Bharti Hexacom shares at ₹790? JM Financial initiates coverage on stock ahead of listing

ARPU on a structural uptrend

Bharti Hexacom's EBITDA margin may further improve

About Bharti Hexacom IPO

Ahead of Bharti Hexacom's listing today, domestic brokerage firm JM Financial came out with an initiation report on the stock with a 'Buy' rating and a price target of ₹790 per share. This implies an upside potential of 39% from its IPO price of ₹570."We initiate coverage on BHL with a buy rating and a target price of ₹790 per share based on 10 times FY26 EV/EBITDA (in line with implied valuation of Bharti’s India wireless business at current market price), implying 39% upside," JM Financial said in a report.While one could make a case for assigning a higher multiple to Bharti Hexacom due to its potential for 2-3% higher EBITDA growth, the brokerage has opted for a 10 times multiple, factoring in potential concentration risk stemming from the company's sole reliance on Rajasthan and North East circles, as well as its focus on wireless business.JM Financial expects the Bharti Hexacom stock to potentially double in the next three to four years on the back of 15-17% EBITDA compounding story. It sees Bharti Hexacom as a mid-cap pure-play on wireless ARPU (average revenue per user) growth story vis-à-vis Bharti (which sees 25-30% of its value coming from other than India wireless business).The brokerage continues to believe that India's wireless ARPU is on a consistent upward trajectory due to the streamlined industry structure and anticipated future investment requirements.Over the next 3-4 years, the industry aims to achieve an ARPU of ₹275 to meet the cost of capital at 12% and ₹300 to attain a pre-tax return on capital employed (RoCE) of 15%, factoring in forthcoming investments such as those for 5G, according to JM Financials' calculation.JM Financial expects Bharti Hexacom's EBITDA margin to further improve to 51.4% and 57.1% in financial year 2026 and financial year 2030, respectively, after having risen to 49.3% in the first nine months of FY24, driven by strong ARPU growth on account of tariff hikes, Bharti's premiumisation strategy and cost optimisation via its 'war on waste' initiative.Additionally, it anticipates that Bharti Hexacom's compound annual growth rate (CAGR) for EBITDA from FY24 to FY26 and FY24 to FY30 will surpass that of Bharti's India wireless business, standing at 17% and 15%, respectively (compared to 15% and 12% for Bharti's India wireless business).This projection is attributed to the potential for a 2% subscriber CAGR and a 10% ARPU CAGR, driven by the relatively lower tele density and penetration of high ARPU post-paid and data subscribers in the Rajasthan and North East circles.While Bharti Hexacom exhibits a lower EBITDA margin, its RoCE stands notably higher at 10.5% in FY23, compared to 8.6% for Bharti. This discrepancy arises from BHL's relatively lower capital expenditure, as Bharti invests in fiber assets within the Rajasthan and NE circle, while BHL incurs costs on a usage basis.Further, with peak capex behind it and structural ARPU growth story ahead, the brokerage expects Bharti Hexacom to turn net-cash by FY29, in contrast to its net debt of ₹7,600 crore at the end of the third quarter of FY24.Key triggers, as per the brokerage, include structural uptrend in ARPU via regular tariff hikes and upgrades/data monetisation.Bharti Hexacom's IPO was open for bidding from April 3-5. The issue was priced in the range of ₹542-570 per share.The issue was entirely an offer-for-sale (OFS), without any fresh equity issue. Telecommunications Consultants India (TCIL), the sole public shareholder in the company, offloaded 7.5 crore equity shares or a 15% stake via the OFS.Since the issue is an OFS, Bharti Hexacom will not receive any proceeds. All the proceeds will be allotted to the selling shareholder in the company.The Sunil Mittal-driven telecom major Bharti Airtel holds a 70% stake or 35 crore shares, while the remaining 30% shareholding, equivalent to 15 crore equity shares, was held by non-promoter TCIL. TCIL's stake is now down to 15% while public investors own 15% post-IPO.The issue was booked nearly 30 times at close on strong interest from qualified institutional buyers (QIBs). The quota for QIBs was subscribed 48.57 times, followed by non-institutional investors at 10.52 times. The category for retail investors was subscribed only 2.83 times.Bharti Hexacom, a wholly-owned subsidiary of Bharti Airtel, runs mobile services in Rajasthan and the Northeast telecommunication circles of India, which comprise Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura. It has a market share of 40% in Rajasthan and 50% in the Northeast.