Buy Bharti Hexacom; target of Rs 1,990: Motilal Oswal

Motilal Oswal research report on Bharti Hexacom

Bharti Hexacom (BHL) delivered an in-line 4Q, with 1-2% QoQ rise in revenue and EBITDA, as the residual benefit of the tariff hike was offset by two fewer days QoQ. BHL’s capex spiked 50% QoQ to INR 4.3b (-14% YoY), though overall capex (ex-spectrum for FY25) moderated to INR 15b (vs. INR 20b YoY). BHL’s net debt (ex-leases) declined INR 6b QoQ to INR 37b (from INR 49b in Sep’24) as it prepaid INR 8.6b debt pertaining to the 2024 auction. As a result, BHL’s net-debt-to-EBITDAaL moderated to 0.9x (vs. 1.5x YoY). Adjusted for INR 8.6b spectrum prepayments, BHL generated INR 6.6b FCF in 4QFY25 and INR 20.4b in FY25. The company announced a dividend of INR 10/share (vs. INR 4/share YoY).

Outlook

BHL provides a pure-play exposure to Bharti Airtel’s fast-growing India wireless and home broadband segments. Given the relatively lower penetration of mobile and fixed broadband in BHL’s circles, its growth prospects are slightly better than Airtel's. Our earnings are broadly unchanged as we model a revenue/EBITDA/PAT CAGR of 14%/21%/ 42% over FY25-28E. Since our initiation in Mar’25, BHL has delivered 30% returns and now trades at 25% premium to the implied EV/EBITDA valuation for Bharti’s India business (vs. 13% on average since its listing). We believe BHL should command a premium to Airtel, given its slightly higher growth, better RoCE, and lower capital misallocation concerns, and ascribe a DCF-based Jun’27E EV/EBITDA of 14.5x (10% premium to our multiple for Airtel’s India wireless business) to BHL. We reiterate our BUY rating on BHL with SoTP-based revised TP of INR 1,900. We continue to like BHL’s superior execution on the premiumization agenda and continued market share gains. However, we believe a 25% premium is steep, and hence, we would prefer Airtel to BHL at present.