Bharti Hexacom Can See Upside Of 34%, Says Jefferies After Initiating 'Buy'

Bharti Hexacom Ltd. offers a strong growth outlook as it operates in markets that have lower tele-density and witnessed higher translation of tariff hikes into the average revenue per user in the past, according to Jefferies India Pvt. The research firm has initiated coverage on the stock with 'buy' rating. It has set a target price of Rs 1,080 apiece, implying a potential upside of 34% from the previous close.

The company's aggressive network expansion and superior execution has driven hefty market-share gains over FY20-24 and Jefferies expects this trend to continue. "As a result, we expect Bharti Hexacom to deliver 16% CAGR in revenues, led by 12% CAGR in ARPU and 45%, CAGR in mobile subscribers over FY24-27," the research firm said in an April 15 note.

Strong top-line growth along with high operating leverage should enable a 600-basis point margin expansion to 53% over FY24-27.

"Our assumptions imply incremental Ebitda margins of 64% over FY24-27, which is higher than Bharti Airtel, but reasonable given the absence of lower-margin enterprise business. Healthy margin expansion should enable Bharti Hexacom to deliver 21% Ebitda CAGR over FY24-27.

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

Given that Bharti Hexacom does not have any spectrum liability for spectrum purchased before 2021, its spectrum payments to the government will be lower from FY26, which will help boost its free cash flow margins by 4-6 percentage points in FY26-27.

Strong cash generation should drive deleveraging of Rs55 billion (14% of market cap) and help reduce net debt to Ebitda ratio to 0.4 times by FY27 and could potentially boost dividend payouts.

Bharti Hexacom has lower capex intensity vs 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 return on capital employed, it said. "Over FY24-27, we expect Bharti Hexacom's ROCE to nearly double to 17.5% primarily due to 10ppts EBIT margin expansion over this period."

Shares of Bharti Hexacom rose as much as 8.76% intraday on the NSE, before paring gains to trade 6.12% higher at 11:38 a.m., compared to a 0.47% decline in the benchmark Nifty 50.

Two analysts tracking the company have a 'buy' rating on the stock, according to Bloomberg data. The average of 12-month analysts' price targets implies a potential upside of 8.8%.