Bharti Hexacom coming with IPO to raise upto Rs 4275 crore

Bharti Hexacom

• Bharti Hexacom is coming out with a 100% book building; initial public offering (IPO) of 7,50,00,000 shares of Rs 5 each in a price band Rs 542-570 per equity share.  
• At least 75% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not more than 15% of the issue will be available for the non-institutional bidders and the remaining 10% for the retail investors.
• The issue will open for subscription on April 3, 2024 and will close on April 5, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 5 and is priced 108.40 times of its face value on the lower side and 114.00 times on the higher side.
• Book running lead managers to the issue are SBI Capital Markets, Axis Capital, BOB Capital Markets, ICICI Securities and IIFL Securities.
• Compliance Officer for the issue is Richa Gupta Rohatgi. 

Profile of the company

The company 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. It offers its services under the brand ‘Airtel’. It has a distinct strategy to premiumise its portfolio by acquiring and retaining quality customers and deliver an experience to them through its omnichannel approach and use of data science. It has a gamut of digital offerings to enhance customer engagement and differentiated customised 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. It undertakes prudent cost optimisation measures to improve its profitability and maintain an efficient capital structure with a comfortable leverage position. It continuously invests in network expansion, technology advancement and judicious spectrum investments. It also derive significant synergies from its relationship with its 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 the company. Airtel owns 70% of its outstanding equity share capital. 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. Airtel’s retail portfolio includes mobile services, fixed-line telephone, broadband services and Digital TV services. Airtel Xstream Fiber is a one-stop solution for all the high-speed internet and content needs of customers with convergence across linear and on-demand entertainment, streaming services spanning music and video. For enterprise customers, Airtel also offers a gamut of solutions that include secure connectivity, cloud and data center services, cyber security, IoT, Ad Tech and CPaaS (Airtel IQ). Its flywheel of digital services includes the Airtel Payments Bank, Wynk Music, Airtel Ads, Airtel IQ and Nxtra by Airtel.

The Government of India through Telecommunications Consultants India (TCIL) owns 30% of the company’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. 

Proceed is being used for:

• Carrying out the Offer for Sale of up to 75,000,000 Equity Shares by the Selling Shareholder.
• Achieving the benefits of listing the Equity Shares on the Stock Exchanges.

Industry overview

Telecommunication has been playing a pivotal role in country’s economic growth. It is the backbone of many industries, including e-commerce, media and entertainment, finance, information and technology (IT), healthcare, transportation, and logistics. The sector facilitates seamless movement of data worldwide through wired or wireless channels and significantly influences economic progress. The telecom market is constantly evolving with integration of cutting-edge technologies over the years. This has widened the coverage of telecom services globally and made them an indispensable part of the daily lives of consumers. Telecom proved to be an essential service, especially during the Covid-19 pandemic, by enabling people to remain connected amid worldwide lockdowns. The telecom industry mainly comprises wireless services, or mobile services, and wireline services, or fixed-line services. In India, wireless services accounted for 97.3% of total telecom customers and wireline services for the remaining 2.7% as of the nine months of Fiscal 2024.

In India, spectrum auctions are held for 22 telecom circles and a telecom company needs to acquire spectrum in each circle to provide comprehensive coverage to its consumers. Operators also need to acquire a unified license with authorisations for access services in each circle before they participate in auctions. So, if a new telecom company plans to launch services in a particular region, it will have to buy both spectrum and a licence for the entire circle. Further, it would have to either wait for spectrum auction or acquire a telecom company with a spectrum portfolio. Currently, acquisition costs are prohibitive given significant consolidation in the domestic industry. Telecom players require substantial capital to purchase spectrum through government auctions and establish and maintain their network infrastructure. Further, the telecom industry remains susceptible to rapid technological changes, necessitating fresh investments or significant overhaul of existing networks.

Growing need for telecom services, network expansion by telecom operators, and availability of services at affordable prices have been driving customer addition and, in turn, contributing to an improvement in teledensity to 84.5% as of Fiscal 2023 from 75.2% as of Fiscal 2014. Rural teledensity improved to 57.7% as of Fiscal 2023 from 44.0% as of Fiscal 2014, which was led by higher penetration of wireless services, whereas urban teledensity declined to 134.2% from 145.5%, during the same period led by SIM consolidation. Rural customers grew faster than urban counterparts, due to low teledensity. Notably, rural customers logged a CAGR of approximately 3.6% between Fiscals 2014 and 2023. In contrast, urban customers exhibited a lower CAGR of approximately 1.8%. The difference in growth rates can be attributed to affordability of smartphones and telecom services and continued network expansion by telecom operators. Telcos’ concentrated and aggressive expansion strategies in rural areas supported rapid customer-base augmentation in these regions. Telecom revenue growth will be supported by a rise in the customer base, supported by an increase in rural teledensity.

Pros and strengths

Established leadership and large customer base in area of operations: The company provides consumer mobile services, fixed-line telephone and broadband services to customers in Rajasthan and in the North East telecommunication circles in India, which comprises the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripura. It has been able to grow its market share by its simple and cogent strategy on acquiring and retaining high value customers by offering them superior experience at competitive prices. Its digital infrastructure investments, digital experience and the digital services it provides along with Airtel and its affiliates have facilitated its growth in market share and catered to the needs of its customers. Customised offerings through family plans and converged plans under the Airtel Black proposition have contributed in improving its market share in post-paid segment. As a result of its strategy, it has been able to consistently increase its ARPU and market share in its circles. It has the highest number of VLR customers of 6.4 million and a VLR market share of 52.3% in the North East circle and the second highest VLR customers in the Rajasthan circle with 23.2 million customers and a VLR market share of 38.7%, as of December 31, 2023. 

Presence in markets with high growth potential: The company operates in the Rajasthan and North East telecommunication circles in India. Rajasthan had 67.0 million telecom customers contributing 5.6% to overall India telecom customers, while the North East had 12.7 million customers, contributing 1.1% to overall India telecom customers in the nine months of Fiscal 2024. Rajasthan had a teledensity of 79.5% as of Fiscal 2023, which lags the national average of 84.5% due to its lower rural teledensity of 57.2%. Rajasthan’s customer base is expected to grow at 1.4% to 1.5% between Fiscals 2023 and 2028 reaching 69.0 million to 69.5 million with a teledensity of 82% to 83% following pan-India trends with rising rural teledensity. Wireless customers are expected to account for approximately 98.5% of the customers by Fiscal 2028. Rajasthan’s focus on resolving regional imbalances and supporting growth in rural areas will create demand for telecom services in rural areas of the state, driving customer growth. The gross revenue of the Rajasthan circle was approximately Rs 127.6 billion in Fiscal 2023 growing at CAGR of 4.4% between Fiscals 2014 and 2023. However, its revenue grew robustly at 17% in Fiscal 2023 in line with the national trend and the industry is expected to grow at 7% to 8% between Fiscals 2023 and 2028 to reach Rs 183 to 185 billion, supported by a rise in teledensity in the region, especially in rural regions, higher tariffs and an increase in internet penetration in the state. 

Building future ready network: The company relies on a robust network infrastructure through owned and leased assets. It benefits from the telecommunication infrastructure and other digital assets of its Promoter, Airtel and its investment in Indus Towers. Over the years, it has increased use of digital tools, data science and technology to enhance the network efficiency, optimise costs and make its networks more environment friendly. As of December 31, 2023, it was present in 486 census towns in the two circles in which it operates with 5,092 owned and 19,782 leased network towers. During the nine months ended December 31, 2023, its customers spent 260,674 million minutes and consumed 3,719 million gigabytes on its network. It has a spectrum portfolio with varied pool of mid band spectrum (1800/2100/2300 MHz bands) along with spectrum holding in 900 Mhz, 3500 MHz and 26 Ghz bands. Over the years, it has followed prudent capital allocation and spectrum acquisition and it chose not to acquire the expensive 700 Mhz band for its 5G network. None of its existing spectrum expires before the year 2030, the validity of its spectrum pool ranges between the years 2030 and 2042 and it does not expect to incur any significant capital expenditure towards spectrum acquisition until the specific spectrum band expires. 

Extensive distribution and service network: The company has an extensive sales and distribution network across the rural and urban areas of the Rajasthan and North East circles serviced by 616 distributors and 75 stores operated by it, as of December 31, 2023. Its distribution partners are digitally empowered to sell Airtel services through the ‘Mitra’ app, which has been licensed to it by one of Airtel’s affiliates, and which facilitates mobile recharge transactions between distributors and retailers and supports onboarding of new customers. Its exclusive retail footprint comprising 89,454 retail touchpoints, as of December 31, 2023, is one of the key differentiators, including for supporting high value customers and providing them superior experience. Its exclusive retail footprint is an integral part of its customer acquisition and engagement strategy, designed to bring the Airtel brand closer to its customers. As of December 31, 2023, it had setup 24 small format low-cost stores, in addition to the 51 retail stores in its two circles to deepen its retail presence and primarily drive the sale of its post-paid, homes broadband and international roaming services. 

Risks and concerns

Rely on sophisticated billing, credit control and customer verification systems: The company is dependent on several sophisticated processes, IT systems and software packages for mobile services usage, billing and credit control. It has also outsourced certain aspects of these systems to specialist service providers, such as its Business Support Systems stack. Any failure of critical IT systems, including those provided by third parties, could have an adverse effect on its business and results of operations, and lead to a loss of revenues and customers. It is dependent on several complex software packages that record minutes used, calculate the appropriate charge and then deduct the amount due from the account of the pre-paid customer or record the amount payable by the relevant post-paid customer. Any failure to properly capture the services provided or to charge the appropriate fees could have an adverse effect on its revenue. No system or process can ensure total capture and some loss of income is common. However, if income leakages increase, or are greater than that of its competitors, then its business, financial condition and results of operations could be adversely affected. Similarly, it is also dependent on several sophisticated systems and processes for customer verification and activation services, which ensures that all necessary documents are procured from pre-paid customers at the time of subscription in compliance with regulatory requirements in relation to verification of the identity of its customers.

Depends on limited number of vendors to supply critical network: The company’s principal vendors and suppliers provide network equipment and related services and site infrastructure for its operations. While it has supply and services agreements with key suppliers and vendors, it cannot assure that it will be able to obtain satisfactory equipment and services as per its expectations. For instance, it works with several entities including Ericsson India Private Limited, Nokia Solutions and Networks India Private Limited and Ceragon Networks Ltd for critical network services. Its top five network and equipment related services suppliers contribute to a significant portion of its network and equipment related service requirements. If its contractual arrangements with such vendors expire or terminate, or if it fails to receive the quality of equipment and maintenance services that it requires, or if its key suppliers discontinue the supply of such equipment and services due to withdrawal from the Indian mobile telecommunications market or otherwise, it may find it difficult to replace a vendor on a timely basis.

Rely significantly on information technology systems: The company may be subject to disruptions, failures or infiltrations of its information technology systems arising from events that are wholly or partially beyond its control (including damage or incapacitation by human error, insider attacks, electrical or telecommunication outages, sabotage, computer viruses, cyberattacks or similar events, or loss of support services from third-parties, such as internet backbone providers), which could result in breaches of applicable data security laws and resultant imposition of monetary penalties, in addition to reputational harm. It may also be subject to claims by customers of interception of their mobile devices, and consequent breach of their privacy. In addition, it uses third party software, platforms, services and data storage services, on-cloud and on-premises data centres, including payment gateway services, cash collection services, electronic sign services, as well as for automated calls and messages. Infiltration of its or such third parties’ information technology systems may result in data losses or theft of its or customers’ proprietary business or personally identifiable information, resulting in exposure to litigation, liabilities, remediation costs, disruption of internal operations, increased cybersecurity protection costs and loss of customer confidence. 

Churn rate in mobile telecommunications industry in India is high: Churn rate in the Indian telecom market is high and weighted average monthly churn rate is approximately 2.7% as of Fiscal 2023. Factors such as SIM consolidation, closure of inactive SIMs, and ease of number portability among others, contribute to a high churn rate for the industry. This makes it necessary for the telecom players to offer competitive tariffs, introduce promotional offerings and maintain service quality to retain customers. A high rate of churn increases its aggregate customer acquisition costs as it need to add new customers in order to maintain or grow its market share. Such customer acquisition costs include payments to be made as commission to agents, costs in relation to SIM cards, welcome kits and documentation and customer verification costs. The need to add customers also requires additional marketing expenditure which cannot be fully passed on to customers. Similarly, a high rate of churn also increases its customer retention costs as it may need to incur expenditure to dissuade its customers from shifting to its competitors by offering deals and services. Further, while it has interconnection and international roaming agreements in place with other telecommunications operators through its Promoter, it has no direct control over the quality of their networks and the interconnections and international roaming services they provide.

Outlook

Incorporated in 1995, Bharti Hexacom provides consumer mobile services, fixed-line telephone and broadband services to customers in Rajasthan and in the North East telecommunication circles in India, which comprises the states of Arunachal Pradesh, Manipur, Meghalaya, Mizoram, Nagaland and Tripura. It has an extensive sales and distribution network across the rural and urban areas of the Rajasthan and North East circles serviced by 616 distributors and 75 stores operated by it, as of December 31, 2023. Its distribution partners are digitally empowered to sell Airtel services through the ‘Mitra’ app, which has been licensed to it by one of Airtel’s affiliates, and which facilitates mobile recharge transactions between distributors and retailers and supports onboarding of new customers. Its operations are conducted by an experienced management team that has significant experience in all aspects of its business operations. On the concern side, the company’s tower infrastructure and telecom business are subject to various national, state-level and municipal environmental laws and regulations in India concerning issues such as damage caused by electromagnetic radiation. It may face negative publicity owing to factors such as network connectivity, customer satisfaction and the efficacy of its complaints and grievance redressal process.  

The company is coming out with an IPO of 7,50,00,000 equity shares of face value of Rs 5 each. The issue has been offered in a price band of Rs 542-570 per equity share. The aggregate size of the offer is around Rs 4065.00 crore to Rs 4275.00 crore based on lower and upper price band respectively. On performance front, the company’s revenue from operations increased by 21.72% from Rs 54,052 million in Fiscal 2022 to Rs 65,790 million in Fiscal 2023. The company’s profit for the period was Rs 5,492 million in Fiscal 2023 compared to Rs 16,746 million in Fiscal 2022. Meanwhile, the company’s strategy is to premiumise its portfolio with continuous upgrades from 2G to 4G/5G customers, upgrading customers within its 4G plans for higher data packs, pre-paid to post-paid upgrade, contextual data monetisation, and through converged offerings. Its simple and clear strategy helps it drive its ARPU growth agenda in absence of tariff hike, which is reflected in its performance. Besides, the company continues to expand its network coverage across the regions in which it operates with a focus on key revenue generating cities and high value catchment areas to increase its customer base and enhance customer experience.