hexacom Ltd as a midcap pure-play on structural wireless ARPU growth story.

Ahead of listing, the grey market premium of Bharti Hexacom has surged further higher to Rs 120-125 apice suggesting a listing pop of around 22 per cent to the investors over its issue price of Rs 570 apiece. The premium in the unofficial market stood at Rs 95-100 in the previous trading session.

"India wireless ARPU is on a structural uptrend given the consolidated industry, and as industry needs ARPU to rise to Rs 275-300 in 3-4 years to meet future capex needs. We expect BHL’s ARPU to grow at 10 per cent CAGR, consisting of 6-7 per cent ARPU CAGR due to regular tariff hikes; and 3-4 per cent ARPU CAGR due to Bharti Airtel’s premiumisation strategy," said JM Financial.

BHL’s FY24-26 Ebitda CAGR could be higher at 17 per cent due to presence in high growth potential markets as Rajasthan/NE circle has relatively lower teledensity; and relatively lower penetration of high ARPU postpaid and data subs, it said. The broker sees ARPU growth on the back of tariff hikes, premiumization strategy and cost optimization via its ‘war on waste’ initiative.

Bharti Airtel is the promoter of Bharti Hexacom and holds 70 per cent stake in the company, while government-owned Telecommunications Consultants India (TCIL) has cut its stake down to 15 per cent now while public investors own 15 per cent post-IPO.

BHL provides consumer wireless (mobile), fixed-line and broadband services in Rajasthan and North East circles under Bharti’s brand 'Airtel'. BHL serves over 27 million wireless subscribers in these two circles and wireless business constitutes 97-98 per cent of its revenue while the balance 2-3 per cent is from broadband business.

The Rajasthan circle accounts for 78 per cent of its revenue and the North-East circle for the remaining 22 per cent. BHL is the market leader in NE with a revenue market share of 52.7 per cent in 9MFY24 while it is second in Rajasthan with revenue market share of 40.4 per cent, said the brokerage.

Bharti Hexacom sold its IPO in the price band of Rs 542-570 per share with a lot size of 26 equity shares. The telecommunications-services provider raised Rs 4,275 crore through its primary stake sale and it had received a decent response for its IPO, fetching an overall subscription of 29.88 times.

"We initiate coverage on Bharti Hexacom with a 'buy' rating and a target price of Rs 790 share based on 10 times FY26 EV/Ebitda, implying 39 per cent upside. Though a higher multiple can be argued for BHL given 2-3 per cent higher EBITDA growth potential, we have used 10 times multiple factoring in potential concentration risk due to BHL’s entire dependence on existing circles," it said.