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Key highlights of Q3FY11 results and our interaction with the management
Hathway Cable and Datacom’s (Hathway) Q3FY11 results have been disappointing. On a consolidated basis,
Hathway has reported revenues of Rs2.27bn (estimates of Rs2.6bn), EBITDA of Rs410m (estimates of Rs600m) and
PBT loss of Rs1m (estimates of profit of Rs154m).
On a standalone basis, Hathway has reported revenues of Rs1.2bn, EBITDA of Rs214m and net loss of Rs124m.
Scale up of cable distribution players, both Hathway and DEN, over the last six months has clearly been below
expectations. While the regulatory environment towards digitization now looks optimistic, our sense is that financial
deliverance for cable players will play out only over the longer term. Operational deliverance over the next 6-
12months will be critical.
Of the consolidated revenues, carriage revenues are estimated to contribute ~Rs1.05bn and subscription and
advertising the remaining Rs1.22bn.
With respect to digitization, Hathway has added 112,000 digital subscribers in Q3FY11 taking the total digital
subscriber base to 1.3m. From hereon, we expect the pace of digitization to pick up pace for Hathway as demand
remains robust.
With respect to the paying subscriber base, Hathway has added 41,000 subscribers during the quarter on the back of
acquisitions. Total paying subscriber base for Hathway now stands at 1.78m.
Of the total IPO proceeds of Rs4.8bn, Hathway has used Rs2.25bn so far. Of this, Rs618m has been deployed towards
digital capex and STBs, Rs425m towards broadband infrastructure, Rs110m towards acquiistions and Rs967m in debt
repayment. While allocation for acquisition related funds stands at Rs2.4bn, our sense is that with the recent TRAI
recommendations expected to be implemented in the next few months, Hathway would utilize capital for digitization
rather than aggressive acquisitions.
As on 31st December 2010, consolidated gross debt stands at Rs2.96bn and cash on books at Rs2.6bn.
In a major positive development for the Indian TV distribution space, the I&B Ministry has given its approval for the
TRAI recommendations announced earlier, and proposed a revised schedule for digitization in the country. In August
2010, TRAI had announced key recommendations for the Indian cable distribution space including a sunset date of
December 2013 for complete migration from analogue to digital cable services. The I&B Ministry has written to the
TRAI proposing March 2015 as the sunset date. We view I&B ministry’s response to TRAI recommendations as being
a critical development for the digitization landscape in the country. We expect India to reach 86m digital homes by
2015 as against 30m+ currently. However, the regulatory push towards digitization in the country could potentially
underpin faster growth in the overall industry. The Cabinet approval is the final step for these proposals to get
implemented, which is likely to be received within the next three months.
Operational deliverance by Hathway has been below expectations, with the pace of digitization yet to gather
momentum. While the regulatory environment is conducive, our sense is that Hathway would need to significantly
up their scale of operations on ground to improve their financial performance. Factoring in the significantly lower
than expected growth during the quarter as also pace of digitization currently, we have downgraded our EPS
estimates for Hathway by 55% for FY11, 19% for FY12 and 21% for FY13. Correspondingly, our target price for the
stock stands revised to Rs184 per share.
Amongst the earlier entrants in the cable industry, Hathway has displayed strong resilience by way of execution to
become the largest cable distribution company in the country. The TV distribution space in the country offers huge
opportunity (70m+ analog homes in the country) and given the current regulatory push towards digitization, players
like Hathway are well placed to capitalize on the growth momentum. However, Hathway’s performance over the last
six months has been clearly below expectations. With the DTH players upping their ante and adding over 1m
subscribers per month, we believe it is imperative for Hathway to rapidly scale up their on-ground operations and
secure its subscriber base. While the regulatory push (cabinet approval for mandatory digitization expected within
next three months) will exert pressure on the LCOs and in itself accelerate the pace of digitization for MSOs, we see
execution as a critical monitorable over the next 6-12 months. Our sense is that, for operational deliverance to reflect
in financial performance for cable players it will be a longer wait. We see merit in investing Hathway – to participate
in the digitization story backed by a strong business model and lower capital requirement relative to DTH, only with
a longer term view. For the near term, our sense is that unless operational deliverance materially improves, value
accretion in the stock will be limited. On the back of our longer term structural call on the business, we maintain our
Outperformer call on the stock with a target price of Rs184.
Valuations
We have valued the cable business on EV/ subscriber basis, which has been arrived at on the basis of months of ARPU.
Economics of individual subscribers suggest that a secondary point can be valued at 29 months, primary point at 32
months and broadband subscriber at 36 months of ARPU. Adopting this valuation methodology on Hathway’s 2.0m
secondary points, 1.8m primary points and 1.13m broadband customers in FY13E, we have arrived at an EV of Rs35.4bn
and equity value of Rs35bn for Hathway. Our price target for the stock is Rs184.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Key highlights of Q3FY11 results and our interaction with the management
Hathway Cable and Datacom’s (Hathway) Q3FY11 results have been disappointing. On a consolidated basis,
Hathway has reported revenues of Rs2.27bn (estimates of Rs2.6bn), EBITDA of Rs410m (estimates of Rs600m) and
PBT loss of Rs1m (estimates of profit of Rs154m).
On a standalone basis, Hathway has reported revenues of Rs1.2bn, EBITDA of Rs214m and net loss of Rs124m.
Scale up of cable distribution players, both Hathway and DEN, over the last six months has clearly been below
expectations. While the regulatory environment towards digitization now looks optimistic, our sense is that financial
deliverance for cable players will play out only over the longer term. Operational deliverance over the next 6-
12months will be critical.
Of the consolidated revenues, carriage revenues are estimated to contribute ~Rs1.05bn and subscription and
advertising the remaining Rs1.22bn.
With respect to digitization, Hathway has added 112,000 digital subscribers in Q3FY11 taking the total digital
subscriber base to 1.3m. From hereon, we expect the pace of digitization to pick up pace for Hathway as demand
remains robust.
With respect to the paying subscriber base, Hathway has added 41,000 subscribers during the quarter on the back of
acquisitions. Total paying subscriber base for Hathway now stands at 1.78m.
Of the total IPO proceeds of Rs4.8bn, Hathway has used Rs2.25bn so far. Of this, Rs618m has been deployed towards
digital capex and STBs, Rs425m towards broadband infrastructure, Rs110m towards acquiistions and Rs967m in debt
repayment. While allocation for acquisition related funds stands at Rs2.4bn, our sense is that with the recent TRAI
recommendations expected to be implemented in the next few months, Hathway would utilize capital for digitization
rather than aggressive acquisitions.
As on 31st December 2010, consolidated gross debt stands at Rs2.96bn and cash on books at Rs2.6bn.
In a major positive development for the Indian TV distribution space, the I&B Ministry has given its approval for the
TRAI recommendations announced earlier, and proposed a revised schedule for digitization in the country. In August
2010, TRAI had announced key recommendations for the Indian cable distribution space including a sunset date of
December 2013 for complete migration from analogue to digital cable services. The I&B Ministry has written to the
TRAI proposing March 2015 as the sunset date. We view I&B ministry’s response to TRAI recommendations as being
a critical development for the digitization landscape in the country. We expect India to reach 86m digital homes by
2015 as against 30m+ currently. However, the regulatory push towards digitization in the country could potentially
underpin faster growth in the overall industry. The Cabinet approval is the final step for these proposals to get
implemented, which is likely to be received within the next three months.
Operational deliverance by Hathway has been below expectations, with the pace of digitization yet to gather
momentum. While the regulatory environment is conducive, our sense is that Hathway would need to significantly
up their scale of operations on ground to improve their financial performance. Factoring in the significantly lower
than expected growth during the quarter as also pace of digitization currently, we have downgraded our EPS
estimates for Hathway by 55% for FY11, 19% for FY12 and 21% for FY13. Correspondingly, our target price for the
stock stands revised to Rs184 per share.
Amongst the earlier entrants in the cable industry, Hathway has displayed strong resilience by way of execution to
become the largest cable distribution company in the country. The TV distribution space in the country offers huge
opportunity (70m+ analog homes in the country) and given the current regulatory push towards digitization, players
like Hathway are well placed to capitalize on the growth momentum. However, Hathway’s performance over the last
six months has been clearly below expectations. With the DTH players upping their ante and adding over 1m
subscribers per month, we believe it is imperative for Hathway to rapidly scale up their on-ground operations and
secure its subscriber base. While the regulatory push (cabinet approval for mandatory digitization expected within
next three months) will exert pressure on the LCOs and in itself accelerate the pace of digitization for MSOs, we see
execution as a critical monitorable over the next 6-12 months. Our sense is that, for operational deliverance to reflect
in financial performance for cable players it will be a longer wait. We see merit in investing Hathway – to participate
in the digitization story backed by a strong business model and lower capital requirement relative to DTH, only with
a longer term view. For the near term, our sense is that unless operational deliverance materially improves, value
accretion in the stock will be limited. On the back of our longer term structural call on the business, we maintain our
Outperformer call on the stock with a target price of Rs184.
Valuations
We have valued the cable business on EV/ subscriber basis, which has been arrived at on the basis of months of ARPU.
Economics of individual subscribers suggest that a secondary point can be valued at 29 months, primary point at 32
months and broadband subscriber at 36 months of ARPU. Adopting this valuation methodology on Hathway’s 2.0m
secondary points, 1.8m primary points and 1.13m broadband customers in FY13E, we have arrived at an EV of Rs35.4bn
and equity value of Rs35bn for Hathway. Our price target for the stock is Rs184.
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