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Hathway Cable & Datacom Ltd
Play on imminent digitalisation; a new Buy
Buy for 40% upside potential
We initiate coverage of Hathway Cable & Datacom (Hathway) with a Buy rating
and PO of Rs130. Hathway is the largest digital cable television service provider
in India. We expect it to benefit from (1) increasing adoption of digital cable
services, (2) implementation of regulation to digitalise the cable network in India,
and (3) cross-selling of broadband services to its cable TV consumers.
Well placed to capitalize on imminent digitalisation
Given the fragmented nature of cable TV distribution and the dominance of
analogue connections (70%), subscriber underreporting remains a key issue.
Multi system operators (MSOs) such as Hathway get paid for only 20% of the
subscriber base. With impending digitalisation, MSOs’ subscription revenue share
is likely to rise given ability to track subscriber numbers in a digital environment.
Hathway is also well positioned to capitalize on digitalisation given strong
presence in key cities such as Mumbai (40% mkt share) & Delhi (25% share).
Turnaround in financials likely
Expect revenues to double and PBIT to jump 5x over next two years driven by
digital roll out in metros. Further upside to earnings likely from digital roll out in
other tier 2/3 cities as well.
Risk reward favorable
While we value the stock at 6x EV/EBITDA at lower end of valuation band of 6-9x
enjoyed by US peers such as Comcast during the digitalisation phase, we believe
valuations could expand to 9x as clarity emerges on timelines for implementation.
Key risk is delay in digitalisation given pending approval from the Government.
Assuming digitalisation to be perpetually delayed our FY13 PBIT estimate could
halve and stock upside could be capped at 15%.
Play on digitalisation in India
We initiate coverage on Hathway with a Buy rating and PO of Rs130, for potential
upside of 40%. It is the largest digital cable television service provider in India
with 1.3mn digital subscribers and ranks third in terms of subscriber base with
nearly 8.3mn subscribers.
We believe the India cable and satellite (C&S) industry is evolving with increasing
adoption of direct to home -DTH and digital cable services by consumers in India.
With the recent Telecom Regulatory Authority of India (TRAI) recommendation to
digitalise analogue networks in India, we expect the trend to accelerate. Hathway
being a leading multi system operator (MSO) stands to gain from this.
Key Investment thesis
1. Industry dynamics in C&S set to change
The India C&S industry remains fragmented with nearly 6,000 MSOs and over
60,000 local cable operators (LCOs). With nearly 115mn C&S households in
India, 70% of whom have analogue connections, and the fragmented nature of
distribution, subscriber underreporting by LCOs, and hence revenue, remains key
issue for MSOs.
While subscription revenue for the industry is estimated at US$4.6bn a year, nearly
65% of it is retained by LCOs compared to around 30% globally. As per industry
estimates, MSOs like Hathway are being paid for just 20% of their subscriber base
given its inability to track subscriber data in an analogue environment. Hathway has
8mn subscribers, but is being paid for only 1.8mn subscribers.
Revised time line to digitalised proposed by TRAI
While adoption of digital cable/DTH services is on the increase, we expect the
trend to accelerate with implementation of the TRAI recommendation on
digitalizing cable networks in India. Last year, TRAI, the regulatory body for the
broadcasting and cable industry, recommended that all analogue cable TV
services be migrated to digital addressable cable TV over the next four years,
starting from March 2011. While the timeline was revised by TRAI to December
2011 to factor in Information & Broadcasting (I&B) ministry’s observation, we
believe digitalisation is now inevitable.
We have factored in upside in revenues from implementation of phase I-IV in our
estimates, albeit with delay in time lines.
More hopeful of implementation than previous attempts
While a similar initiative (the Conditional Access System) was undertaken in 2006
by I&B ministry, with some success in Chennai city, a few parts of Mumbai, Delhi
and Kolkata, we believe the current recommendation addresses the shortcomings
of 2006 recommendations and is likely to be a success.
Key areas where the current recommendation scores are (1) compulsory
digitalisation of all channels vs. partial earlier and (2) retail pricing forbearance.
Besides TRAI is driving the entire process this time as compared to earlier
recommendation/ implementation from I&B ministry.
2. Hathway- well positioned in key markets
We believe Hathway is well positioned to capitalize on imminent digitalisation
given its presence in nearly 127 cities with an estimated subscriber base of over
8mn. It has a strong presence in some of the larger markets such as Mumbai
(40% market share) and Delhi (25% market share) which are likely to be
digitalised first as per TRAI recommendations.
Upside from current digital base likely
Hathway has been investing in digitalizing its network and migrating its
consumers to digital cable services on a voluntary basis for the last 4-5 years.
Though it has nearly 1.2mn digital subscribers, almost 50% more than peers, it is
not necessarily being paid for offering digital services to these subscribers given
negotiations with LCOs are largely on a fixed-sum basis versus per subscriber
given significant underreporting of subscriber data.
In the likelihood of mandatory digitalisation being implemented in metros/Tier 2
cities from FY13, Hathway would be able to capture its share of subscriber fees
(revenues) from LCOs for offering digital services to these consumers.
3. 2x jump in revenues, 5x jump in PBIT from Phase I
Assuming implementation of just phase I (four metros), cable subscription
revenues could double and profits jump five-fold over the next two years for
Hathway. Assuming Phase I implementation from 2Q FY13, a delay of six months
than scheduled to be conservative, we expect EBITDA margins to expand from
the current 17% to 25% by FY13 driven by migration of nearly 1.5mn subscribers
to digital services in these metros.
Hathway has nearly 2.3mn subscribers (mostly analogue) in Delhi, Mumbai and
Kolkata and, based on its plans to voluntarily seed digital boxes in these cities,
should derive revenues from at least additional 1.5mn subscribers, in our view.
Consequently FCF is also likely to turn around in FY12, driven by improvement in
profitability and a recent financing tie-up with NDS (digital set top box provider) for
set-top boxes where Hathway would now be required to make the bulk of
payments to NDS in the third year.
…. Further upside from Phase II/III implementation
Assuming Phase II is implemented with a delay of a year (FY14), revenue
trajectory is likely to improve further.
We believe Hathway has nearly 6mn subscribers residing in Phase II locations.
Assuming 20% of these are contributing to revenues currently and factoring in
competition from DTH providers, we expect potential to digitalise at least 2.8mn
subscribers.
We see significant upside to PBIT from implementation of phase II albeit with a lag.
4. Cross selling of broadband services
We expect revenues from broad band (14% of revenues) to register CAGR of
22% over FY11-13E, driven by strong growth in subscriber numbers on:
1. Significant investments in enabling two-way connection with homes
over the last 18 months and its plan to cross sell broadband services to
existing cable subscribers. The number of homes passed increased from
0.9mn (FY09) to over 1.3mn as of end-3Q FY11. Homes Passed are homes
that could be easily and inexpensively connected to a cable network where
the feeder cable is nearby. Subscriber numbers increased modestly during
this time though.
2. Renewed focus, improved competitive positioning. Renewed focus in
this segment as reflected by recent hiring at senior levels and the launch of
new attractive schemes in the market place, improving competitive
positioning. While this would attract new clients, even existing customers are
likely to upgrade, driving higher ARPUs for the company. So far, Hathway
was offering 512Kbp plans to customers which have now been upgraded to
5mbps.
Valuations: Risk reward favorable
40% potential upside from current levels
The stock is down 50% since listing and has underperformed the broader index
sharply due to disappointment in earnings. Growth in cable subscriber numbers
was disappointing and was driven by slow down in acquisition of competing
networks during last 2-3 quarters.
We believe the industry is evolving and the best is yet to come. We believe
valuations could mirror that of US based companies such as Comcast. In US
share of digital consumers increased from ~20% in 2001 to 70% currently and
during that time stocks like Comcast (provider of video, high speed Internet &
phone services) traded at multiples of 6-9x and are currently trading at about 6x
EV/EBITDA, one year forward.
Our PO of Rs130 is at a conservative 6x EV/EBITDA FY13E on par with current
multiples for Comcast. We believe this is fair given
1) Likely jump in revenues and profits from digitalisation and our view that
Hathway is well placed to capitalize on this opportunity.
2) Our view that digitalisation is inevitable.
See scope for multiples to expand… 95% upside
We believe valuation multiples could expand to 9x EV/EBITDA FY13E at higher
end of EV/EBITDA band, as clarity emerges on timelines for implementation of
Phase II/III.
Given that only 30% of its subscriber base reside in Phase I cities, growth
trajectory is likely to continue well beyond 2013. Factoring in 9x EV/EBITDA, we
see upside potential of 95% from current levels in a best case scenario.
Valuations backed by DCF
For DCF purposes we have factored in upside from phase II/III implementation as
well given our view that digitalisation is inevitable, albeit with a delay. Our DCF
valuation is at Rs200 in a best case scenario.
What if digitalisation perpetually delayed?
If digitalisation is perpetually delayed, which we believe is unlikely given strong
support by stakeholders (broadcasters, DTH and MSOs) and recent comments
from the I&B Ministry toward TRAI’s recommendation, we see the following
implications.
1. FY13 PBIT could halve.
2. Capex will reduce. We have assumed seeding of boxes to accelerate from
3Q FY12. Hathway may choose to seed boxes at gradual phase as against
acceleration assumed by us in end FY12.
3. Stock upside could be capped. Our DCF value falls to Rs110 - upside
potential of 15%.
Relative valuations: Key players likely to
benefit
We believe all players, ie, DTH and cable operators, will benefit given the industry
today is impacted by structural issues, such as underreporting by local cable
operators and the low level of digitalisation currently. Revenues likely to shift from
LCOs to MSOs/ DTH operators and growth for MSOs would be driven by its
ability to digitalise their consumer base and provide quality offerings to
consumers.
While we believe both Hathway & Den will benefit. Both stock are trading at
EV/EBITDA multiples of 6x FY12E. We highlight a few areas where Hathway is
placed relatively better than its peers.
1. Number of digital subscribers stood at 1.3mn for Hathway compared to
0.4mn for Den as per MPA report. Hathway has been proactively seeding
digital boxes much ahead of its peers.
2. We believe Hathway’s footprint is much more diversified than peers and
should benefit given its presence in two large markets, i.e., Mumbai and
Delhi. Den has a strong presence in Delhi currently.
3. Hathway also provides broad band services to its clients. Nearly 18% of its
revenues come from broadband services.
Key risks
Delay in digitalisation
We believe delays in digitalisation remain a key risk for the stock. We have
factored in a six-month delay to the revised timeline for implementation in metros.
We note that TRAI recommendations need to be approved by the Government.
Increasing competition from competing MSOs/DTH players
Our capex assumptions could change substantially if competition between MSOs
increases substantially. Currently there is truce between players and given that
MSOs such as Hathway and Den have a strong subscriber base to deal with in
their respective territories, it is unlikely that they will enter each others’ territories
in our view. DTH remains a competition. We have factored in market share loss of
20% to 40% to DTH players in our assumptions.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hathway Cable & Datacom Ltd
Play on imminent digitalisation; a new Buy
Buy for 40% upside potential
We initiate coverage of Hathway Cable & Datacom (Hathway) with a Buy rating
and PO of Rs130. Hathway is the largest digital cable television service provider
in India. We expect it to benefit from (1) increasing adoption of digital cable
services, (2) implementation of regulation to digitalise the cable network in India,
and (3) cross-selling of broadband services to its cable TV consumers.
Well placed to capitalize on imminent digitalisation
Given the fragmented nature of cable TV distribution and the dominance of
analogue connections (70%), subscriber underreporting remains a key issue.
Multi system operators (MSOs) such as Hathway get paid for only 20% of the
subscriber base. With impending digitalisation, MSOs’ subscription revenue share
is likely to rise given ability to track subscriber numbers in a digital environment.
Hathway is also well positioned to capitalize on digitalisation given strong
presence in key cities such as Mumbai (40% mkt share) & Delhi (25% share).
Turnaround in financials likely
Expect revenues to double and PBIT to jump 5x over next two years driven by
digital roll out in metros. Further upside to earnings likely from digital roll out in
other tier 2/3 cities as well.
Risk reward favorable
While we value the stock at 6x EV/EBITDA at lower end of valuation band of 6-9x
enjoyed by US peers such as Comcast during the digitalisation phase, we believe
valuations could expand to 9x as clarity emerges on timelines for implementation.
Key risk is delay in digitalisation given pending approval from the Government.
Assuming digitalisation to be perpetually delayed our FY13 PBIT estimate could
halve and stock upside could be capped at 15%.
Play on digitalisation in India
We initiate coverage on Hathway with a Buy rating and PO of Rs130, for potential
upside of 40%. It is the largest digital cable television service provider in India
with 1.3mn digital subscribers and ranks third in terms of subscriber base with
nearly 8.3mn subscribers.
We believe the India cable and satellite (C&S) industry is evolving with increasing
adoption of direct to home -DTH and digital cable services by consumers in India.
With the recent Telecom Regulatory Authority of India (TRAI) recommendation to
digitalise analogue networks in India, we expect the trend to accelerate. Hathway
being a leading multi system operator (MSO) stands to gain from this.
Key Investment thesis
1. Industry dynamics in C&S set to change
The India C&S industry remains fragmented with nearly 6,000 MSOs and over
60,000 local cable operators (LCOs). With nearly 115mn C&S households in
India, 70% of whom have analogue connections, and the fragmented nature of
distribution, subscriber underreporting by LCOs, and hence revenue, remains key
issue for MSOs.
While subscription revenue for the industry is estimated at US$4.6bn a year, nearly
65% of it is retained by LCOs compared to around 30% globally. As per industry
estimates, MSOs like Hathway are being paid for just 20% of their subscriber base
given its inability to track subscriber data in an analogue environment. Hathway has
8mn subscribers, but is being paid for only 1.8mn subscribers.
Revised time line to digitalised proposed by TRAI
While adoption of digital cable/DTH services is on the increase, we expect the
trend to accelerate with implementation of the TRAI recommendation on
digitalizing cable networks in India. Last year, TRAI, the regulatory body for the
broadcasting and cable industry, recommended that all analogue cable TV
services be migrated to digital addressable cable TV over the next four years,
starting from March 2011. While the timeline was revised by TRAI to December
2011 to factor in Information & Broadcasting (I&B) ministry’s observation, we
believe digitalisation is now inevitable.
We have factored in upside in revenues from implementation of phase I-IV in our
estimates, albeit with delay in time lines.
More hopeful of implementation than previous attempts
While a similar initiative (the Conditional Access System) was undertaken in 2006
by I&B ministry, with some success in Chennai city, a few parts of Mumbai, Delhi
and Kolkata, we believe the current recommendation addresses the shortcomings
of 2006 recommendations and is likely to be a success.
Key areas where the current recommendation scores are (1) compulsory
digitalisation of all channels vs. partial earlier and (2) retail pricing forbearance.
Besides TRAI is driving the entire process this time as compared to earlier
recommendation/ implementation from I&B ministry.
2. Hathway- well positioned in key markets
We believe Hathway is well positioned to capitalize on imminent digitalisation
given its presence in nearly 127 cities with an estimated subscriber base of over
8mn. It has a strong presence in some of the larger markets such as Mumbai
(40% market share) and Delhi (25% market share) which are likely to be
digitalised first as per TRAI recommendations.
Upside from current digital base likely
Hathway has been investing in digitalizing its network and migrating its
consumers to digital cable services on a voluntary basis for the last 4-5 years.
Though it has nearly 1.2mn digital subscribers, almost 50% more than peers, it is
not necessarily being paid for offering digital services to these subscribers given
negotiations with LCOs are largely on a fixed-sum basis versus per subscriber
given significant underreporting of subscriber data.
In the likelihood of mandatory digitalisation being implemented in metros/Tier 2
cities from FY13, Hathway would be able to capture its share of subscriber fees
(revenues) from LCOs for offering digital services to these consumers.
3. 2x jump in revenues, 5x jump in PBIT from Phase I
Assuming implementation of just phase I (four metros), cable subscription
revenues could double and profits jump five-fold over the next two years for
Hathway. Assuming Phase I implementation from 2Q FY13, a delay of six months
than scheduled to be conservative, we expect EBITDA margins to expand from
the current 17% to 25% by FY13 driven by migration of nearly 1.5mn subscribers
to digital services in these metros.
Hathway has nearly 2.3mn subscribers (mostly analogue) in Delhi, Mumbai and
Kolkata and, based on its plans to voluntarily seed digital boxes in these cities,
should derive revenues from at least additional 1.5mn subscribers, in our view.
Consequently FCF is also likely to turn around in FY12, driven by improvement in
profitability and a recent financing tie-up with NDS (digital set top box provider) for
set-top boxes where Hathway would now be required to make the bulk of
payments to NDS in the third year.
…. Further upside from Phase II/III implementation
Assuming Phase II is implemented with a delay of a year (FY14), revenue
trajectory is likely to improve further.
We believe Hathway has nearly 6mn subscribers residing in Phase II locations.
Assuming 20% of these are contributing to revenues currently and factoring in
competition from DTH providers, we expect potential to digitalise at least 2.8mn
subscribers.
We see significant upside to PBIT from implementation of phase II albeit with a lag.
4. Cross selling of broadband services
We expect revenues from broad band (14% of revenues) to register CAGR of
22% over FY11-13E, driven by strong growth in subscriber numbers on:
1. Significant investments in enabling two-way connection with homes
over the last 18 months and its plan to cross sell broadband services to
existing cable subscribers. The number of homes passed increased from
0.9mn (FY09) to over 1.3mn as of end-3Q FY11. Homes Passed are homes
that could be easily and inexpensively connected to a cable network where
the feeder cable is nearby. Subscriber numbers increased modestly during
this time though.
2. Renewed focus, improved competitive positioning. Renewed focus in
this segment as reflected by recent hiring at senior levels and the launch of
new attractive schemes in the market place, improving competitive
positioning. While this would attract new clients, even existing customers are
likely to upgrade, driving higher ARPUs for the company. So far, Hathway
was offering 512Kbp plans to customers which have now been upgraded to
5mbps.
Valuations: Risk reward favorable
40% potential upside from current levels
The stock is down 50% since listing and has underperformed the broader index
sharply due to disappointment in earnings. Growth in cable subscriber numbers
was disappointing and was driven by slow down in acquisition of competing
networks during last 2-3 quarters.
We believe the industry is evolving and the best is yet to come. We believe
valuations could mirror that of US based companies such as Comcast. In US
share of digital consumers increased from ~20% in 2001 to 70% currently and
during that time stocks like Comcast (provider of video, high speed Internet &
phone services) traded at multiples of 6-9x and are currently trading at about 6x
EV/EBITDA, one year forward.
Our PO of Rs130 is at a conservative 6x EV/EBITDA FY13E on par with current
multiples for Comcast. We believe this is fair given
1) Likely jump in revenues and profits from digitalisation and our view that
Hathway is well placed to capitalize on this opportunity.
2) Our view that digitalisation is inevitable.
See scope for multiples to expand… 95% upside
We believe valuation multiples could expand to 9x EV/EBITDA FY13E at higher
end of EV/EBITDA band, as clarity emerges on timelines for implementation of
Phase II/III.
Given that only 30% of its subscriber base reside in Phase I cities, growth
trajectory is likely to continue well beyond 2013. Factoring in 9x EV/EBITDA, we
see upside potential of 95% from current levels in a best case scenario.
Valuations backed by DCF
For DCF purposes we have factored in upside from phase II/III implementation as
well given our view that digitalisation is inevitable, albeit with a delay. Our DCF
valuation is at Rs200 in a best case scenario.
What if digitalisation perpetually delayed?
If digitalisation is perpetually delayed, which we believe is unlikely given strong
support by stakeholders (broadcasters, DTH and MSOs) and recent comments
from the I&B Ministry toward TRAI’s recommendation, we see the following
implications.
1. FY13 PBIT could halve.
2. Capex will reduce. We have assumed seeding of boxes to accelerate from
3Q FY12. Hathway may choose to seed boxes at gradual phase as against
acceleration assumed by us in end FY12.
3. Stock upside could be capped. Our DCF value falls to Rs110 - upside
potential of 15%.
Relative valuations: Key players likely to
benefit
We believe all players, ie, DTH and cable operators, will benefit given the industry
today is impacted by structural issues, such as underreporting by local cable
operators and the low level of digitalisation currently. Revenues likely to shift from
LCOs to MSOs/ DTH operators and growth for MSOs would be driven by its
ability to digitalise their consumer base and provide quality offerings to
consumers.
While we believe both Hathway & Den will benefit. Both stock are trading at
EV/EBITDA multiples of 6x FY12E. We highlight a few areas where Hathway is
placed relatively better than its peers.
1. Number of digital subscribers stood at 1.3mn for Hathway compared to
0.4mn for Den as per MPA report. Hathway has been proactively seeding
digital boxes much ahead of its peers.
2. We believe Hathway’s footprint is much more diversified than peers and
should benefit given its presence in two large markets, i.e., Mumbai and
Delhi. Den has a strong presence in Delhi currently.
3. Hathway also provides broad band services to its clients. Nearly 18% of its
revenues come from broadband services.
Key risks
Delay in digitalisation
We believe delays in digitalisation remain a key risk for the stock. We have
factored in a six-month delay to the revised timeline for implementation in metros.
We note that TRAI recommendations need to be approved by the Government.
Increasing competition from competing MSOs/DTH players
Our capex assumptions could change substantially if competition between MSOs
increases substantially. Currently there is truce between players and given that
MSOs such as Hathway and Den have a strong subscriber base to deal with in
their respective territories, it is unlikely that they will enter each others’ territories
in our view. DTH remains a competition. We have factored in market share loss of
20% to 40% to DTH players in our assumptions.
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