Bharti Hexacom IPO: Should You Dial in to this Massive 5G Opportunity?

The Indian primary market is once again surging with optimism, and more than 40 big IPOs are likely in financial year 2025.

The first big IPO to open for FY25 would be Bharti Hexacom's IPO, which is slated for 3 April 2024.

You see, India's telecom market is the second largest in the world. Demand for reliable internet and mobile services is exploding, creating fertile ground for companies like Bharti Hexacom to thrive.

This upcoming IPO marks a pivotal moment in the telecom sector.

Here are some key details about the IPO:

IPO Open date	3-Apr-24
IPO Close date	5-Apr-24
Face value	Rs 5 per share
Price band	Rs 542 to Rs 570 per share
Lot size	26 shares
Total issue size (shares)	75 million shares
Book built size (Rs)	Rs 42.8 bn
Retail investors quota	Not more than 10%

Data Source: RHP

This IPO also marks the first time a Government of India body, TCIL, is utilising the Offer for Sale (OFS) method to dilute its holding and establish Bharti Hexacom's true enterprise value.

About Bharti Hexacom

Bharti Hexacom, established in 1995, is a seasoned leader with a proven track record. It is a wholly-owned subsidiary of Bharti Airtel. The Government of India holds the other 30% through Telecommunication Consultants of India Limited (TCIL).

Bharti Hexacom has been providing reliable mobile telephony and fixed-line telephone and broadband services to Rajasthan and North Eastern regions in India.

Its robust regional presence translates to a loyal customer base of 27.1 million (m) as of 31 December 2023. Out of this, 19.1 m of the customers are data users, with a majority (18.8 m) opting for the power of 4G and 5G technology.

With a staggering Rs 206 bn invested in digital infrastructure by December 2023, the company is equipped to handle the ever-growing demand for high-speed connectivity.

Favourable Factors for Bharti Hexacom

Bharti Hexacom is backed by the prestigious Airtel brand, ranked among the top 5 most valuable Indian brands. This strong association translates to instant brand recognition and consumer trust.

Here's what sets the company apart:

• Deeply Rooted in Local Markets: It boasts a leadership position in both Rajasthan (40% market share) and the North East circle (51% market share.
• Unmatched Reach: The company has built a comprehensive distribution network encompassing 616 distributors and a staggering 89,454 retail touchpoints.
• Premiumisation Push: It is strategically upgrading its network, encouraging customers to migrate from 2G to the power of 4G and 5G technology.

Some Risk Factors...

• Regional Dependence: A large portion of Bharti Hexacom's revenue comes from Rajasthan and the North East circle. Any economic or regulatory hurdles in these specific regions could disrupt their operations.
• Infrastructure Challenges: Expanding services to remote areas in the North East circle requires significant investment in infrastructure. This can lead to increased capital expenditure (capex) and logistical challenges.
• Power Supply Concerns: Inconsistent electricity supply in rural areas occasionally affects service reliability and stability. The company must find innovative solutions to ensure consistent performance.
• Debt Concerns: the company has outstanding borrowings exceeding Rs 37.7 bn as of December 2023, which could raise questions about its default and refinancing capabilities.
• Capital Intensive Industry: The telecom sector requires substantial upfront investments, with high barriers to entry. Securing the necessary capital can be challenging.

Bharti Hexacom IPO Shareholder Quota

If you remember, the IPOs of Tata Technologies and BLS e-Services had a separate shareholder quota.

Similarly, investors of Bharti Airtel were hoping that Bharti Hexacom's IPO would also have a separate shareholder quota.

But sadly, there's no such bifurcation. There's no shareholder quota set aside for Bharti Airtel shareholders.

What's the Grey Market Premium Indicating?

As of 29 March 2024, the GMP for Bharti Hexacom was Rs 38 on the grey market, representing a listing premium of nearly 7% over the issue price.

Our Take on the Bharti Hexacom IPO

Having a strong partnership with a reliable parent company like Airtel can be a significant advantage.

It's undeniable that the company faces intense competition from its competitors (with a national presence) in the telecom market.

However, it boasts a higher Average Revenue Per User (ARPU) than some competitors, indicating a potentially more loyal and engaged customer base.

Based on the company's strong regional presence, leadership position in key circles, and future-proof infrastructure, investors might consider that the issue is fully priced in and could justify the valuation that Bharti Hexacom is asking.

While accounting adjustments might suppress the net profit, Bharti Hexacom's core business is likely experiencing healthy growth at the gross level. This indicates its day-to-day operations are generating strong revenue.

Competitor Analysis - Standalone

	Revenue from operations CAGR Fiscal 2021-2023	EBITDA CAGR Fiscal 2021-2023
BSNL	4.70%	15.10%
Bharti Airtel	14.80%	23.60%
Bharti Hexacom	19.60%	59.20%
Reliance Jio	14.00%	22.30%
Vodafone Idea	0.30%	-0.40%

Data source: Red Herring Prospectus

As you can see from the table, Bharti Hexacom registered the highest revenue and EBITDA when compared on a CAGR basis between fiscal 2021 and 2023.

The company also had the highest PAT margin supported by extraordinary income in 2022.

The Indian government's vision for "Bharat 6G by 2030" signifies a strong commitment to building a future-proof telecom infrastructure.

Beyond potential risks, Bharti Hexacom benefits from strong tailwinds - rising disposable income, surging demand for 5G, and booming smartphone/smart TV use. This translates to a growing data consumption market perfectly positioned for Bharti Hexacom's expertise.

The company's management is also confident of maintaining its leadership in Rajasthan and North East areas.

This is the first IPO where a government of India body is diluting its holding to establish the enterprise value via the OFS mode.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions.

If you do wish to apply to this IPO, ensure that the investment aligns with your financial objectives and matches your risk tolerance level.

Happy Investing!

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...