Bharti Hexacom runs mobile services in Rajasthan and the Northeast telecommunication circles of India, comprising Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland, and Tripura. The company offers its services under the brand Airtel.

The company has a gamut of digital offerings to enhance customer engagement and differentiated customized offerings through family and converged plans under the Airtel Black proposition, resulting in the continuous improvement of its revenue market share during the last three fiscals. As of December 31, 2023, it invested Rs 206 billion in capital expenditures in its future ready digital infrastructure.

The company was at number one position in revenue market share in the Northeast circle during the nine months ended December 31, 2023, and Fiscals 2023 and 2022. In the Rajasthan circle, the market share gap between the company and the market leader narrowed between Fiscal 2021 and the nine months ended December 31, 2023. The company stood at the close second position during the nine months ended December 31, 2023.

As of December 31, 2023, the company was present in 486 census towns and had an aggregate of 27.1 million customers across both the circles. Its customer market share has grown consistently in Rajasthan from 33.1% as of March 31, 2021, to 35.0% as of December 31, 2023, and in the Northeast from 43.6% to 49.8% between the same dates. The company has the highest number of Visitor Location Register (VLR) customers (6.4 million) and a VLR market share of 52.3% in the Northeast circle and the second highest in the Rajasthan circle with 23.2 million.

The company relies on a robust network infrastructure with a mix of owned and leased assets. As of December 31, 2023, the company utilized 24,874 network towers. Of this, it owned 5,092 towers. The remaining 19,782 towers were leased from tower companies. The company has a spectrum portfolio with a varied pool of mid band spectrum (1800/2100/2300 MHz bands), enabling it to offer 5G Plus services on the widely chosen non-standalone network architecture and at a low cost of ownership.

The company has an extensive distribution and service network and has set up 51 retail outlets and 24 small format stores to reach 90 cities as of December 31,2023. As of December 31,2023, the distribution network comprised 616 distributors and 89454 retail touch points.

Bharti Hexacom is the subsidiary of Bharti Airtel, owning a 70% stake in the company. Headquartered in India, Bharti Airtel is a global communications solutions provider with 55.1 crore customers in 17 countries across South Asia and Africa as on December 31, 2023. The company ranks among the top three mobile operators globally and its networks cover over two billion people. Bharti Airtel is the largest integrated communications solutions provider in India and the second-largest mobile operator in Africa. Bharti Airtel‘s retail portfolio includes high speed 4G and 5G mobile broadband, Airtel Xstream Fiber with convergence across linear and on-demand entertainment, streaming services spanning music and video, digital payments and financial services. For enterprise customers, Airtel offers a gamut of solutions that includes secure connectivity, cloud and data centre services, cyber security, IoT, Ad Tech and cloud-based communication.

Object of the offer

The offer is entirely an OFS of up to 7,50,00,000 shares by the only public shareholder, Telecommunications Consultants India Limited (TCIL).

Post issue, parent Bharti Airtel will retain its 70% stake in Bharti Hexacom, while TCIL’s stake will drop to 15%.

The company will not receive any proceeds from the offer and all the offer proceeds will be received by the selling shareholder TCIL.

Strengths

The company is the market leader in and has a large customer base in its area of operations (Rajasthan and Northeast). The company has a revenue market share of around 40.4% in Rajasthan and 52.7% in the Northeast and customer market share of 35% and 49.8% in Rajasthan and Northeast, respectively, for the nine months ended December 31,2023. As of December 31, 2023, the company was present in 486 census towns and had an aggregate of 27.1 million customers. As of the same date, its customer base included 19,144 thousand data customers. Of this, 18,839 thousand were 4G and 5G customers. Itscustomers consumed approximately 23.1 GB of data per customer per month during the nine months ended December 31, 2023.

The company is present in markets with high growth potential. The company operates in Rajasthan and Northeast with tele-density of 79.5% and 79.7%, respectively,as against national average of 84.5%. These two regions are expected to see improvement in tele-density and adoption of smart-phones in rural areas through investments in network infrastructure along with factors including the growth of digital payments, indicating strong growth potential for telecom and data services, increase in data consumption, and growth in demand for e-education. The company believes that its established leadership position in these circles may place it well to capitalize on growth opportunities.

Bharti Airtel owns 70% of the outstanding equity share capital of the global communications solutions-provider, with over 500 million in 17 countries across South Asia and Africa. The company provides its services under the brand Airtel, widely recognized in India, as well as several overseas jurisdictions. Further, it derives significant synergies from its relationship with Bharti Airtel and its affiliates, including through Indus Tower’s infrastructure, inter circle roaming arrangements, its national long-distance network and corporate functional support. The relationship helps it to drive growth, optimize capital efficiency and maintain its competitive advantage. The company needs to obtain better terms from its vendors and other third parties due to the scale of the combined operations. The company also derives operational efficiencies by centralizing and sharing certain key functions across its businesses such as finance, legal, information technology, strategy, procurement, and human resources.

The company has an extensive sales and distribution network across rural and urban areas of the Rajasthan and Northeast circles serviced by 616 distributors and 75 stores operated by the company, as of December 31 , 2023. Its distribution partners are digitally empowered to sell Airtel services through the ‘Mitra’ app, licensed to the company by one of Airtel’s affiliates. It facilitates mobile recharge transactions between distributors and retailers and supports on-boarding of new customers. In addition, the company has an exclusive retail footprint comprising 89,454 retail touch points, supporting high value customers by providing superior experience.

Weaknesses

The company derives its revenues from providing mobile telephone services in Rajasthan and the Northeast circle. Any unfavorable developments in such regions could adversely affect the company’s business.

There are outstanding legal proceedings against the company and promoter, amounting to Rs 2405.5 crore and Rs 37,004.4 crore, respectively. Any adverse outcome in any of these proceedings may adversely affect the company’s financial condition.

The company had contingent liabilities of Rs 275.3 crore as on December 31,2023.

Reduction in revenue fromtelecom services, due to regulatory ceilings on pricing, or owing to pricing pressure, reduction in ARPU, may have an adverse effect on the company’s revenue and profitability.

The company operates in the telecom industry, a highly competitive and is subject to technological and regulatory risk.

The company has incurred significant indebtedness. The debt-to-equity ratio stood at 1.4 times as on December 31,2023. It must service the debt and comply with any lenders‘covenants to avoid defaulting on its borrowings and refinancing risk.

The company incurred losses in the earlier years. It is unable to earn sufficient profits and cash flow,it will not be able to meet its financial obligations, thereby impacting its financial condition.

Telecommunications Consultants India Limited is a Government of India company and its balance stake will mean dilution hangover can continue.

The company requires significant capital to fund its capital expenditure. It is unable to raise additional capital. It business will be adversely affected.

Valuation

For the nine months ended December 2023, sales were up by 7.7% to Rs 5220.8 crore. The OPM increased 598 bps to 47.57%, leading to a 23.2% increase in operating profit to Rs 2483.4 crore. Other income increased 108.1% to Rs 200.0 crore. Interest cost declined 2.2% to Rs 478.7 crore and depreciation increased 10.4% to Rs 1279.40 crore. PBT increased by 34.2% to Rs 622.30 crore. Tax expenses increased by 192.5% to Rs 340.5 crore. Net profit declined by 18.9% to Rs 281.8 crore as against net profit of Rs 347.30 croreinthe corresponding period of the previous year.

For FY 2023, sales were up by 21.7% to Rs 6579.0 crore. The OPM rose 878 bps to 42.34%, leading to a 53.6% increase in OP to Rs 2785.70 crore. OI increased 57.9% to Rs 140.20 crore. Also,interest cost increased 11.7% to Rs 638.8 crore. Depreciation increased 7.8% to Rs 1553.3 crore. PBT declined by 60.1% to Rs 733.80. Lower PBT was mainly due to exceptional gain of Rs1951.1 crore in FY2022. Tax expenses increased by 10.9% to Rs 184.6 crore. Net profit stood at Rs 549.20 crore as against net profit of Rs 1674.60 crore in FY2022.

At the higher price band of Rs 570, the offer is made at a P/E of 36 times TTM (till December 2023) EPS (of Rs 15.7) and P/S of 4.3 times TTM sales (till December 2023).

Listed industry peers are Bharti Airtel(holding company of Bharti Hexacom) and Vadofone Idea, with operations in all the 22 telecom circles in India as against the company, operating only in Rajasthan and Northeast.In comparison, Bharti Airtel trades at 81.57 times its P/ TTM EPS and 4.7 times P/TTM sales.Vodafone Idea trades at 1.5 times its P/TTM sales. Vodafone Idea is incurring losses. As such, its PE could not be calculated.