IPO Review Rating matrix Rating : Unrated Issue Details Issue Opens Issue Closes 21-Jun-17 23-Jun-17 Issue Size ( Crore) 768-777 Fresh Issue ( crore) 240 Offer for Sale ( crore) 240.5-244.8 Price Band ( ) 167-170 No of Shares on Offer (crore) 1.4 QIB (%) 50% Non-Institutional (%) 15% Retail (%) 35% Minimum lot size (No. of shares) 88 Objects of the issue Objects of the Issue a) Repayment/ pre-payment in full or part of certain borrowings availed by the company to the tune of 228.9 crore b) General corporate purposes c) Offer for sale Shareholding Pattern Amount 2 480-485 crore Post issue at higher band Pre-Issue Post-Issue Promoter & promoter group 98.9% 73.9% Public 1.1% 26.1% Financial Summary- IGaap Crore FY14 FY15 FY16 9MFY17 Net Sales 577.2 622.8 844.6 689.3 EBITDA 156.1 149.2 264.5 203.5 EBITDA Margin (%) 27.0 24.0 31.3 29.5 PAT 24.0 16.7 69.1 43.2 Valuation Summary (at upper price band: 170) (x) FY14 FY15 FY16 FY17* P/E 79.6 114.5 27.7 33.2 EV/EBITDA 13.8 14.0 8.2 7.5 P/BV 6.0 5.7 4.1 NA RoCE 13.0 11.5 18.4 NA RoNW 7.6 5.0 14.9 NA *P/E and EV/EBITDA are based on annualized FY17 estimates Research Analyst Bhupendra Tiwary bhupendra.tiwary@icicisecurities.com Sneha Agarwal sneha.agarwal@icicisecurities.com June 16, 2017 GTPL Hathway is a leading regional multiple system operator (MSO) in India offering cable and broadband services. The company is the market leader in Gujarat with a market share of 67% of cable television subscribers in 2015, accounting for ~3.7 million (mn) of 5.6 mn cable television households in Gujarat as per a MPA Report. The company is No. 2 MSO in Kolkata, Howrah in West Bengal with a market share of 24% of cable television subscribers therein accounting for ~0.7 mn of 3.0 mn cable television households in Kolkata and Howrah. The company has seeded ~7.71 mn STBs in all its markets put together and has a broadband subscriber base of 230000 subscribers. GTPL is the only MSO in India making consistent profits. Operating revenues and EBITDA have grown at a 23.1% and 35.3% CAGR in FY13-16 to 844.6 crore and 264.5 crore, respectively. It is coming out with a fresh issue of 240 crore and OFS of ~ 240.5-244.8 crore (1.44 crore shares). Investment Rationale Leading regional MSO with significant share in Gujarat and Kolkata GTPL enjoys strong content cost benefits owing to its leadership position in the Gujarat market with ~67% market share. Gujarat is an important market for broadcasters and advertisers with 5% viewership share from the market on an all-india basis and more than 8% of the Hindi speaking market in India in 2015. Hence, the company accounted for 14% share of the total cable carriage and placement fee market in India in FY16. The company intends to be a regional leader and would only enter those markets where it can secure a leadership position. About 2/3 rd of GTPL s presence is in Phase III/IV markets, which are yet to see complete monetisation and will aid revenues as monetisation is visible herein. Envisions strong broadband growth with newer GPON technology rollout GTPL has ~230000 broadband subscribers with monthly ARPU of 472 and average usage of 35 GB per month. The company expects strong growth in the broadband segment as it is set to launch GPON, which is EBITDA accretive with certain efficiencies and adept at providing broadband speeds of 1 GB/sec. The company already has a million home passes enabled with 23% penetration and expects broadband penetration to increase with the new technology. However, capex required for GPON technology remains unknown. Key risks and concerns GTPL Hathway Ltd Price band 167-170 Inability to acquire new subscribers: Any inability to seed STBs in Phase IV markets and acquire new subscribers may impact the future growth prospects of the company Capex for broadband and threat from competition: GTPL yet to deploy capex for the GPON technology it is banking upon for the broadband business and could face some difficulty in raising the said funds. There is also a lingering threat from Jio launch to the business Risk from new tariff order: The new tariff order, when implemented, could impact future ARPUs, pay TV economics, operational flexibility, etc. Restrictions on subscription charges may adversely affect subscription income Priced at annualised FY17 EV/EBITDA (IGAAP) multiple of 7.5x on 170 Though the company remains one of the very few profit making MSO, we remain wary of cable industry structure wherein LCOs hold the key for effective monetisation pass through. There is also a risk of disruption in the broadband business from Jio s foray into FTTH. The stock is available at a multiple of 7.5x FY17 annualised EV/EBITDA, on the higher band.
Company Background GTPL is a leading regional MSO in India offering cable television and broadband services. It is promoted by Aniruddhasinhji Jadeja and Kanaksinh Rana. In October 2007, Hathway acquired a 50% share in the company s business. It is the No. 1 MSO in Gujarat with a market share of 67% of cable television subscribers in 2015, accounting for 3.7 million of 5.6 million cable television households in Gujarat. In addition, it is the No. 2 MSO in Kolkata and Howrah in West Bengal with a market share of 24% of cable television subscribers in this market in 2015, accounting for 0.7 million of 3.0 million cable television households in Kolkata and Howrah. As of January 31, 2017, its digital cable television services reached 189 towns across India, including towns in Gujarat, West Bengal, Maharashtra, Bihar, Assam, Jharkhand, Madhya Pradesh, Telangana, Rajasthan and Andhra Pradesh The company intends to be a regional leader and intends to enter only those markets wherein it can scale up to be a regional leader. The company seeded approximately 6.55 million STBs (as on January, 2017) and had ~5.69 million active digital cable subscribers. The company has 2,30,000 broadband subscribers and has an established home pass of one million households. The company also provides owned and operated 27 channels offering localised content to its subscribers and enjoys the right to place the Gujarat News channel on its network. The company has completed the rollout of STBs in Phase I, II, III areas and is working towards completing the rollout of STBs in Phase IV areas. Revenues are expected to grow at a faster pace once monetisation commences in the markets so digitised. GTPL owns intercity and intra-city optical fibre cable network of 5,406 km while leased fibre network was at 3,615 km. Digital cable services across the company s coverage area is supported by one main digital head-end located in Ahmedabad. GTPL is the only MSO in India making consistent profits. Operating revenues and EBITDA have grown at 23.1% and 35.3% CAGR in FY13-16 to 844.6 crore and 264.5 crore, respectively. Exhibit 1: Digitization schedule Page 2
Exhibit 2: Progress of digitisation Particulars Number of STB Seeded (in million) % of network digitized Regulatory deadline Phase I 0.7 100% 31-Oct-2012 Phase II 2.2 100% 31-Mar-2013 Phase III 2.4 100% 31-Jan-2017 Phase IV 1.3 52% 31-Mar-2017 Total 6.6 85% Investment rationale Leading regional MSO with significant share in Gujarat, Kolkata GTPL enjoys strong content cost benefits owing to its leadership position in the Gujarat market with ~67% market share. Gujarat is an important market for broadcasters and advertisers with 5% viewership share from the market on an all-india basis and more than 8% of the Hindi speaking market in India in 2015. Hence, the company accounted for 14% share of the total cable carriage and placement fee market in India in FY16. The company intends to be a regional leader and would only enter those markets where it can secure a leadership position. About two-third of the company s presence is in the Phase III and IV markets, which are yet to see complete monetisation and will lead to incremental revenues in the future as monetisation begins from these markets. The company has been successful in maintaining quality relations with its LCO, which has aided the smooth functioning of the cable business. Envisions strong broadband growth with newer GPON technology rollout GTPL has ~230000 broadband subscribers with a monthly ARPU of 472 and average usage of 35 GB per month. The company expects strong growth in the broadband segment as it is set to launch GPON, which is EBITDA accretive with certain efficiencies and adept at providing broadband speeds of 1 GB/sec. The company already has a million home passes enabled with 23% penetration. It expects broadband penetration to increase with the new technology. However, the capex required for the GPON technology remains unknown. Exhibit 3: Broadband key metrics KPI FY14 FY15 FY16 9MFY17 Total homes passed (mn) 0.3 0.5 0.8 1.1 Average monthly data usage/sub (GB) 35.0 38.0 39.0 34.4 Subscribers (million) 0.1 0.1 0.2 0.2 ARPU expected to improve as company intends to increase HD offerings, offer digital content The company has completed rollout of STBs in Phase I, Phase II and Phase III areas and is working towards completing the rollout of STBs in Phase IV areas. ARPU is expected to exhibit an increase as and when the monetisation process begins in the Phase II/III markets and the digitisation in the Phase IV is complete. Moreover, GTPL is targeting strengthening its HD service offering, which will result in higher ARPUs. The number of paying HD subscribers is at 0.06 million as on January 31, 2017. Page 3
Exhibit 4: ARPU per month trends 300.0 250.0 237.5 241.7 252.3 200.0 200.3 150.0 100.0 50.0 70.9 90.7 76.6 72.9 0.0 FY14 FY15 FY16 9MFY17 Primary ARPU Secondary ARPU Company intends to increase primary subscriber base GTPL has ~0.33 million of its total digital and analog subscribers as primary subscribers, to whom they provide direct connections, either through relationship with such subscribers, through joint ventures, or through right to use agreements entered into with LCOs (January 31, 2017). The company aims to increase its primary subscriber numbers and benefit from a higher realisation per primary subscriber compared to secondary subscribers, as sharing of subscription fees with LCOs gets eliminated. Page 4
( crore) (%) Financials GTPL earns majority of its revenues in the form of subscription, activation and placement revenues. Subscription revenues contribute as much as 40% to overall revenues (as on FY16) and have grown at 32% CAGR over FY13-16. GTPL is the only MSO in India making consistent profits. Its operating revenues and EBITDA have grown at 23.1% and 35.3% CAGR over FY13-16 to 844.6 crore and 264.5 crore, respectively. Exhibit 5: Revenue break-up FY13 FY14 FY15 FY16 9MFY17 Subscription Income 146.8 234.4 299.7 334.4 323.5 ISP Access Revenue 10.5 17.9 33.5 73.0 93.1 Placement / Carriage Income 244.7 242.2 248.5 267.0 171.3 Activation Charges (Set Top Boxes) 36.3 70.4 31.7 151.4 88.8 Sale of services Equipment lease and rent income 3.9 3.5 1.7 4.2 1.5 Profit on sale of set top box 0.1 0.6 0.0 3.3 1.5 Other operational income 10.9 8.0 7.6 11.3 9.6 Total operating revenues 453.2 577.2 622.8 844.6 689.4 Being a regional leader, the company enjoys several content costs advantage with broadcasters. Hence, it operates at a better margin profile against its peers. Going ahead, as the high ARPU generating broadband segment gains momentum, margins are expected to improve further. In addition, monetisation of Phases II/III will be further EBITDA accretive. Exhibit 6: Revenue and EBITDA trends 900 844.6 35 800 700 600 577.2 622.8 689.3 30 25 500 453.2 20 400 15 300 200 100 10 5 - FY13 FY14 FY15 FY16 9MFY17 - Total Revenue EBITDA EBITDA Margin (RHS) Page 5
( crore) (%) Exhibit 7: PAT and PAT margins trends 80 70 69.1 9.0 8.0 60 50 40 30 20 38.3 24.0 16.7 43.2 7.0 6.0 5.0 4.0 3.0 2.0 10 1.0 - FY13 FY14 FY15 FY16 9MFY17 PAT PAT Margin (RHS) - Industry Overview The TV industry in India has grown at a CAGR of 12.3% from 37000 crore in 2012 to an estimated 58800 crore in 2016. The industry is expected to grow at a CAGR of 14.7% to 116600 crore in 2021. Subscription revenue is estimated to grow from 38700 crore in 2016 to 77100 crore in 2021 at a CAGR of 14.8%, driven by intended benefits of digitisation after 2017 (Source: The KPMG-Ficci Report). The number of TV households in India increased to 181 million in 2016, implying a TV penetration of 63%. The number of C&S subscribers is estimated to have reached 169 million. The number of paid C&S subscribers is estimated at 147 million in 2016, implying a paid C&S TV penetration of 81%. The number of TV households is expected to increase to 203 million by 2021, with the paid C&S subscriber base expected to grow to 171 million by 2021, representing 84% of TV households. Regional cable TV Market overview Gujarat Gujarat had ~8.3 million pay TV subscribers as on CY15 and captured more than 5% viewership share on an all India basis and more than 8% of the Hindi speaking market. Several national MSOs like DEN, InCable and SITI operate in the cable TV market in Gujarat. However, cable distribution in Gujarat continues to be dominated by GTPPL Hathway with 67% market share therein. It has enhanced its channel offerings and differentiated its service offering with a wide suite of local channels and strong LCO tie-ups. As a result, over the last three years, it has been the No. 1 operator in Gujarat with ~3.7 million of total 5.6 million cable TV households in Gujarat. Kolkata and Howrah The cities of Kolkata and Howrah were among the earliest markets to be fully digitised and had ~4 million pay TV subscribers at the end of 2015. GTPL continues to remain a strong No. 2 cable platform in this market with 24% share with ~0.7 million of total 3 million cable TV households in Kolkata and Howrah. Page 6
Broadband services India s internet subscriber base is expected to increase from 411.6 million subscribers in 2016 to 1,004.3 million subscribers in 2021 led by growth in wireless subscribers. With 137 million broadband subscribers in 2015, India s broadband market penetration was lower compared to developed markets like the US, UK, South Korea and Japan. There is headroom for growth in India s broadband subscriber base as well as the internet user base generally. Fixed broadband had only 6% household penetration at the end of 2015. Considering the benefits of fixed broadband, leading cable operators as well as telecom operators are investing in fibre upgrades and nextgeneration fixed broadband technologies. The government s digital India programme is also expected to promote cable broadband with cable pipes already reaching over 100 million homes. GTPL also intends to cash in on this digital revolution by coming out with new GPON technology that is more effective both cost & technology wise. Page 7
Objects of issue The offer comprises the fresh Issue by GTPL and an offer for sale by selling shareholders. Objects of fresh issue: There was a fresh issue of 240 crore by the company through the IPO. The objects of the fresh issue are as follows: a) Repayment/pre-payment, in full or part, of certain borrowings availed by GTPL ( 228.9 crore) b) General corporate purposes (remaining) Offer for sale The selling shareholders are selling ~1.44 crore share cumulatively. The company shall not receive any proceeds from the offer for sale (OFS) by selling shareholders while the proceeds received from the OFS will not form part of the net proceeds. Selling shareholders will be entitled to their respective proportion of proceeds from the OFS after deducting their proportionate offer related expenses. The company has fixed the price band as 167-170 with the total issue size ranging between 480 and 485 crore. Page 8
Key risks and concerns Inability to acquire new subscribers The future growth of the company will be partly dependent on completion of the rollout of STBs in Phase IV areas. The discontinuance of analog signals has been challenged in courts in a number of states. The digitisation in Phase IV areas could be delayed or halted if any such court actions (including injunctions) are successful and the process can be delayed further. Moreover, if the number of STBs available at the time of rollout of digital cable services does not meet demand, the ability to complete the rollout of STBs in Phase IV areas could be impacted. The income profile of the subscribers in the Phase IV markets could be a hindrance in digitising the Phase IV market as the audience therein may be unwilling to pay higher costs for digital television services. This could impact the future growth prospects of the business as two-third of the company s business comes in from Phase III/IV markets. Risk from new tariff order The new tariff order sets out a maximum amount of 130 per month per STB, excluding taxes, which distributors may charge their subscribers to view up to 100 standard definition FTA channels. Distributors can offer a maximum of 15% discount to their subscribers for bundled channels over the sum of the retail price of those channels. Broadcasters have to declare maximum retail prices per month for their channels. Bundled channels (or bouquet) will not be allowed to contain any pay channel for which the maximum retail price per month is more than 19. Every broadcaster has to declare a minimum 20% of the maximum retail price of the pay channels or bouquet as distribution fee and will be permitted to offer only up to 15% discount on the maximum retail price of pay channels, provided that the sum of the broadcaster s distribution fee and such discount shall in no case exceed 35% of the maximum retail price of the pay channels. The new tariff regime would have a significant impact on future ARPUs, pay TV economics, operational flexibility and results of operations. Technology risk The entertainment and media, cable distribution and internet service provider industry are characterised by rapid changes in technology and the introduction of new products and services. Technological developments within the cable distribution services include changes that may result in improved utilisation of network infrastructure, better consumer experience with more robust content recording features and new interactive content. Any change in market demand as a result of technological change and improvements may require the company to adopt emerging technologies and innovate with new products and services. The inability to adapt to the changing technologies would affect the sustainability of the company s business. Capex for broadband The company is banking on the new technology rollout for the future performance of the broadband business for which it is yet to deploy capex. The company could face some difficulty in raising funds to execute the requisite capex and the return on capex so invested would be lower than expected if it fails to attract the requisite number of subscribers for its new offerings. Page 9
Financial Summary Exhibit 8: Profit and Loss Statement ( Crore) FY13 FY14 FY15 FY16 9MFY17 Revenue from operations 453.2 577.2 622.8 844.6 689.3 Net Revenue 453.2 577.2 622.8 844.6 689.3 Operating Expenses 259.7 318.0 352.5 413.6 328.7 Employee Cost 35.8 49.2 59.7 80.5 78.4 Other expenses 50.7 53.9 61.4 86.1 78.8 Total Operating Expenditure 346.3 421.1 473.6 580.1 485.9 EBITDA 106.9 156.1 149.2 264.5 203.5 Other Income 2.1 2.1 9.4 7.6 11.4 Interest 19.5 40.2 41.8 46.1 42.8 Depreciation 29.0 71.6 83.8 104.4 101.9 PBT 60.5 46.4 33.1 121.5 70.1 Total Tax 18.7 21.7 12.7 48.5 24.8 Minority Interest (3.6) (0.7) (3.8) (5.1) (1.8) Profit/Loss from associate 0.1 0.1 0.2 1.2 (0.3) Net Profit / (Loss) for the year 38.3 24.0 16.7 69.1 43.2 Exhibit 9: Balance Sheet ( Crore) FY13 FY14 FY15 FY16 9MFY17 Equity Capital 1.7 2.0 2.0 98.3 98.3 Reserve and Surplus 253.8 315.9 331.1 366.1 409.2 Total Shareholders funds 255.5 317.9 333.1 464.4 507.6 Total Debt 230.0 282.3 239.6 347.8 436.3 Minority Interest 36.6 43.2 48.4 56.8 58.7 Deferred tax liabilities 12.0 22.3 28.1 42.9 43.0 Liability side total 534.1 665.6 649.1 911.9 1,045.6 Net Block 479.9 674.1 696.3 917.4 1,004.4 Capital WIP 23.2 21.5 10.8 60.6 61.6 Non Current Investments 4.1 8.7 14.6 8.9 6.1 Current Investments - - 0.0 0.1 0.1 Deferred Tax Assets 0.2 0.1 0.3 0.3 2.8 Debtors 121.3 199.0 228.1 244.8 326.4 Cash 45.6 40.5 61.3 83.5 96.8 Loans & Advances 77.5 96.6 72.2 108.1 107.6 Other Current Assets 35.3 13.1 26.9 24.6 30.4 Total Current Assets 279.9 349.3 388.8 461.4 564.0 Creditors 67.6 93.0 129.1 122.7 119.7 Provisions 2.8 5.2 9.0 12.6 18.0 Other Current Liabilities 189.0 294.5 327.9 407.0 468.3 Total Current Liabilities 259.4 392.7 466.1 542.3 606.0 Net Current Assets 20.5 (43.5) (77.3) (80.9) (42.0) Other Non-Current assets 6.4 4.8 4.7 5.9 15.5 Assets side total 534.1 665.6 649.1 911.9 1,045.6 Page 10
Exhibit 10: Key ratios FY13 FY14 FY15 FY16 FY17* Per Share Data ( ) EPS - Diluted 3.4 2.1 1.5 6.1 5.1 Operating Ratios (%) EBITDA / Net Sales 23.6 27.0 24.0 31.3 29.5 PAT / Net Sales 8.4 4.2 2.7 8.2 6.3 Inventory Days - - - - - Debtor Days 97.7 125.8 133.7 105.8 129.6 Creditor Days 54.4 58.8 75.7 53.0 47.5 Return Ratios (%) RoE 15.0 7.6 5.0 14.9 11.0 RoCE 15.0 13.0 11.5 18.4 15.7 RoIC 16.7 14.0 11.3 20.9 15.4 Market Cap / Sales 4.2 3.3 3.1 2.3 2.1 Price to Book Value 7.5 6.0 5.7 4.1 3.7 Solvency Ratios (x) Net Debt / Equity 0.7 0.8 0.5 0.6 0.2 Debt / EBITDA 2.2 1.8 1.6 1.3 0.8 Current Ratio 0.9 0.8 0.7 0.7 0.8 Quick Ratio 0.9 0.8 0.7 0.7 0.8 *FY17 ratios are based on the upper band price and annualized FY17 numbers based on 9MFY17 financials. Page 11
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 400 093 research@icicidirect.com Page 12
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