Indus Towers Transfer And Network Expansion Will Improve Efficiency

Key Takeaways

• Transfer of telecom towers to Indus Towers is set to enhance operational efficiency and boost EBITDA margins through cost reduction and streamlined focus.
  
• Expansion into remote areas and focus on broadband and IoT will likely drive revenue growth through increased market penetration and improved infrastructure.
  
• Strategic shifts, such as exiting low-margin businesses and infrastructure refocus, might improve efficiency but could affect revenue growth and market positioning amid competitive pressures.

Catalysts

Provides mobile services, fixed-line telephone, and broadband services to end consumers and business customers under the Airtel brand in India.

• Bharti Hexacom's planned transfer of 3,400 telecom towers to Indus Towers is expected to lead to greater operational efficiency and focus, potentially boosting long-term value creation and improving EBITDA margins by streamlining costs.
  
• The ongoing expansion into remote villages and the enhancement of network infrastructure, including the addition of 5,214 new sites and extensive fiber deployment, is likely to drive future revenue growth by increasing market penetration and improving connectivity.
  
• The integration of AI to manage network operations and solarization efforts aims to lower carbon footprint and energy costs, enhancing net margins and contributing to financial sustainability.
  
• The strategic focus on increasing broadband penetration and expanding Fixed Wireless Access (FWA) coverage suggests a significant revenue growth opportunity, as these initiatives could tap into the growing demand for home connectivity in underpenetrated markets.
  
• Bharti Hexacom's initiative to retool its B2B portfolio, including exiting low-margin businesses and focusing on high-growth sectors like Cloud and IoT, could lead to improved revenue growth and a stronger EBITDA margin profile by concentrating on higher-margin offerings.

Bharti Hexacom Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Bharti Hexacom's revenue will grow by 15.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 17.5% today to 28.4% in 3 years time.
• Analysts expect earnings to reach ₹37.3 billion (and earnings per share of ₹72.77) by about July 2028, up from ₹14.9 billion today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting ₹44.8 billion in earnings, and the most bearish expecting ₹30.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.0x on those 2028 earnings, down from 60.7x today. This future PE is lower than the current PE for the IN Wireless Telecom industry at 47.7x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 12.55%, as per the Simply Wall St company report.

Bharti Hexacom Future Earnings Per Share Growth

Risks

• The decision to exit low-margin business segments, such as wholesale commodity voice and messaging, could reduce reported revenue, potentially affecting investor sentiment about top-line growth despite there being no impact on EBITDA due to these segments' negligible margins. (Revenue)
  
• A focus on debt reduction and financial prudence, such as prepaying high-cost spectrum dues, might limit the company's capacity to make significant investments in new growth areas, potentially slowing future revenue expansion. (Earnings)
  
• Bharti Hexacom’s infrastructure transfer to Indus Towers suggests operational and strategic refocusing but may dilute short-term EBITDA margins due to incremental IP fees, despite expected improvements in operational efficiency over time. (EBITDA Margins)
  
• The ongoing competitive landscape, with competitors like Jio accelerating growth in digital revenue streams and broadband market penetration, poses a risk if Bharti Hexacom cannot capture a proportional share of market expansion compared to its competitors. (Revenue)
  
• The uncertainty in adjustments to tariffs, despite current low ARPU levels in India compared with global standards, could constrain short-term revenue growth if tariff increases do not materialize as planned or if they fail to enhance ARPU significantly. (Revenue)

Valuation

• The analysts have a consensus price target of ₹1827.583 for Bharti Hexacom based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹2120.0, and the most bearish reporting a price target of just ₹1480.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹131.3 billion, earnings will come to ₹37.3 billion, and it would be trading on a PE ratio of 35.0x, assuming you use a discount rate of 12.5%.
• Given the current share price of ₹1814.3, the analyst price target of ₹1827.58 is 0.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.