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.”
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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.
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The Govt has 15% stake in Bharti Hexacom at the moment and as a result does not have any board representation after its listing.
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