Reduce Bharti Hexacom Ltd for the Target Rs 1,600 by Emkay Global Financial Services Ltd
Bharti Hexacom (Hexacom) reported results ahead of expectations, driven by 2.8% qoq increase in mobile services ARPU, which led to 4.0% qoq revenue growth (vs street expectations of 3.1% qoq). EBITDA margin improved 20bps qoq due to increase in network costs and access charges. We attribute the strong ARPU improvement to robust postpaid subscriber addition and an increasing share of data customers and smartphone users. Hexacom continues to execute well, attracting a high-quality, sticky customer base on the back of its strong network and brand. However, given rich valuations (12.6x FY28E EV/EBITDA), we maintain REDUCE. We increase our TP by 3.2% to Rs1,600 from Rs1,550, as we roll over to 1QFY29E TTM EBITDA. Key risks to our thesis include higher-than-expected ARPU improvement, significant market-share gains from peers, and momentum in Home Services.
Mobile Services: ARPU drives revenue growth
The Mobile Services segment reported 3.7% qoq revenue growth to Rs24bn, as ARPU increased to Rs259 from Rs252. This diverges from Reliance Jio’s flat ARPU (Rs215.6), which we attribute to stronger postpaid subscriber additions and an increasing share of 4G/5G subscribers. Mobile services EBITDA margin increased 30bps qoq to 55.3%. Capex came down sharply to Rs2.2bn (vs Rs4.3bn in 4QFY26), resulting in OFCF of Rs11bn (vs Rs8.4bn in 4QFY26)
Home Services: Investing in a long-term opportunity
Home Services revenue growth momentum slowed to 7.9% qoq, on a high base of 20.6% qoq in 4QFY26. The company added 75k home customers vs a record-high 148k in 4QFY26. ARPU was flat qoq at Rs482. EBITDA margin improved further, by 154bps qoq to 39.7%; margins for this business continue to increase, up 790bps yoy. Heightened capex (Rs1.6bn, flat qoq), dragged cashflow (outflow of Rs1.1bn). For the Homes Services business, Hexacom is prioritizing fiber, given its superior performance; FWA is used only in challenging geographies where connecting fiber is cost-prohibitive. The company has slowed FWA subscriber additions to focus on higher-quality additions, in light of the increase in cost of subscriber addition due to higher chipset prices.
Outlook and valuations: Strong execution; expensive valuations
While we believe Hexacom’s strong brand and network continue to drive industry-leading revenue growth, we believe street’s ARPU growth forecasts are optimistic. We build in 12.3%/15.3% revenue/EBITDA CAGR over FY26-28E, vs 13.8%/17.5% for the street. The stock trades at 14.6x/12.6x FY27E/FY28E EV/EBITDA. Considering optimistic growth expectations and expensive valuations, we see the risk-reward as unfavorable. We maintain REDUCE and increase our TP to Rs1,600, as we roll over to 1QFY29E TTM EBITDA, while maintaining 13x target multiple.
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