Jefferies' Prediction for Bharati Hexacom: 'Double Your Money in a Year'

Tanushree Jaiswal Tanushree Jaiswal 16th April 2024 - 04:15 pm
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Jefferies is bullish on Bharti Hexacom, a Bharti Airtel group company, citing its strong growth prospects and healthy margin expansion. The brokerage initiated coverage on the stock with a "buy" rating and a price target of ₹1,080, which represents a near 34₹ upside potential. This positive assessment led to a nearly 9₹ surge in the share price, with Bharti Hexacom trading at ₹869.85 on the NSE at 9:44 am.

According to Jefferies, Bharti Hexacom presents a compelling investment opportunity in the Indian telecom sector, leveraging segments of Bharti Airtel's business experiencing rapid growth, higher return on capital employed (RoCE), and improved free cash flow (FCF) conversion rates. The brokerage forecasts a compound annual growth rate (CAGR) of 16 percent in revenue and 21% in EBITDA from FY24 to FY27, along with a 40 percent CAGR in FCF. These projections, coupled with reduced capital expenditure, are expected to drive debt reduction and enhance dividend payouts.

JM Financial, another brokerage, also shares a positive outlook on Bharti Hexacom, highlighting its role in the structural growth story of wireless average revenue per user (ARPU) in India's telecom sector. JM Financial initiated coverage with a "buy" rating and a price target of ₹790, implying a 39% upside potential. The brokerage expects Bharti Hexacom's ARPU to grow at a 10 percent CAGR, supported by tariff hikes and premiumization strategies.

"India wireless ARPU is on a structural uptrend given the consolidated industry, and as industry needs ARPU to rise to ₹275-₹300 in 3-4 years to meet future capex needs. We expect BHL’s ARPU to grow at 10% CAGR, consisting of 6-7% ARPU CAGR due to regular tariff hikes; and 3-4% ARPU CAGR due to Bharti Airtel’s premiumisation strategy," said JM Financial.

"We initiate coverage on Bharti Hexacom with a 'buy' rating and a target price of 790 share based on 10 times FY26 EV/Ebitda, implying 39% upside. Though a higher multiple can be argued for BHL given 2-3% higher EBITDA growth potential, we have used 10 times multiple factoring in potential concentration risk due to BHL’s entire dependence on existing circles," it said.

Jefferies outlines four key reasons for further gains in Bharti Hexacom:

  1. Strong growth outlook: The company operates in markets with lower tele-density and has seen higher translation of tariff hikes into ARPUs, with expectations of continued market acquisition and revenue growth.
  2. Margin gains: Over FY24–27, substantial operating leverage and robust topline growth should allow for a 600bps increase in margin to 53%, with expectations of incremental EBITDA margins of 64%.
  3. Strong free cash flow generation: Bharti Hexacom's robust EBITDA growth and decreasing capex intensity position it to generate a 40% CAGR in free cash flows, contributing to debt reduction and increased dividend payments.
  4. Lower capital intensity driving higher ROCEs: The company's reduced network investments per site compared to Bharti Airtel's operations, along with cheaper spectrum prices, are expected to boost return on capital employed (ROCE), with projections of nearly doubling ROCE to 17.5% over FY24–27.

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