Bharti Hexacom IPO review (Apply)

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Review By Dilip Davda on March 26, 2024

•    BHL is a "Airtel" group arm providing communications solutions in north east regions.
•    After turning the corner for FY22, though its top line continued to surge, its bottom lines marked degrowth at net level due to accounting adjustments before the IPO.
•    "Airtel" brand enjoys place in top five most valuable brands.
•    Based on FY24 annualized earnings, the issue appears fully priced.
•    Investors may park funds for the medium to long term rewards. 

ABOUT COMPANY:
Bharti Hexacom Ltd. (BHL) is a communications solutions provider offering consumer mobile services, fixed-line telephone and broadband services to customers in the Rajasthan and the North East telecommunication circles in India, which comprises the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripura. The company offers its services under the brand 'Airtel'. It has a distinct strategy to premiumise portfolio by acquiring and retaining quality customers and deliver an experience to them through its Omni channel approach and use of data science. 

The company has a gamut of digital offerings to enhance customer engagement and differentiated customized offerings through family and converged plans under Airtel Black proposition, which has resulted in the continuous improvement of its revenue market share during the last three Fiscals. BHL undertakes prudent cost optimization measures to improve profitability and maintain an efficient capital structure with a comfortable leverage position. The company continuously invests in network expansion, technology advancement and judicious spectrum investments. As of December 31, 2023, BHL had invested Rs. 206 billion in capital expenditure in its future ready digital infrastructure. It also derives significant synergies from its relationship with Promoter, Airtel, through the expansive digital infrastructure, digital experience and the digital services it provides to its customers.

The Company was originally incorporated in 1995 as 'Hexacom India Limited'. In 2004, the name of the Company was changed to 'Bharti Hexacom Limited' when Airtel acquired a majority equity interest in it. Airtel owns 70% of BHL's outstanding equity share capital, as of the date of this Red Herring Prospectus. 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 in terms of consolidated operating revenue as of Fiscal 2023. (Source: CRISIL Report) 

The Government of India, through Telecommunications Consultants India Limited ("TCIL") owns 30% of BHL's outstanding equity share capital. TCIL is an engineering and consultancy company and was set up in 1978 for providing Indian telecom expertise in all fields of telecom and information technology to developing countries around the world. Its core competence is in the fields of switching, transmission systems, cellular services, rural telecommunication, optical fibre based backbone transmission systems, information technology and networking solutions, application software, e-Governance, 4G/5G, FTTH, VOIP, Wi-Fi surveillance, cyber security and civil construction and project management consultancy services.

As of December 31, 2023, BHL were 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 North East from 43.6% to 49.8% between the same dates. (Source: CRISIL Report). It has the highest number of Visitor Location Register ("VLR") customers (6.4 million) and a VLR market share of 52.3% in the North East circle and the second highest in the Rajasthan circle with 23.2 million customers and a VLR market share of 38.7%, as of December 31, 2023. (Source: CRISIL Report). 

As of the same date, its customer base included 19,144 thousand data customers, of which 18,839 thousand were 4G and 5G customers, and data consumption per customer per month stood at approximately 23.1 GB during the nine months ended December 31, 2023. The company relies on a robust network infrastructure with a mix of owned and leased assets. As of December 31, 2023, it utilized 24,874 network towers, of which the company owned 5,092 towers, and the remaining 19,782 towers were leased from tower companies. It has a spectrum portfolio with varied pool of mid band spectrum (1800/2100/2300 MHz bands), which has enabled it to offer 5G Plus services on the widely chosen non-standalone network architecture and at a low cost of ownership. (Source: CRISIL Report). This has enabled BHL to save a significant amount of capital towards sub-GHz spectrum for 5G roll out and additional capital expenditure required to be spent on network infrastructure to deploy the same.

The company has an extensive distribution and service network across the regions it operates in and during the nine months ended December 31, 2023 and the last three Fiscals, it has set up 51 retail outlets and 24 small format stores to reach 90 cities, as of December 31, 2023. As of the said date, its distribution network comprised 616 distributors and 89,454 retail touchpoints. As of December 31, 2023, it had 422 full-time employees.

According to the management, it is providing a part exit to TCIL - a Government of India enterprise with a view to discover the price and listing benefits. Perhaps this is the first such IPO where a GoI body dilutes its holding to establish the enterprise value via OFS mode. This IPO also indicates that the company is not in the need of any fresh fund inflow to meet its planned growth as of now.  

BHL currently enjoys 40+% market share in Rajasthan Circle and 51+% market share in North East circle and thus enjoys leadership. The management is confident of maintaining its leadership with user friendly services and modules. 

ISSUE DETAILS/CAPITAL HISTORY:
The company is coming out with its maiden secondary IPO by way of Offer for Sale (OFS) of 75000000 equity shares of Rs. 5 each to mobilize Rs. 4275 cr. at the upper cap. The company has announced a price band of Rs. 542 - Rs. 570 per share. The issue opens for subscription on April 03, 2024, and will close on April 05, 2024. The minimum application to be made is for 26shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. The issue constitutes 15% of the post-IPO paid-up capital of the company. This being an OFS, no funds going to the company. The offer is being made to provide exit to some of its stakeholders and to unlock the listing gains. 

The company has allocated not less than 75% for QIBs, not more than 15% for HNIs and not more than 10% for Retail investors. 

The joint Book Bunning Lead Managers (BRLMs) to this IPO are SBI Capital Markets Ltd., Axis Capital Ltd., BOB Capital Markets Ltd., ICICI Securities Ltd., and IIFL Securities Ltd., while KFin Technologies Ltd. is the registrar of the issue. 

Having issued initial equity shares at par, the company issued further equity shares in the price range of Rs. 10.00 - Rs. 30.00 (on the basis of Rs. 5 FV) between September 2006 and September 2008. The average cost of acquisition of shares by the promoters/selling stakeholders is Rs. 7.08, and Rs. 16.30 per share. 

This being the pure secondary offer, company's paid-up capital will remain same at Rs. 250.00 cr. Based on the upper cap of the IPO price band, the company is looking for a market cap of Rs. 28500 cr. 

FINANCIAL PERFORMANCE:
On the financial performance front, for the last three fiscals, BHL has posted a total income/net profit/- (loss) of Rs. 4704.30 cr. / Rs. - (1033.90) cr. (FY21), Rs. 5494.00 cr. / Rs. 1674.60 cr. (FY22), and Rs. 6719.20 cr. / Rs. 549.20 cr. (FY23). For 9M of FY2 ended on December 31, 2023, it earned a net profit of Rs. 281.80 cr. on a total income of Rs. 5420.80 cr. 

For the last three fiscals, the company has reported an average RPS of Rs. 13.21 and an average RoNW of 13.46%. The issue is priced at a P/BV of 6.45 based on its NAV of Rs. 88.32 as of December 31, 2023 as well as on post-IPO basis.

If we attribute annualized FY24 earnings to its paid-up equity capital, then the asking price is at a P/E of 75.80. Based on FY23 earnings, the P/E stands at 51.91. According to the management, while it marked growth at EBITDA level, due to one time accounting adjustment before the IPO, it posted lower net profits for FY23 and 9M-FY24. Based on recent financial parameters, the issue appears fully priced. 

For the reported periods, the company has posted PAT margins of - (22.0) % (FY21), 30.5% (FY22), 8.2% (FY23), and RoCE margins of - (1.4) %, 4.1%, 10.5%. PAT and RoCE data for 9M-FY24 is not given in the offer document. RoCE data differs in its KPI Table (refer Page 185 and Page 192 of the RHP). 

DIVIDEND POLICY:
The company has declared a dividend of 30% for the 9M-FY24 period. It has also adopted a dividend policy in January 2024, based on its financial performance and future prospects. 

COMPARISON WITH LISTED PEERS:
As per the offer document, the company has shown Bharti Airtel, Vodafone Idea (listed), and Reliance Jio Infocomm (unlisted) as their listed peers. The two listed peers are trading at a P/E of 64.2, and 00 (as of March 22, 2024). However, they are not comparable on an apple-to-apple basis. 

MERCHANT BANKER'S TRACK RECORD:
The five BRLMs associated with the issue have handled 112 public issues in the last three fiscals, out of which 36 issues closed below the offer price on listing date. 

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