Double Downgrade: Bharti Hexacom shares can fall 22% after sharp run-up, Macquarie warns

Brokerage firm Macquarie has issued a double downgrade on shares of Bharti Hexacom Ltd. on Friday, July 4, after the sharp run-up seen in the stock.Macquarie has downgraded the Bharti Airtel unit to “underperform” from its earlier rating of “outperform”, but has marginally raised its price target to ₹1,480 from ₹1,450 earlier. The revised price target implies a potential downside of 22.5% from current levels.
Bharti Hexacom had received an “outperform” recommendation from Macquarie in August last year, when it had initiated coverage on the stock.
The brokerage said that the downgrade comes on the back of a near-doubling of Bharti Hexacom’s stock over the last 12 months, in comparison to just a 6% advance for the Nifty Midcap index.Despite the downgrade, Macquarie continues to like Bharti Hexacom’s fundamentals and a higher Average Revenue Per User (ARPU) could result in a strong improvement in the company’s Return on Invested Capital (RoIC).

In its base case, Macquarie expects Bharti Hexacom’s subscribers to grow at a Compounded Annual Growth Rate (CAGR) of 2% over the next three years, similar to its parent company.At ₹229, Bharti Hexacom’s ARPU has been trading at a 2% discount to Bharti Airtel but is at a premium between 10% to 40% to peers like Vodafone Idea and Reliance Jio.

Owing to a healthy free cash flow generation, Macquarie expects Bharti Hexacom’s net debt to Earnings Before Interest, Tax, Depreciation and Amortisation (EBITDA) will decline from 2.4 times in the financial year gone by to 0.8 times in financial year 2028. Its RoIC is also likely to improve to 25% in the next three years, in comparison to 13% last year.

However, Macquarie’s bull case scenario values the stock at ₹1,900, which is around the same price at which the stock trades currently.

Out of the 12 analysts that have coverage on the stock, six of them have a “buy” rating, four say “hold”, while two have a “sell” recommendation.

Shares of Bharti Hexacom are currently trading 1% lower on Friday at ₹1,909. The stock is down 7% from its 52-week high of ₹2,052.