Bharti Hexacom: JP Morgan initiates coverage on stock; check target price

Bharti Hexacom shares: With today's rally, Bharti Hexacom stock is up 104 per cent from its issue price of Rs 570. JP Morgan sees 20 per cent upside from here on

JP Morgan on Bharti Hexacom: Bharti Hexacom shares surged 9.3 per cent to Rs 1,165 per share on the BSE on Tuesday, July 16. Global brokerage firm JP Morgan has initiated coverage on the stock with an 'Overweight' rating and a target price of Rs 1,280.

JP Morgan's target price on Bharti Hexacom suggests another 20.13 per cent upside from the stock's last closing price of Rs 1,065.5 per share on the BSE. At 10:25 AM, however, Bharti Hexacom shares were trading 5.3 per cent higher as against 0.2 per cent rise in the benchmark BSE Sensex.

JP Morgan, according to reports, believes Bharti Hexacom is among the best pure-plays in the Indian market repair thesis as 98 per cent of its revenues come from wireless services, compared to Bharti Airtel and Vodafone Idea.

 

Further, Bharti Hexacom benefits from "stronger growth in subscriber numbers and organic average revenue per user (ARPU) expansion" as it operates in low teledensity and internet penetration areas like Rajasthan and the North East.

This results in Bharti Hexacom's spectrum cost per population at 54 per cent for 5G and 62 per cent for 4G. Both of which are lower than Bharti Airtel's national average, as per JP Morgan.

Bharti Hexacom serves around 27 million wireless subscribers (subs) in these two circles; wireless business constitutes 97-98 per cent of its revenue while the balance 2-3 per cent is from broadband business. Also, the Rajasthan circle accounts for 78 per cent of its revenue and the NE circle for the remaining 22 per cent.

BHL, however, is the market leader in NE with a revenue market share (RMS) of 52.7 per cent in 9MFY24 (up from 42 per cent in FY21), while it is second in Rajasthan with RMS of 40.4 per cent (up from 32.7 per cent in FY21).

Bharti Hexacom Arpu outlook

Additionally, as Hexacom's Arpu is just 2 per cent less than Bharti Airtel's, Bharti Hexacom may provide superior returns, JP Morgan said.

Bharti Airtel is the promoter of Bharti Hexacom Ltd (BHL) and holds 70 per cent stake in the company. Government-owned TCIL's stake, meanwhile, is now down to 15 per cent while public investors own 15 per cent post-IPO.

Going ahead, JP Morgan anticipates a 15 per cent tariff hike each in the financial year 2025 and financial year 2026, which may drive a compound annual growth rate (CAGR) of 17 per cent in revenue and 21 per cent in Ebitda over the FY24-27 estimates.

Those at JM Financial, meanwhile, peg BHL's Arpu growth at 10 per cent CAGR (to Rs 285 in FY28 from Rs 204 in Q4FY24) consisting of 6-7 per cent Arpu CAGR due to regular tariff hikes; and 3-4 per cent Arpu CAGR due to Bharti's premiumisation strategy driving MBB upgrade (Arpu goes up by 55-80 per cent due to this), post-paid additions (Arpu rises by 70 per cent due to this), data monetisation, and international roaming.

"Though Bharti Hexacom's Ebitda margin is lower, its return on capital employed (RoCE) is higher than Bharti Airtel's due to its relatively lower capex as Bharti lays fibre assets in Rajasthan/NE circle and BHL pays for it on usage basis. Further, with peak capex behind it and structural Arpu growth story ahead, we expect Bharti Hexacom to turn net-cash by FY29," the brokerage had said in its coverage initiation report in April. It has a 'Buy' rating on the stock.

That said, Jefferies had, last month, downgraded Bharti Hexacom to 'Hold' from 'Buy'. However, it had increased the price target on Bharti Hexacom stock to Rs 1,290 from Rs 1,200 earlier.

Bharti Hexacom debuted on the Indian stock markets on April 12, 2024, at Rs 775 per share. With today's rally, Bharti Hexacom stock is up 104 per cent from its issue price of Rs 570. The stock, however, had hit a record high of Rs 1,368.85 per share on June 26, 2024.