The share price of Bharti Hexacom is down 3% after Motilal Oswal downgraded the stock to Neutral. The target price is set at Rs 1,900 per share. This is around the 52-week high of the share. This, as a result indicates very little downside for the stock in the near-term. According to the brokerage house, the 40% premium to its parent company, Bharti is steep and the “risk-reward is no longer attractive.”
Here is a quick analysis of why Motilal Oswal sees limited room for upside for the share price –
Motilal Oswal on Bharti Hexacom: Valuation worry
Given Bharti Hexacom’s “slightly higher growth, better RoCE, and lower capital misallocation concerns, it should command a premium to Airtel,” as per the Motilal Oswal and they had priced in a 10% premium to the share value compared to Bharti Airtel. However, after the recent run-up the premium has risen to 37%. This according to them has made the risk-reward ratio unfavourable.
As per their calculation, Bharti Hexacom now trades at “19x one-year forward EV/EBITDA.” This is at a “37% premium to the implied one-year forward EV/EBITDA for Bharti’s India business.”
Motilal Oswal on Bharti Hexacom: Free cash flow no longer attractive
According to the Motilal Oswal report, “given the relatively lower penetration of mobile and fixed broadband in Bharti Hexacom’s circles, its growth prospects are slightly better than Bharti’s.” The key telecom play delivered free cash flow of Rs 2000 crore . However, Motilal Oswal expects the company to use this amount “debt payments and dividends (Vs potential acquisitions for Bharti).” Moreover, they believe “Bharti Hexacom Free cash flow has moderated to 3% (from 5% earlier).” This is another point of concern at current rates.
Motilal Oswal on Bharti Hexacom: Market share gain tough?
The other big worry for Motilal Oswal is the prospects of market share gain for Bharti Hexacom. They believe higher concentration among top two could make market share gains tougher for the company. Overall impact of that on costs and margins also need to be accounted for.
Motilal Oswal on Bharti Hexacom: Can Govt stake impede operation?
The Govt has 15% stake in Bharti Hexacom at the moment and as a result does not have any board representation after its listing. Motilal Oswal expects “the Govt to sell its stake over the medium-term, which would create a supply overhang and increase the free float in Bharti Hexacom.”
They believe low free float is also a key reason for its relatively strong run-up. The tail risks of unfavorable merger ratio with Bharti is another concern for them, According to Motilal Oswal, “Bharti would ideally want to have the India wireless and homes business under a single entity to have full control and ownership.” Though, the company continues to trade at a significant premium they” believe the possibility of a merger is low.”
However, if Bharti were to still merge Bharti Hexacom, “there could be a risk of an adverse swap ratio for Bharti Hexacom shareholders,” as pert Motilal Oswal . This is another concern for them.
Bharti Hexacom stock performance
The Bharti Hexacom stock is up 7% for the month and gained 28% over past 6 months. The stock delivered 72% returns in last 1 year. At current levels, it is around 5% away from its 52-week high Rs 1,931 per share.