IPO Size: Rs. 4,275 cr, Entirely Offer for Sale (OFS)  

• By Government of India (30% stake to drop to 15%)

Price band: Rs.542-570 per share

M cap: Rs. 28,500 cr, implying 15% dilution

• 75% reserved for institutions, as operating loss in FY21 and FY22

IPO Date: Wed 3^rd Apr to Fri 5^th Apr 2024, Listing Fri 12^th Apr 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

‘Airtel’ Telecom Operator in 2 circles

Bharti Hexacom, 70% subsidiary of Bharti Airtel, provides mobile, fixed-line telephone and broadband services in 2 of the 22 telecommunications circles in India. It serves 2.7 cr customers in Rajasthan and North-East (comprising 6 states) circles, under the brand ‘Airtel’, enjoying 40% and 53% revenue market share in the circles respectively. The spectrum it holds is valid till different dates between 2030 to 2042.

Financials: Weaker than Parent

On the 4 key telecom industry parameters, Bharti Hexacom scores below its parent Bharati Airtel -

• Average revenue per user (ARPU) of Rs. 197 per month for Bharti Hexacom is lower than Airtel’s Rs. 208.
• This leads to a lower operating margin - 9MFY24 EBITDA margin for Bharti Hexacom was at 49% on Rs. 5,221 cr revenue, against 54% for Bharti Airtel.   
• Bharti Hexacom’s net-debt to EBITDA ratio of 2.9x is higher than Airtel’s 2.4x
• RoE at 9% (9MFY24 annualised) is again poorer than Airtel’s 12%, which is anyway quite low, due to high capex requirement in business and the intensely competitive nature of the Indian telecom industry.

While ARPUs have risen at 15% CAGR in past 3 years, competitive pressures are unlikely to ease in the near future, while over the long term, speculated entry of Elon Musk’s Starlink could prove to be an industry disruptor.

Unattractive Pricing

Bharti Hexacom shares are being offered at an EV/EBITDA multiple of 10.5x, on 9MFY24 annualised EBITDA of Rs. 3,200 cr. On the other hand, parent Bharti Airtel is ruling at an EV/EBITDA multiple of 11x, on FY24E basis, leaving no incentive for prospective IPO investors. Thus, IPO pricing leaves no margin for upside.

Even post listing, Bharti Hexacom’s valuation multiple will be linked to that of its parent as it lacks any unique moat.