Hathway Cable & Datacom (HATCAB) 64

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1 Result Update Rating matrix Rating : Hold Target : 64 Target Period : 12 months Potential Upside : 0% What s changed? Target Unchanged EPS FY15E Changed from to EPS FY16E Changed from to EPS FY17E Introduced at Rating Unchanged Quarterly performance Q3FY15 Q3FY14 YoY (%) Q2FY15 QoQ (%) Revenue EBITDA (33.1) EBITDA (%) bps bps PAT (58.0) (36.9) 57.5 (39.3) 47.9 Key financials Crore FY14 FY15E FY16E FY17E Net Sales 1,581 1,605 1,747 1,964 EBITDA Net Profit (111) (115) (77) (57) EPS ( ) (7.3) (1.4) (1.0) (0.7) Valuation summary FY14 FY15E FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW RoCE 0.1 (0.3) Stock data Particulars Amount Market Capitalization Crore Total Debt (FY14) Crore Cash and Investments (FY14) 44 Crore EV Crore 52 week H/L 74 / 46 Equity capital Crore Face value 2 Price performance 1M 3M 6M 12M Dish TV Hathway Cable Research Analyst Karan Mittal karan.mittal@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com February 12, 2015 Hathway Cable & Datacom (HATCAB) 64 Broadband revenue picking up, in line performance Hathway Cable s revenue came in at crore, up 1.9% YoY, slightly higher than our expectation of crore on account of higher broadband income The EBITDA came in at 24.6 crore, with margins at 10.3%, higher then our expectations on account of higher revenues Net loss came in at 58.0 crore, in line with our expectations Digitisation benefits accruing, yet to gain full momentum Hathway, one of the largest multi system operators (MSO) with subscriber base of 11.7 million subscribers has already digitised 8.5 million subscribers. It has seeded set top boxes (STB) in all of the 6.8 million subscriber households in Phase I and II cites. In Delhi, the company has shifted back to net billing. The step has had no EBITDA impact on the local cable operator (LCO) commission. It actually reduces the liability to pay taxes to at least the extent of the LCO commission. Though Hathway is negotiating with several LCOs and has already started to bill most of them on a per subscriber mode, current realisation is far lower than the true potential with Phase I market collection being 95 approximately. Nonetheless, subscription income has grown since the digitisation process started. Hathway derived 650 crore from subscription revenue in FY14. Going ahead, we expect subscription revenues to grow at 7.4% CAGR over FY14-17E to crore (based on net billing and exclusive of the activation revenues). Re-negotiation of deals may lead to higher content costs There have been major changes in the content deals between Hathway and the broadcasters. Zee and Star would be providing Star channels on a cost per subscriber (CPS) basis and RIO basis, respectively. The deal brings about some changes in the revenue model in terms of reduced carriage and changes in the costs in terms of higher content costs. Hathway plans to take ARPU hikes in the coming quarters to offset the impact of higher costs. However, the amount of ARPU hike benefit that will accrue to Hathway after parting with LCO s share remains to be seen. The digitisation process has not panned out as smoothly as planned earlier. The subscribers may look at shifting towards the DTH players in case the ARPU expands beyond a certain limit. Broadband revenue picking up!! The broadband segment has been picking up quite strongly. There has been a nearly 39% YoY jump in broadband revenues to 51.3 crore in the current quarter. The ramp up in the segment has been coming from the demand for DOCSIS 3.0 technology, which has a user base of at the end of the current quarter. Owing to the increased base of high ARPU generating DOCSIS 3.0 users the average broadband ARPU has increased to ~ 490 in the quarter from 440 a quarter ago. The increase in the broadband revenues is highly margin accretive. We expect the segment to post revenue growth of 44% FY14-17E CAGR to reach crore from crore in FY14. Digital cable revenue may get delayed; rate as HOLD The overall opportunity from digitisation remains huge, even though its monetization will take longer time. Moreover, the newer deals could lead to changes in the revenues and the margins. Owing to several uncertainties surrounding the cable space as whole, we have a HOLD rating, valuing it at a target price of 64 on a DCF based methodology. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q3FY15 Q3FY15E Q3FY14 Q2FY15 YoY (%) QoQ (%) Comments Revenue The company has shifted to net biiling in the Delhi which brought about a revenue impact of about 3 crore. In addition, tiff with several broadcasters also led to some revenue losses for the company Other Income Employee Expenses Raw Material Expenses Administrative Expenses Programming and Operating Cost EBITDA EBITDA Margin (%) bps -495 bps Depreciation Interest Total Tax PAT Change in estimates FY15E FY16E FY17E ( Crore) Old New % Change Old New % Change Introduced Comments Revenue 1, , , , ,963.6 Reduced estimates on account of a delay in digitisation in Phase III and IV cities and shift to net billing in Delhi. Moreover, with the change in deals with various broadcasters the carriage revenues are also expected to decrease. EBITDA The increase in content costs that would stem from the new CPS and RIO deals signed has made us cut down our estimates EBITDA Margin (%) bps bps 20.8 Growth in the high margin generating broadband revenues will lead to some margin improvement PAT EPS ( ) Assumptions Current Earlier Introduced Comments FY13 FY14E FY15E FY16E FY15E FY16E FY17E Total Subscribers (mn) Digitized Subscribers (mn) The tepid digitization activity seen since the past several quarters has made us tone down our estimates ARPU ( ) ICICI Securities Ltd Retail Equity Research Page 2

3 Quarter highlights Though the overall revenue depicts a 9.4% QoQ decline, the like to like number (net of LCO commission due to shift to net billing in Delhi) comes to about 229 crore, remaining flat QoQ. The impact of LCO commission in the last year same quarter is about 9 crore and about 12 crore in the last quarter. The current quarter adjusted for 3 crore (impact due to net billing) shows a flat QoQ growth in subscription revenue but a healthy about 17% YoY growth in the revenue line. The company s digital universe has expanded by 0.1 million subscribers to 8.5 million due to the seeding of about boxes. The subscriber universe for Hathway stands at 11.7 million. The company is offering channels from the Zee TV portfolio on a cost per subscriber basis. The Star channels will, however, be offered on a RIO basis and there would not be any carriage revenues coming in from Star channels Post the deals with broadcasters, we believe the company will face some escalation in content costs. Hathway, thus, intends to push for an increase in ARPUs. However, the distribution of benefit of the hike between the LCO and Hathway remains a concern The company is also quite active on its broadband offerings and has increased its number of home passes in the cities of Bangalore and Hyderabad. The company has reached DOCSIS 3.0 customers at the end of the current quarter. Consequent to the demand towards DOCSIS 3.0 the company has been able to reach an average broadband ARPU of 490 in the quarter from 440 in the previous quarter. The company plans to reach about 25% penetration levels of the current home passes available in the broadband segment ICICI Securities Ltd Retail Equity Research Page 3

4 Company Analysis Highest digitised subscriber base of 8.5 million Hathway has shown an impressive performance in digitising its current subscriber base in Phase I and II. The company seeded ~8.5 million STBs, with the total subscriber base reaching 11.7 million. The company by way of certain consolidation could raise the total tally of its subscriber base to 11.7 million from the 8.8 million at the end of FY13. Hathway has about ~70% of its subscribers from the Phase I and II markets, the areas which are relatively less elastic to price rise. Hence, the company would be in a better competitive position in mitigating the impact of its low ARPU phase III and IV subscribers. We expect the digitised base, which, in turn, is the revenue generating subscribers, to reach 9.1 and 9.3 million subscribers by FY16E and FY17E, respectively. Exhibit 1: Subscriber Base FY12 FY13 FY14 FY15E FY16E FY17E Total Subscribers Digitized Subscriber Base *The digitised subscriber base are assumed estimates based on the STB information disseminated by the company Subscription revenues to grow at a 7.4% FY14-17E CAGR With the onset of digitisation, the subscription revenues for all players in the cable and distribution space have started to scale upwards. Shift to gross billing or package linked billing has happened only in Delhi. Other metros are facing considerable resistance from LCOs, which may delay the whole process. Though Hathway is negotiating with several LCOs and has already started to bill most of them on a per subscriber mode, current realisation is far lower than the true potential. The management indicated that the average ARPU for the Phase I markets was 95 and that in the Phase II markets was in the 68 per subscriber. We expect ARPUs to have an upside potential. However, the complete benefits from digitisation would only flow once things are clear at the ground level with digitisation having been fully achieved. We factor a subscription revenue growth at a CAGR of 7.4% in FY14-17E to crore in FY16E from in FY14. Broadband revenue picking up!! The broadband segment has been picking up quite strongly. There has been a nearly 39% YoY jump in broadband revenues to 51.3 crore in the current quarter. The ramp up in the segment has been coming from the demand for DOCSIS 3.0 technology, which has a user base of at the end of the current quarter. Owing to the increased base of high ARPU generating DOCSIS 3.0 users the average broadband ARPU has increased to ~ 490 in the quarter from 440 a quarter ago. The increase in the broadband revenues is highly margin accretive and we expect the ICICI Securities Ltd Retail Equity Research Page 4

5 segment to post revenue growth of 44% FY14-17E CAGR to reach crore from crore in FY14. EBITDA margins!! The margins in the quarter were slightly above our estimates due to higher-than-expected growth in the high margin contributing broadband revenues. Going ahead, the margins will benefit slightly by increased seeding of boxes and a higher proportion of activation income in the year FY16 and FY17 due to Phase III & IV seeding. However, the newly signed content deals could impact the content costs and, hence, the margins. We have factored in consolidated EBITDA margins of 21.1% and 20.8% for FY16E and FY17E respectively. Exhibit 2: EBITDA & PAT margin trend (%) FY12 FY13 FY14E FY15E FY16E FY17E EBITDA Margin PAT Margin' ICICI Securities Ltd Retail Equity Research Page 5

6 Outlook and Valuation The overall opportunity from digitisation remains huge, even though its monetisation will take longer. Moreover, newer deals could lead to changes in the revenues and margins. Owing to several uncertainties surrounding the cable space as whole, we have a HOLD recommendation, valuing it at a target price of 64 on a DCF based methodology. Exhibit 3: DCF Valuation in Crore WACC 12.9% Revenue CAGR over FY14 - FY21E 11.7% Present Value of Cash Flow till FY21E 1,581.0 Terminal Growth 4.0% Present Value of terminal cash flow 4,702.5 PV of firm 6,283.5 Less: Current Debt 1,121.6 Total present value of the Equity 5,161.9 Number of Equity Shares outstanding 80.7 DCF - Target price ( ) 64 Exhibit 4: Valuation Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY NA FY NA FY15E NA FY16E NM ICICI Securities Ltd Retail Equity Research Page 6

7 Company snapshot Target Price : Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Jun-10 Mar-11 FY12 Jun-12 Mar-13 Dec-13 Mar-14 Jul-14 Event G Subramanian appointed Chief Financial Officer (CFO) of the company Hursh Shrivastava appointed director of the company Hathway Cable and Datacom launches their digital cable TV services in Gujranwala Town (model town), near Delhi University. Hathway launches digital cable and broadband combo. It launches Hindi music channel in Bangaluru. Hathway introduce HD Services pan-india Sunset date for the Phase I of digitisation. Hathway has about 2.5 million subscribers in Phase I Sunset date for the phase II of digitisation. Hathway has about 4.3 million susbcribers in Phase II Hathway increases its total subscriber base from 8.8 million subscribers to 11 million subscribers by way of acquisitions Hathway has the highest digitised base of about 8 million subscribers in its total subscriber base of 11 million subscribers Hathway was issued disconnection notice from Zee over due subscription by Hathway. The TDSAT had directed Hathway to pay 21.6 per subscriber as subscription to the Zee group and was asked to put their channels on ala carte system. However, Hathway's failure to do so has worsened the issue between them. Sep-14 The company completed preferential allotment of Equity amounting to crore during the quarter from Tybourne Capital. With this raise they have cumulatively rasied crore at 320 per share Top 10 Shareholders Rank Name Latest Filing Date % O/S Position (m) Change (m) 1 Raheja (Akshay Rajan) 31-Dec Raheja (Viren Rajan) 31-Dec P6 Asia Holding Investment IV (Mauritius) Ltd. 31-Dec Hathway Investments, Ltd. 31-Dec Macquarie Investment Management Ltd. 15-Jan Providence Equity Advisor Mauritius, Ltd. 30-Sep Capital Research Global Investors 31-Dec Reliance Capital Asset Management Ltd. 31-Dec Spur Cable & Datacom Pvt. Ltd. 31-Dec Route One Investment Company, LLC 30-Sep Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares P6 Asia Holding Investment IV (Mauritius) Ltd m 70.72m Fidelity Management & Research Company -3.26m -3.12m Capital Research Global Investors 52.19m 47.00m Reliance Capital Asset Management Ltd m -2.94m CLSA Capital Partners 7.32m 7.78m Kotak Mahindra Asset Management Company Ltd m -2.18m Macquarie Investment Management Ltd. 2.67m 2.59m BlackRock Asset Management North Asia Limited -2.00m -2.18m Dimensional Fund Advisors, L.P. 0.30m 0.27m Excel Funds Management Inc m -1.76m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 7

8 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15E FY16E FY17E Total operating Income 1, , , ,963.6 Growth (%) Content Cost and LCO Commision Employee Expenses Other Expenses ,016.2 Total Operating Expenditure 1, , , ,556.2 EBITDA Growth (%) Depreciation Interest Other Income Non Operating Expenses (20.8) Exceptional Items PBT MI/PAT from associates (8.8) (8.0) (4.0) (6.0) Total Tax PAT (108.5) (114.8) (77.2) (57.0) Growth (%) NM NM NM NM EPS ( ) (7.3) (1.4) (1.0) (0.7) Cash flow statement Crore (Year-end March) FY14 FY15E FY16E FY17E Profit after Tax (111.1) (114.8) (77.2) (57.0) Add: Depreciation Add: Interest Paid (Inc)/dec in Current Assets (273.0) 79.5 (40.3) (119.8) Inc/(dec) in CL and Provisions (91.5) CF from operating activities (Inc)/dec in Investments (0.3) (Inc)/dec in Fixed Assets (807.5) (252.4) (214.0) (228.0) Others 4.3 (10.7) (3.5) (9.8) CF from investing activities (803.6) (263.1) (217.5) (237.8) Equity Capital Inc/(dec) in loan funds (100.0) (50.0) - Dividend paid & dividend tax Less:Interest Paid CF from financing activities Net Cash flow (10.5) Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15E FY16E FY17E Liabilities Equity Capital Reserve and Surplus , , ESOP's Total Shareholders funds , , ,156.9 Total Debt 1, , Others Total Liabilities 2, , , ,379.5 Assets Gross Block 2, , , ,471.8 Less: Acc Depreciation , , ,873.5 Net Block 1, , , ,598.3 Capital WIP Net Intangible Assets Total Fixed Assets 2, , , ,853.0 Investments Goodwill on Consolidation Inventory Debtors Loans and Advances Cash Other Current Assets Total Current Assets 1, , , ,492.2 Creditors Provisions Other Current Liabilities Total Current Liabilities 1, , ,225.8 Net Current Assets Other non current assets Application of Funds 2, , , , Key ratios (Year-end March) FY14 FY15E FY16E FY17E Per share data ( ) EPS (7.3) (1.4) (1.0) (0.7) Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Total Operating income (6.4) (6.5) (3.4) (2.2) PAT Margin (7.0) (7.1) (4.4) (2.9) Inventory days Debtor days Creditor days Return Ratios (%) RoE (11.6) (8.9) (6.4) (4.9) RoCE 0.1 (0.3) RoIC 0.1 (0.4) Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 8

9 ICICIdirect.com coverage universe (Media) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) RoCE (%) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E DB Corp (DBCORP)* Buy 6, DISH TV (DISHTV) Buy 8, NA NA NA NA NA NA 9.2 NM NA ENIL (ENTNET) Buy 2, NA NA NA NA NA Eros (EROINT) Buy 3, NA NA NA NA NA Hathway Cables (HATCAB) Hold 5, NM NM NM NM NM NM NM HT Media (HTMED) Buy 3, NA NA NA NA NA Inox Leisure (INOX) Buy 1, Jagran Prakashan (JAGPRA) Buy 4, NA NA NA NA NA PVR (PVRLIM) Buy 2, Sun TV (SUNTV) Hold 17, TV Today (TVTNET) Buy 1, ZEE Ent. (ZEETEL) Hold 34, ICICI Securities Ltd Retail Equity Research Page 9

10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 10

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