IPO: Bharti Hexacom

Bharti Hexacom (a Bharti Airtel subsidiary) is a mobile, fixed-line telephone, and broadband services provider that has launched its IPO (initial public offering). Here's a breakdown of the company's strengths, weaknesses, and growth prospects to help investors make an informed decision.

In a nutshell

• Quality : Its three-year average return on equity (ROE) and return on capital employed (ROCE) are 2.1 and 4.4 per cent, respectively. Moreover, it has also generated positive cash flows in the last three financial years.
  
• Growth : The company increased its revenue by 19.6 per cent annually during FY21-FY23 due to higher mobile service usage, resulting in an annual increase of 17.1 per cent in the ARPU (average revenue per user) of mobile services.
  
• Valuation : The stock is valued at a P/E and P/B of 58.9 and 7.2 times, respectively.
  
• Overview : The company is poised to capitalise on the growing demand for connectivity in the country. The adoption of 5G technology would further act as a growth catalyst. Although it has a strong presence, it does face intense competition from Reliance Jio. Besides, a high debt position is something to be monitored.

About Bharti Hexacom

Bharti Hexacom, a subsidiary of Bharti Airtel, offers telecom and broadband services in Rajasthan and the northeast region of India. It primarily has two business segments:

• Mobile services (pre-paid, post-paid and data services) - contributed 98 per cent of revenue in FY23.
• Home and office services (telephone and broadband services) - contributed 2 per cent of revenue in FY23.

Strengths of Bharti Hexacom

• Enjoys strong brand recognition through its flagship brand, Airtel.
• Its revenue market share in the northeast region is around 53 per cent, higher than Jio's share of 43 per cent as of 9MFY24.

Weaknesses of Bharti Hexacom

• Faces strong competition from Reliance Jio .
• Operates in a highly capital-intensive and regulated industry.

Risk report

Company and business

• Are Bharti Hexacom's earnings before tax more than Rs 50 crore in the last 12 months?
  Yes. Its TTM (trailing twelve months) profit before tax was Rs 892 crore.
  
• Will Bharti Hexacom be able to scale up its business?
  Yes. Rising demand for connectivity coupled with the roll-out of 5G would help it scale up the business.
  
• Does Bharti Hexacom have recognisable brands with client stickiness?
  Yes. Bharti Hexacom operates under the well-established brand 'Airtel'.
  
• Does the company have a credible moat?
  No. It operates in a competitive environment.

Management

• Do any of the company's founders still hold at least a 5 per cent stake in the company? Or do promoters hold more than a 25 per cent stake in the company?
  Yes. Promoters' stake will be 70 per cent post-IPO.
  
• Do the top three managers have more than 15 years of combined leadership at Bharti Hexacom?
  No. The combined leadership of the top three managers is 15 years.
  
• Is the management trustworthy? Is it transparent in its disclosures, which are consistent with SEBI guidelines?
  Yes. No information to suggest otherwise.
  
• Is the company's accounting policy stable?
  Yes. No information to suggest otherwise.
  
• Is Bharti Hexacom free of promoter pledging of its shares?
  Yes. It is free of promoter pledging of its shares.

Financials

• Did the company generate a current and three-year average return on equity (ROE) of more than 15 per cent and a return on capital employed (ROCE) of more than 18 per cent?
  No. Its three-year average ROE and ROCE are 2.1 and 4.4 per cent, respectively. Its TTM ROE and ROCE were 12.2 and 9.1 per cent, respectively.
  
• Was the company's operating cash flow positive during the last three years?
  Yes. It reported positive cash flows from operations in the last three financial years.
  
• Is the company's net debt-to-equity ratio less than one?
  No. Its net debt-to-equity stood at 2.1 times as of December 31, 2023.
  
• Is Bharti Hexacom free from reliance on huge working capital for day-to-day affairs?
  Yes. As a result of its business model and thanks to consistent operating cash flows, it has been able to manage its working capital.
  
• Can the company run its business without relying on external funding in the next three years?
  No. It operates in a highly capital-intensive industry and may require raising funds for further expansion.
  
• Is Bharti Hexacom free from meaningful contingent liabilities?
  Yes. Contingent liabilities as a percentage of equity stood at 6.2 per cent as of December 31, 2023.

Valuations

• Does the stock offer an operating earnings yield of more than 8 per cent on its enterprise value?
  No. The stock will offer a 4.2 per cent operating earnings yield on its enterprise value.
  
• Is the stock's price-to-earnings less than its peers' median level?
  N/A. The stock is valued at a price-to-earnings ratio of 58.9 times. It does not have any comparable listed peers.
  
• Is the stock's price-to-book value less than its peers' average level?
  N/A. The stock is valued at a price-to-book ratio of 7.2 times. It does not have any comparable listed peers.

Disclaimer: This is not a stock recommendation. Do your due diligence before investing.

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