Bharti Hexacom Share : A Promising Play on India's Booming Telecom Market

India has emerged as one of the fastest-growing wireless telecom markets among the top five and other emerging global markets.

The newly listed Bharti Hexacom is a direct play on this advancing sector.

The stock has been in the news lately, after moving up sharply by around 7% earlier this week.

After making an impressive debut and listing at Rs 755 (up 35% from its issue price of Rs 570) on 12 April, the stock has surged more than 30%.

The recent jump in the stock price comes on the back of a broker report citing strong growth and returns in the business in the coming years. (alternatively, The recent jump in the stock price comes from anticipation of strong growth and returns in the business in the coming years)

Bharti Hexacom, is largely held by the telecom player Bharti Airtel, is also a telecom player.

It offers consumer mobile services, fixed-line telephone and broadband services to customers in the Rajasthan and the North East telecommunication circles in India. The North East circle comprises the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripura.

Like its parent company, Bharti Hexacom also offers services under the brand 'Airtel'.

The company enjoys a wide set of customer base both in mobile services (over 25 m) and fixed-line telephone and broadband service (219,000).

Over the years, the company's customer market share has grown consistently in Rajasthan from 33.1% as of 31 March 2021, to 35.1% as of 30 September 2023, and in the North East from 43.6% to 49.4%.

Presently, the telecom player leads the North Eastern market and enjoys an enviable second position in the Rajasthan market.

The widespread presence makes the company a key player in the country's evolving telecom industry.

India's Booming Telecom Market

India is rapidly emerging as one of the fastest-growing wireless telecom markets.

The number of wireless telecom customers in the country increasing at a CAGR of 2.6% between the financial years 2014 and 2023 to 1,143.9 million (m).

Yet, despite these impressive numbers, India's wireless teledensity stands modestly at 82.5 customers per 100 people.

Even India's telephone and fixed broadband customers at 1.9 and 2.4 per 100 people, respectively, are much lower than those in other large economies.

This disparity leaves vast expanses of untapped potential, especially in the country's rural heartlands.

CRISIL projects the number of wireless customers to clock a CAGR of 1-1.5% between the financial years 2023 and 2028, led by higher smartphone penetration, increased affordability of mobile phones, and continued demand for data and telecom services.

Wireless teledensity is expected at 84.0-85.0% as of the financial year 2028. This will be driven by telcos' investments in expanding coverage and the increase in smartphone penetration, particularly in rural areas.

Moreover, India boasts the most competitive tariffs in absolute dollar terms compared to similar economies. China sets the bar with the lowest fixed broadband price of US$ 4.5 per month for at least 5 GB, while India offers unlimited data for a nominal US$ 5 per month.

Notably, India leads the pack with the lowest mobile telecom price at US$ 2.0, outperforming regional counterparts like China, Thailand, and Vietnam.

This signals significant potential for strengthening the Average Revenue Per User (ARPU) in India, aligning well with the upward trajectory of per capita income growth.

India's internet or data customers are also expanding at a fast pace. The total number has surged exponentially, soaring 3.6 times to 847 m in the financial year 2023 from a mere 233 m in 2014, boasting a remarkable CAGR of 15.4%.

This was a direct result of the sharp decline in tariffs, highlighting the pivotal role of affordability in driving market penetration.

Looking ahead, CRISIL anticipates a consistent uptick in data customers.

This growth will be fuelled by ongoing technological advancements, the proliferation of smart devices such as smartphones, increased internet usage and the gradual transition of non-data users towards data-based services.

Additionally, the affordability of data packages is poised to improve access to data services across a broader demographic spectrum.

Bharti Hexacom - Sustainable Growth Driven by a Strong Market Presence

Bharti Hexacom's growth trajectory has been bumpy. The volatility in the business reflects the competitive intensity in the telecom market in the past few years.

In the financial year 2021, the company reported a loss because of low ARPU, which was addressed by a tariff hike in November 2021. Since then the business has been picking up.

Bharti Hexacom Financial Snapshot (2019-23)

	2018-2019	2019-2020	2020-2021	2021-2022	2022-2023
Revenue Growth (%)	-18.95%	8.28%	20.98%	15.73%	22.19%
Operating Profit Margin (%)	0.79%	13.63%	26.11%	35.20%	44.47%
Net Profit Margin (%)	-19.98%	-70.12%	-22.46%	30.98%	8.35%
Return on Capital Employed (%)	-10.10%	-34.38%	-5.26%	25.64%	12.87%
Return on Equity (%)	-11.78%	-61.83%	-41.31%	59.31%	13.96%

Data Source: Ace Equity

The returns have also improved with the Return on Capital Employed and Return on Equity standing at 12.9% and 14% in the financial year 2023.

The company relies on a robust network infrastructure with a mix of owned and leased assets. As of 30 September 2023, it had 23,748 network towers, of which 5,005 towers were owned.

Bharti Hexacom has a spectrum portfolio with a varied pool of mid-band spectrum, which enables it to offer 5G Plus services on the widely chosen non-standalone network architecture and at a low cost of ownership.

This has helped it save a significant amount of capital towards sub-GHz spectrum for 5G rollout and additional capital expenditure required to be spent on the network infrastructure to deploy the same.

The company operates in a capital-intensive industry and involves relatively lengthy development periods.

Bharti Hexacom's funding needs primarily revolve around acquiring licenses, purchasing spectrum, deploying networks and sustaining ongoing expansion and enhancement efforts.

Looking ahead, future capital needs will continue to hinge on factors such as upcoming spectrum allocation schedules and the projected costs associated with establishing, expanding, or modernizing our networks.

In the financial year 2023, the company reported a debt-to-equity ratio of 1.5x. Going forward, the company will have to raise more debt, if it decides to expand its business.

Growing Market Consolidation is a Welcome Change

In the fiercely competitive and capital-intensive telecommunications industry, players resort to mergers and acquisitions to enhance technological capabilities, expand their customer base, or diversify product offerings.

With India's comparatively low ARPU compared to similar markets, achieving economies of scale is imperative for survival.

This presents significant barriers to entry for new telecom companies unless they possess a large customer base to justify returns.

As of the first half of the financial 2024, the top three players-Reliance Jio, Airtel, and Vodafone Idea-dominated the market, accounting for around 92% of total wireless customers and approximately 95% of wireless revenue.

Competing against these industry giants is immensely challenging for new entrants due to their extensive coverage, robust infrastructure, diverse spectrum portfolios, and deep understanding of the Indian telecom market landscape.

All of which bodes well for established players like Bharti Hexacom.

Given its leadership status in the existing circles, the company seems well-poised to grow its business. Furthermore, the company has achieved significant market consolidation in its operating regions.

In the first half of FY 2024, Reliance Jio held a dominant Revenue Market Share (RMS) of 46.1%, closely followed by Bharti Hexacom (Airtel) at 40.3%, leaving little room for competitors like Vodafone Idea and BSNL.

Similarly, in the northeast circle, the top two players' RMS increased to 92.2% in FY 2024 from 75.9% in FY 2019, indicating heightened market consolidation.

Bharti Hexacom (Airtel) led with an RMS of 52.1%, up from 44.6% in FY 2014, trailed by Reliance Jio at 40.1% in the first half of FY 2024, further limiting space for competitors like Vodafone Idea and BSNL.

Bharti Hexacom's Revenue Market Share (2014-2024) - Northeast and Rajasthan

Moreover, it also derives significant synergies from its relationship with the Promoter, Airtel, through the expansive digital infrastructure, digital experience and the digital services it provides to its customers.

Airtel is a global communications solutions provider with over 500 million customers in 17 countries across South Asia and Africa. It is among the top global mobile operators in terms of number of customers and is India's largest integrated communications solutions provider.

The company's other prominent shareholder (15% stake) is the Government of India through Telecommunications Consultants India Limited.

Valuations

At present, the stock of Bharti Hexacom is trading at a price to earnings ratio of 94.6 times, a premium to its peers.

Bharti Hexacom Peer Comparison 2022-2023

	Revenue from Operations (2023) (Rs m)	Net profit (2023) (Rs m)	Operating Margin (2023) (%)	Debt to Equity (x)	P/E (x) (Current)	Return on Net Worth (%) 5-Yr Average
Bharti Hexacom	65,790	5,492	44.50%	1.49	94.6	15.90%
Bharti Airtel	1,391,448	122,874	51.30%	2	66.5	15.90%
Vodafone Idea	421,772	-293,011	39.70%	-2.5	NA	39.40%

Data Source: Ace Equity and Equitymaster

In conclusion

Bharti Hexacom is potentially a compelling investment opportunity for those seeking exposure to India's burgeoning telecom market.

The company's strong regional presence, experienced leadership and focus on high-growth marketsposition it to capitalize on the sector's significant potential.

With improving financials and a favorable regulatory environment, Bharti Hexacom is a promising play on India's connected future.

However, despite the positive odds, investors must conduct their own research before investing in any stock and ensure it matches their long-term goals and investment temperament.

That is what successful investing is all about.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...