Buy Bharti Hexacom Ltd For Target Rs.2,030 by Motilal Oswal Financial Services Ltd
In-line 2Q; albeit slightly weaker than Bharti Airtel
* Bharti Hexacom (BHL) reported an in line 2Q, with ~2.5-4% QoQ growth in customer wireless revenue and overall EBITDA, driven by ~2.2% QoQ growth (vs. 2.7% QoQ for Bharti) in wireless ARPU to INR264.
* Paying wireless subscriber base declined QoQ due to tariff rejig and weather disruptions in North East.
* HBB revenue/EBITDA grew ~4%/6% QoQ, but was below expectations as net adds remained stable QoQ (~71k) and ARPU declined ~1.5% QoQ.
* Reported segmental capex moderated ~9% YoY to INR3.4b (though down ~12% QoQ), while cash capex surged ~62% YoY to INR6.9b due to payment of creditors for capex.
* Due to elevated cash capex and higher cash tax, FCF generation (after leases and interest payments) moderated to INR2.2b (vs. INR4.4b YoY). For 1HFY27 FCF stood at INR12.7b (vs. INR13.4b YoY).
* Net debt (ex-leases) increased INR6b QoQ to INR15.8b, due to dividend payouts, with net debt to EBITDAaL rising to 0.31x (vs. 0.2x QoQ).
* Over last one year, BHL has under-performed BHARTI (market cap -8% vs. +9% for BHARTI). As a result, its implied premium to BHARTI’s India business on one-year forward EV/EBITDA has shrunk from ~30% to ~11% currently. Given better return ratios and lower capital misallocation risks (vs. BHARTI), we believe there is a case for BHL to trade at a premium (though it has lower growth avenues).
* Our FY27 estimates remain largely unchanged, while we cut our FY28-29E revenue and EBITDA estimates by 1-2%. We model a ~12%/16%/27% CAGR in BHL’s customer revenue/EBITDA/adj. PAT over FY26-29, driven by ~15% tariff hike, continued premiumization, and HBB ramp-up.
* We ascribe a DCF-based FY29E EV/EBITDA of 13.5x to BHL (which is at ~25% premium to our multiple for Bharti’s India business). We reiterate our BUY rating with a revised TP of INR 2,03
Higher cash capex and tax outgo leads to moderation in FCF during 2Q
* 2Q overall revenue at INR25.8b (+11% YoY, in line) grew 3% QoQ, with customer revenue rising ~2.6% QoQ to INR24.2b.
* Reported wireless revenue/EBITDA grew ~3% QoQ, driven by 2.2% QoQ (2.7% QoQ for BHARTI, in line) growth in ARPU to INR264, on the back of one additional day QoQ, while paying subs declined ~16k QoQ.
* Homes revenue rose ~4% QoQ to INR 1.31b (49% YoY, 9% below), while EBITDA at INR0.53b (18% below) rose 6% QoQ, led by 71k net adds (vs. 75k QoQ), while ARPU declined 1.4% QoQ at INR 475/month.
* Reported EBITDA grew ~4% QoQ to INR13.8b (+14% YoY, in line) as margin expanded ~65bp QoQ to 53.3%,
* Reported EBITDAaL grew 3.5% QoQ to INR12.5b, with pre-IND AS EBITDA margin rising ~40bp QoQ to 48.6%. Incremental pre-IND AS EBITDA margin stood at ~60% (vs. 58% in 1QFY27).
* Reported PAT grew ~17% QoQ to INR5.7b (+34% YoY, 7% ahead of our est. of INR5.3b), mainly due to lower tax rate.
* Overall 2Q capex moderated 9% YoY to INR3.4b (down 12% QoQ), while cash capex surged 62% YoY to INR6.9b due to payment of creditors for capex.
* Due to elevated capex and higher cash tax, FCF generation (after leases and interest payments) moderated to INR2.2b (vs. INR4.4b YoY).
* Net debt (ex-leases) increased INR6b QoQ at INR15.8b, with leverage rising moderately to ~0.31x (vs. 0.2x QoQ).
Valuation and view
* BHL provides a pure-play exposure to BHARTI’s fast-growing wireless and HBB segments in circles with lower data and HBB penetration.
* Over last one year, BHL has under-performed BHARTI (market cap -8% vs. +9% for BHARTI), as a result its implied premium to BHARTI’s India business on oneyear forward EV/EBITDA has shrunk from ~30% to ~11% currently. Given better return ratios and lower capital misallocation risks (vs. BHARTI), we believe there is a case for BHL to trade at a premium (though it *Our FY27 estimates remain largely unchanged, while we cut our FY28-29 revenue and EBITDA estimates by 1-2%. We model ~12%/16%/27% CAGR in BHL’s customer revenue/EBITDA/adj. PAT over FY26-29, driven by ~15% tariff hike, continued premiumization and HBB ramp-up.
* We ascribe a DCF-based FY29E EV/EBITDA of 13.5x to BHL (which is at ~25% premium to our multiple for Bharti’s India business). We reiterate our BUY rating with a revised TP of INR 2,030 (earlier INR2,020). The LT risk-reward remains favorable (bull case: INR2,485; bear case: INR1,390).
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