Company Overview
Bharti Hexacom is a communications solutions provider offering consumer mobile services, fixed-line telephone and broadband services to customers in the Rajasthan and North-East telecommunication circles in India, which comprises the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura. The company offers services under the brand ‘Airtel’. The company is continuously investing in network expansion, technology advancement and judicious spectrum investments. As of December 31, 2023, the company had invested Rs. 20,600 crores in capital expenditure in its future-ready digital infrastructure. The company also derives significant synergies from its relationship with its promoter, Airtel, through its expansive digital infrastructure, digital experience, and services it provides to its customers. As of December 31, 2023, Bharti Hexacom was present at 486 census towns and had an aggregate of 27.1 million customers across both circles. The company’s customer market share has grown consistently in Rajasthan from 33.1% as of FY21 to 35.0% on 9MFY24 and in the Northeast from 43.6% to 49.8% during the same period. Further, the company’s customer base included 19,144k data customers, of which 18,839k were 4G and 5G customers, and data consumption per customer per month stood at ~23.1 GB during 9MFY24. Bharti Hexacom’s robust network infrastructure consists of 24,874 network towers, of which it owns 5,092 towers. Further, the company has a spectrum portfolio with a varied pool of mid-band spectrum (1800/2100/2300 MHz bands), enabling it to offer 5G Plus services on the widely chosen non-standalone network architecture and at a low cost of ownership. This has enabled the company to save significant capital towards the sub-GHz spectrum for the 5G rollout and additional capex spent on network infrastructure to deploy the same. As of December 31, 2023, the company’s extensive distribution network comprised 616 distributors and 89,454 retail touchpoints along with 51 retail outlets and 24 small format stores across 90 cities.\
Objects of the issue:
The net proceeds from the fresh issue will be used towards the following purposes:
ÞThe company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholder post deduction of offer-related expenses;
ÞGeneral corporate purposes.
Investment Rationale:
Established leadership position and large subscriber base to drive business
Bharti Hexacom provides mobile and fixed-line telephone and broadband services to customers in Rajasthan and the North-East telecommunication circles of India. As of December 31, 2023, the company was present in 486 census towns and had 27.1 million customers. The company enjoys extensive market coverage and penetration, evidenced from its number one position in the highly competitive North-East circle alongside a formidable second position in the Rajasthan circle. The digital services that the company provides, along with Airtel and its affiliates, have facilitated its market share growth. Higher Average Revenue Per User (ARPU) compared to competitors in North-East and Rajasthan circles indicate Bharti Hexacom’s ability to efficiently monetize its subscriber base. The company has invested Rs. 7,100 crores in capital expenditure and deployed 9,805 network sites, as the company plans to focus on key revenue-generating cities and high-value catchment areas and expand the coverage in rural areas. The company’s strategy for fast-paced network coverage expansion, network deployment, and asset-light business model has been backed by partnerships with local cable operators in most of the regions in which it operates. Such arrangements led to the faster rollout of fibre home passes, shortened the time for go-to-market beyond larger towns and accelerated revenue growth. This has enabled Bharti Hexacom to provide customers with high-speed and reliable broadband connectivity .
Prudent spectrum management and focus on building a future ready network to aid growth
The company has a spectrum portfolio with a varied pool of mid-band spectrum (1800/2100/2300 MHz bands) and spectrum holding in 900 MHz, 3500 MHz, and 26 GHz bands. Following prudent capital allocation and spectrum acquisition, the company is yet to acquire the expensive 700 MHz band for its 5G network. None of the company’s existing spectrum expires before 2030, and the validity of the company’s spectrum pool ranges between 2030 and 2042. Further, the company does not expect to incur any significant capex towards spectrum acquisition until the specific spectrum band expires not expect to incur any significant capex towards spectrum acquisition until the specific spectrum band expires. The company’s 5G Plus services are deployed on the recently acquired 3500 MHz band in non-standalone mode with dual connectivity. The non-standalone network deployment has lower capex requirements, low cost of ownership, and reduced environmental impact and has been the widely chosen network architecture, with ~85% of telecom operators worldwide initiating 5G deployment based on such architecture. The company is continuously focusing on its network infrastructure to ensure a superior customer experience.
Valuation and Outlook:
Bharti Hexacom offers services under Airtel, which is widely recognized in India and several overseas jurisdictions. The company believes that the strength of the Airtel brand and advertising campaigns have contributed significantly to its market share growth and helped it to fortify its market position. The company also continues to expand its network coverage across the regions in which it operates, focusing on key revenue-generating cities and high-value catchment areas to increase its customer base and enhance customer experience. For the FY2019-23 period, the industry ARPU for wireless services in Rajasthan grew from Rs. 68 to Rs. 145 at a CAGR of 20.8%, while in the North East circle, it grew from Rs. 74 to Rs. 170 at a CAGR of 23.1%, outperforming the national ARPU growth from Rs.71 to Rs. 142.3 at a CAGR of 19.0% during the same period. These two regions are expected to see improvement in tele density and adoption of smartphones in rural areas through investments in network infrastructure, growth in digital payments, rise in data consumption and increase in demand for e-education. The company also has a record of sustained consolidated revenue from operations, growing at a CAGR of 19.6% during FY2021-23. The company is focused on delivering a brilliant customer experience by transforming its services through innovative technology and digital tools, creating a seamless and delightful user experience. The company has adopted an omnichannel strategy which has enabled it to engage with customers anytime, anywhere, thereby seamlessly transitioning between channels. Bharti Hexacom is also undertaking prudent cost optimization measures to improve profitability. One of the key focus areas is prudent capital allocation and improving return on capital employed, which is reflected in the capital expenditure on both spectrum and non-spectrum spending. The issue is valued at a P/E of 75.8x on the upper price band based on FY24 earnings, which is fairly valued. We, therefore, recommend an SUBSCRIBE rating for the issue.
Key Risks
- The company derives 100% of its revenues from providing consumer mobile, fixed-line telephone, and broadband services to customers in Rajasthan and the Northeast circle only. Any unfavourable developments in such regions could adversely affect its business and financial condition.
- If company ARPU decreases due to internal factors or industry trends, the company’s profitability may be impacted. Any sustained decrease in ARPU without tariff hikes or failure to retain/add premium customers at existing tariff rates could adversely affect the company’s business, financial condition, and results of operations.
- The company requires significant capital to fund capital expenditures, and if it cannot raise additional capital, its business, financial condition, and results of operations could be adversely affected
