Buy Bharti Hexacom Ltd for the Target Rs. 1,900 by Motilal Oswal Financial Services Ltd
In-line 4Q; prefer Airtel following BHL’s sharp run-up
* Bharti Hexacom (BHL) delivered an in-line 4Q, with ~1-2% QoQ rise in revenue and EBITDA, as the residual benefit of the tariff hike was offset by two fewer days QoQ.
* BHL’s capex spiked ~50% QoQ to INR4.3b (-14% YoY), though overall capex (ex-spectrum for FY25) moderated to ~INR15b (vs. INR20b YoY).
* BHL’s net debt (ex-leases) declined ~INR6b QoQ to INR37b (from INR49b in Sep’24) as it prepaid ~INR8.6b debt pertaining to the 2024 auction. As a result, BHL’s net-debt-to-EBITDAaL moderated to ~0.9x (vs. ~1.5x YoY).
* Adjusted for INR8.6b spectrum prepayments, BHL generated ~INR6.6b FCF in 4QFY25 and ~INR20.4b in FY25. The company announced a dividend of INR10/share (vs. INR4/share YoY).
* BHL provides a pure-play exposure to Bharti Airtel’s fast-growing India wireless and home broadband segments. Given the relatively lower penetration of mobile and fixed broadband in BHL’s circles, its growth prospects are slightly better than Airtel's.
* Our earnings are broadly unchanged as we model a revenue/EBITDA/PAT CAGR of ~14%/21%/ 42% over FY25-28E.
* Since our initiation in Mar’25, BHL has delivered ~30% returns and now trades at ~25% premium to the implied EV/EBITDA valuation for Bharti’s India business (vs. ~13% on average since its listing).
* We believe BHL should command a premium to Airtel, given its slightly higher growth, better RoCE, and lower capital misallocation concerns, and ascribe a DCF-based Jun’27E EV/EBITDA of 14.5x (~10% premium to our multiple for Airtel’s India wireless business) to BHL. We reiterate our BUY rating on BHL with SoTP-based revised TP of INR1,900.
* We continue to like BHL’s superior execution on the premiumization agenda and continued market share gains. However, we believe a 25% premium is steep, and hence, we would prefer Airtel to BHL at present.
Broadly in-line 4Q; capex spikes QoQ, but FCF generation robust
* BHL’s overall 4Q revenue at INR22.9b (+23% YoY, in line) was up ~2% QoQ, as the residual flow-through of the wireless tariff hike was offset by two fewer days QoQ.
* Overall, 4Q EBITDA at INR11.7b (+33% YoY, inline) was up 1.4% QoQ as network opex declined 2% QoQ (2% below our est.).
* Reported EBITDA margin dipped ~15bp QoQ to 51% (+400bp YoY, 10bp above our est.) but remained below 57.8% for Bharti India (ex-Indus).
* Reported PAT stood at INR4.7b, up 80% QoQ (2.1x YoY), boosted by tax reversals. Adjusted for exceptional items, PAT at INR3.8b rose 4% QoQ (+71% YoY) and was 8% above our est., mainly due to a lower tax rate.
* Overall capex spiked ~50% QoQ to INR4.25b (-14% YoY).
* BHL’s consolidated free cash flow (post-leases, interest payments, but before spectrum prepayments) stood at INR6.6b (vs. INR5.1b QoQ). For FY25, BHL generated FCF of ~INR20b before spectrum prepayments.
* BHL’s net debt (ex-leases) declined ~INR6b QoQ to INR36.9b.
Wireless: Incremental EBITDA margin slightly weaker than Airtel’s
* BHL’s wireless ARPU was broadly stable QoQ at INR242 (+19% YoY, our est. INR243), as residual tariff hike flow-through was offset by two fewer days QoQ.
* BHL reported 515k paying net adds (vs. 491k net adds QoQ and our est. 300k), with contribution to Bharti’s 4QFY25 net adds at ~10% (vs. ~7.8% share in Airtel’s paying subs base).
* Wireless revenue inched up 1.4% QoQ (vs. 1.9%/2.4% for Bharti/RJio incl. FTTH) to INR22.3b (+22% YoY, in line), while EBITDA at INR12b (+34% YoY, in line) was up ~2% QoQ (vs. 2-2.4% for Airtel/RJio incl. FTTH).
* Wireless EBITDA margin expanded ~25bp QoQ to 53.8% (+480bp YoY), though lower than the 40bp QoQ improvement for Airtel to 59.2%.
* Incremental wireless EBITDA margin was ~72% (vs. ~53% for RJio), but lower than ~85% for Airtel’s India wireless business due to QoQ inferior in-roamer vs. out-roamer mix. We note BHL typically benefits from higher in-roamers in 3Q.
Key highlights from the management commentary
* Captive tower sales to Indus: BHL had approved the transfer of ~3,400 towers to Indus Towers. However, the proposed tower sale has been put on hold, following a request from TCIL (15% stake). The company believes in the business case for the tower sale to Indus and will undertake a fresh evaluation process to ensure transparency and compliance with governance standards.
* FWA: Fixed wireless access (FWA) accounted for the lion’s share of home broadband net adds during 4Q and believes that the potential of FWA in BHL’s circles is significantly higher, given relatively lower fiber availability. However, the company is not rushing to switch to SA 5G, as the capacity of the 5G network is sufficient to service the FWA base in the medium term.
* Capex: Similar to Airtel, management expects BHL’s capex to taper down further in FY26 as there is no major rural rollout planned in BHL’s circles.
* Capital allocation: The capital allocation policy would be similar to the parent, Bharti Airtel. It will be a prudent mix of deleveraging, step-up of dividend payments, and growth capex.
* Deleveraging: The company prepaid INR8.6b of spectrum dues pertaining to the 2024 auctions during 4Q. As a result, net-debt-to-EBITDAaL moderated to 0.9x (vs. 1.5x YoY).
Valuation and view
* BHL provides a pure-play exposure to Bharti Airtel’s fast-growing India wireless and home broadband segments. Given the relatively lower penetration of mobile and fixed broadband in BHL’s circles, its growth prospects are slightly better than Airtel's.
* Our earnings are broadly unchanged as we model a revenue/EBITDA/PAT CAGR of ~14%/21%/ 42% over FY25-28E.
* Since our initiation in Mar’25, BHL has delivered ~30% returns and now trades at ~25% premium to the implied EV/EBITDA valuation for Bharti’s India business (vs. ~13% on average since its listing).
* We believe BHL should command a premium to Airtel, given its slightly higher growth, better RoCEs, and lower capital misallocation concerns, and ascribe a DCF-based Jun’27E EV/EBITDA of 14.5x (~10% premium to our multiple for Airtel’s India wireless business) to BHL. We reiterate our BUY rating on BHL with an SoTP-based revised TP of INR1,900.
* We continue to like BHL’s superior execution on the premiumization agenda and continued market share gains. However, we believe a 25% premium is steep, and hence, we would prefer Airtel to BHL at present.
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