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Strong results; beneficiary of premiumisation story

Bharti Hexacom (BHL) 4QFY24 EBITDA was 1.5% higher than JMFe at INR 9.3bn (up 4.1% QoQ and 13.8% YoY) on account of strong wireless subs (subscribers) additions (of 560k) and sharper jump in ARPU (to INR 204) driven by rise in AMDU and improved subs mix on back of robust 4G/5G net adds (of 640k). EBITDA margin improved 18bps QoQ to 49.6%. Home broadband and wire-line business continued to register strong subs addition while its ARPU further declined QoQ. Capex was INR 1.4bn higher QoQ at INR 4.9bn; net debt increased by INR 2.9bn to INR 78.3bn at end-4QFY24 due to seasonal increase in working capital. Further, board approved final dividend of INR 4/share (or 40% payout), though will frame dividend policy once some deleveraging is done. We maintain BUY on BHL (revised 1 year TP of INR 1,075) as we believe India wireless business tariff hikes are likely to be more frequent, going forward, given the consolidated industry structure and higher ARPU requirement for Jio also to justify significant 5G capex. ARPU growth aided by likely moderation in capex will drive BHL’s FCF growth from FY25, enabling it to get to net cash by FY29; this will also aid in accretion in equity value. We see BHL as a midcap pure-play on wireless ARPU growth story.

* EBITDA slightly higher than JMFe on account of strong wireless subs additions and sharper jump in ARPU: BHL’s 4QFY24 revenue at INR 18.7bn (up 3.7% QoQ and 7.8% YoY), was 1.2% higher than JMFe of INR18.5bn on account of strong wireless subs additions and sharper jump in ARPU.

Network cost (at INR 4.6bn, +0.8% QoQ and +12.1% YoY) and licence fee/SUC cost (at INR 1.7bn, +4.4% QoQ and +14.7% YoY) were in-line with JMFe. Moreover, SG&A cost (at INR 0.9bn, -1.5% QoQ and +12.3%) and other costs at INR 2.7bn (+3.0% QoQ, -16.5% YoY) were also in-line. Hence, EBITDA was also 1.5% above JMFe at INR 9.3bn (+4.1% QoQ and +13.8% YoY) with EBITDA margin improving by another 18bps QoQ to 49.6% in 4QFY24 due to operating leverage and sustained focus on the ‘War on Waste’ programme to drive cost optimization. Wireless business net subscribers rose strongly by 560k to 27.3mn (vs. JMFe of 330k net additions) with reported churn lower QoQ at 2.0% in 4QFY24. Further, 4G/5G net additions were also slightly better than expected at 640k in 4QFY24 v JMFe of 600k addition (vs 570k addition in 3QFY24); 4G/5G subscribers constitute 71% of total subscribers. Further, usage metrics was up 3.4% QoQ at 24.5GB/user/month in 4QFY24. Wireless ARPU jumped by INR 4 QoQ to INR 204 vs Bharti Airtel’s ARPU rising by INR 1 QoQ to INR 209 and Jio’s ARPU (including FTTH) being flat QoQ at INR 181.7; BHL management highlighted this higher APRU was partly due to full quarter of normal operations in Manipur in 4QFY24 vs. only 3 weeks of normal operation in 3QFY24.

* Home broadband and wire-line business – strong subs addition continues while ARPU continues to decline:

BHL’s home broadband and wire-line revenue rose slightly QoQ to INR 547mn in 4QFY24 (+0.7% QoQ and +27% YoY) with additions of 16k subscribers during the quarter (taking subs base to 305k at end 4QFY24); however, ARPU was down 2.8% QoQ at INR 522/month in 4QFY24 (vs. INR 537/month in

* Capex was INR 1.4bn higher QoQ at INR 4.9bn in 4QFY24; net debt increased by INR 2.9bn to INR 78.3bn:

Capex was INR 1.4bn higher QoQ at INR 4.9bn in 4QFY24 (vs. 3QFY24 capex of INR 3.5bn). Further, FY24 capex was INR 20.2bn (vs. FY23 capex of INR15.2bn and FY22 capex of INR 7.7bn). Net debt, including lease liabilities, increased INR 2.9bn to INR 78.3bn at end-4QFY24 due to seasonal increase in working capital and higher interest & finance charges on account of payment of spectrum dues. Net debt-EBITDA, including lease liabilities, was 2.11x at end-4QFY24 vs. 2.13x at end-3QFY24.

* Maintain our BUY rating on BHL with revised 1-year TP of INR 1,075 and 3-year TP of INR 1,500 (implying 16% IRR):

We have raised FY25-26 EBITDA by ~7% factoring in FY24 financials, higher APRU/subs growth and operating leverage. Further, we have revised our 1 year TP to INR 1,075 (from INR 790) due to increase in our estimates, roll-forward of our valuation to Sep’25 and increase in EV/EBITDA multiple to 11.0x (from 10.0x) given the potential to generate EBITDA growth of 3-4% above Bharti Airtel. Our 3 year TP stands at INR 1,500/share implying 16% IRR potential (Exhibit 6). We expect BHL’s FY24-26/FY24-30 EBITDA CAGR to be higher at 20%/16% (vs. 14%/12% for Bharti’s India wireless business) due to ~2.4% subs CAGR and ~10.4% ARPU CAGR potential as Rajasthan/NE circle has relatively lower teledensity and lower penetration of high ARPU post-paid & data subs. As detailed in our initiation note (Mid-cap pure-play on structural wireless ARPU growth story), we reiterate our BUY rating on BHL as we believe India wireless business tariff hikes are likely to be more frequent, going forward, given the consolidated industry structure and higher ARPU requirement for Jio also to justify significant 5G capex. ARPU growth aided by likely moderation in capex will drive BHL’s FCF growth from FY25, enabling it to get to net cash by FY29; this will also aid in accretion in equity value. We see BHL as a midcap pure-play on wireless ARPU growth story vis-à-vis Bharti (which sees 25-30% of its value coming from other than India wireless business).

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