Bharti Hexacom: Airtel in chhota pack

Both Bharti Airtel and Bharti Hexacom operate using the Airtel brand. Hexacom operates mobile and landline services in Rajasthan and North-East circles. Now, there are two key factors why many brokerages, including Motilal Oswal Financial Services that has recently initiated coverage on the stock, have a positive view on Hexacom. First, it remains a pure play in the Indian telecom industry unlike Bharti Airtel, which has a global presence, especially in Africa. Second, lower capital misallocation concerns.

Bharti Airtel’s chairman has spoken about the possibility of overseas acquisitions in the medium term. If that happens, its investors would have reason to worry. After all, they have already waited a long time for a higher dividend payout. Recall that Bharti Airtel’s Africa acquisition took a while to pay off.

Hexacom has no such ambitions of acquisitions. Thus, its significantly improved free cash flow can be entirely available for dividend distribution. Plus, Hexacom could potentially show higher growth as the circles in which it operates have a relatively lower tele density and lower internet penetration versus other parts of India.

“Arpu growth aided by likely moderation in capex will drive Bharti Hexacom’s free cash flow growth from FY25, enabling it to get to net cash by FY29; this will also aid in accretion in equity value,” said JM Financial Institutional Securities in its Q3FY25 results review report.

True, Hexacom’s Q3FY25 average revenue per user, or Arpu, at ₹241 is lower than that of Airtel by ₹4. While some of the gap could be owing to a lower postpaid subscriber base, it could also be because Hexacom’s customers have no or low data plans.

Potential growth areas

Home broadband is another area where Hexacom lags Bharti Airtel. While just 4% of Hexacom’s wireless subscriber base has home broadband, the corresponding number for Airtel is 7.5%. Perhaps, the lack of broadband availability, especially in the North East region, is the culprit here. There is potential for higher growth in home broadband as fixed wireless access (FWA) services are made available in remote and rural areas.

Bharti Airtel’s home segment margin at 50% in 9MFY25 is much higher than Hexacom’s 32%. Some of the differential can be attributed to operating leverage owing to the higher user base that absorbs fixed costs more quickly. Thus, there is potential for this gap to close in the future as Hexacom’s user base grows with the increased availability. Even in terms of existing broadband Arpu, Hexacom can catch up given that its reported 9MFY25 Arpu at ₹494 is lower than ₹568 of Airtel.

Motilal Oswal has arrived at a target price of ₹1,625 based on 13x of EV/Ebitda for Hexacom based on FY27 estimates, which is on par with its Airtel India valuation. Hexacom’s shares closed at ₹1,357.40 apiece on Wednesday. 

Among the risks, “Given slightly higher growth and better RoCE, Hexacom has been trading at a premium to its parent, Bharti Airtel. While the Bharti Group has not indicated that a merger of Hexacom into a parent entity is in the works, we note a merger at an unfavourable swap ratio, could hurt Hexacom’s shareholders,” said Motilal Oswal. 

Additionally, the Indian government holds a 15% stake in Hexacom, and a potential stake sale overhang remains.