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Hathway Cable and Datacom Ltd.
Remain OW on Valuation; Potential from Digitization
What's Changed
Price Target Rs258.00 to Rs138.00
F11e EPS From Rs.1.9 to -Rs.1.5
F12e, F13e EPS Down 78% and 51%
We remain positive from a one-year perspective:
Cable market conditions still look tough currently, and
we are mindful of the poor success of Hathway’s LCO
consolidation strategy. We prefer DTIL (OW), since
strong catalysts for Hathway may take 2-3 quarters to
emerge. Yet after a 28% YTD decline, we view
valuations favorably. Also, over the next 6-8 quarters,
Hathway’s revenue growth and margin trends should
improve substantially from current levels.
We curb our earnings forecasts… This is mainly to
account for the low pace of LCO consolidation so far.
Our F12 and F13 EPS forecasts have fallen by 78% and
51% as we cut our assumptions for subscriber numbers
and ARPU. Our new forecasts still imply a healthy
EBITDA CAGR of 31% in F11-F13 – in line with our view
that Hathway is not too far from an earnings inflexion.
…but digitization should spur earnings growth…
Addressability in India’s cable market should start
improving substantially over the next two years.
Digitization is voluntary in the short term and mandatory
in the medium to longer term. In 2-3 years down the line,
we think LCO consolidation should also help.
…and valuation: EV/EBITDA multiples of 7.9x (F12e)
and 6.0x (F13e) indicate upside in view of our projected
EBITDA CAGR. We estimate that the current stock price
assigns an unfairly low value of Rs36 per share to
Hathway’s cable business without placement fees. Full
digitization in itself could be worth Rs144 per share,
though in our base case we include only Rs60.
Sentiment Close to Bottom, Earnings Looking Up; Stay OW
Why Overweight?
Potential from digitization: Hathway’s earlier strategy to
grow via forward integration (i.e., by acquiring Local Cable
Operators) does not seem to be working. However, the
government is considering mandatory phased digitization of
India’s entire ~85m analog TV base by F15. We do not agree
with the market’s fears that DTH will snatch large market share
from digital cable. While DTH’s growth has been very strong
and may remain strong in the next 2-3 years, digital cable too
should see growing penetration in the next 6-8 quarters with
analog cable losing out.
Strong infrastructure and brand: Hathway is among India’s
leading cable TV providers by several measures:
• Total subscriber base of about 8m
• Paying subscriber base of about 1.8m
• Directly held subscriber base (primary points) of 560k
• Digital subscriber base of 1.3m
• Cable broadband subscriber base of 367k
With solid infrastructure in place, we think it is well positioned to
gain from the increasing digital penetration in India’s cable TV
market.
Valuations look attractive… Hathway’s share price has
declined 28% year-to-date and 45% over the last year, vs. a
10% decline and 7% rise for the Sensex. In our view, the stock
seems to be reflecting just about 25% of potential upside from
digitization – which in our view is unfair – and no gains from the
possibility of ARPU increases.
…even after curtailing our earnings forecasts by 78% and
51% for F12 and F13: We are revisiting our forecasts after 12
months. Even after this current round of EPS reductions,
though, we are forecasting a CAGR of 31% in EBITDA for
F11-F13, which we feel is quite healthy.
Exhibit 1
What’s Changed: Earnings Estimates
F10 F11e F12e F13e
Revenue
Old 7,325 9,299 12,081 15,033
New 7,328 8,827 9,888 11,302
EBITDA
Old 1,416 2,913 4,048 4,691
New 1,259 1,621 2,083 2,773
PAT
Old -622 269 606 721
New (654) (219) 133 351
Source: Company data, Morgan Stanley Research (e) estimates
We cut our price target from Rs257 to Rs138: This reflects
to the following changes in our assumptions:
1) Decrease in growth CAGR of primary points acquisitions
for F10-F13e from 45% earlier to 7% now.
2) Decrease in carriage and placement fees at a CAGR of
35% now vs. 1.5% earlier for F13-F18
3) Increase in WACC from 12% to 13% due to an increase in
risk free rate and risk premium from 8% and 6% to 7.86%
and 6.5%, respectively.
4) Reporting level: from 20% earlier to 60% now by F18
5) Decrease in broadband ARPU and subscriber addition
CAGR from 8% and 28% earlier to 7% and 18% now, for
F11-F13.
What’s in the price? We estimate that the current stock price
assigns only Rs23 per share to Hathway’s cable business,
keeping out the value of carriage and placement fees. In our
view, the stock is reflecting a scenario where the process of
digitization is extremely slow – accordingly, where Hathway’s
subscriber base declines 7.6% p.a. in F11-F16, and even by
F16, digital penetration is a downbeat 41%.
We like this stock more from a one-year perspective: We
acknowledge that strong catalysts – news flow on concrete
progress on mandatory digitization, demonstration of earnings
from voluntary digitization – may take 2-3 quarters to emerge.
We still prefer Dish TV over Hathway: We cite higher
visibility on DTIL’s near-term earnings growth and less
dependence on regulatory factors for DTIL.
Hathway’s Earnings Outlook: What’s Changed
LCO acquisition has not gone according to plan… In the
last 3-4 quarters, the main reason for the earnings
disappointments and clouding of future trends for Hathway has
been its inability to proceed with its previously stated plan to
grow via acquisition of local cable operators (LCOs). Lower
primary points growth drive a reduction in our forecasts for
paying subscriber base as well as ARPU for F11-F13. However,
higher carriage and placement fees have been the redeeming
feature for Hathway.
…but we think a tipping point is not far off: Resistance of
the LCOs to sell out of their business even when up against the
advertising might and digital quality of DTH companies has
surprised us. However, we think that we are not too far from a
tipping point where the LCOs’ ability to under-report the actual
subscriber numbers falls drastically.
We cite the following factors:
1) DTH penetration as a proportion of total cable and satellite
homes has grown from 4% at end-F08 and 16% at
end-F10 to 24% in F11. By the end of F12 and F13, we
expect this to be 31% and 36%. We think that at around
30-35%, most LCOs will see the inevitability of digitization
and will start selling out to MSOs or will agree to report a
higher proportion of subscribers.
2) As DTH penetration spreads, further consumer awareness
grows – hence demand for digital delivery becomes
stronger. We think this can also break down LCOs’
resistance to digitization in the next 6-8 quarters.
3) Acceleration in government efforts to phase out the analog
system – again boosted by growing consumer acceptance.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Hathway Cable and Datacom Ltd.
Remain OW on Valuation; Potential from Digitization
What's Changed
Price Target Rs258.00 to Rs138.00
F11e EPS From Rs.1.9 to -Rs.1.5
F12e, F13e EPS Down 78% and 51%
We remain positive from a one-year perspective:
Cable market conditions still look tough currently, and
we are mindful of the poor success of Hathway’s LCO
consolidation strategy. We prefer DTIL (OW), since
strong catalysts for Hathway may take 2-3 quarters to
emerge. Yet after a 28% YTD decline, we view
valuations favorably. Also, over the next 6-8 quarters,
Hathway’s revenue growth and margin trends should
improve substantially from current levels.
We curb our earnings forecasts… This is mainly to
account for the low pace of LCO consolidation so far.
Our F12 and F13 EPS forecasts have fallen by 78% and
51% as we cut our assumptions for subscriber numbers
and ARPU. Our new forecasts still imply a healthy
EBITDA CAGR of 31% in F11-F13 – in line with our view
that Hathway is not too far from an earnings inflexion.
…but digitization should spur earnings growth…
Addressability in India’s cable market should start
improving substantially over the next two years.
Digitization is voluntary in the short term and mandatory
in the medium to longer term. In 2-3 years down the line,
we think LCO consolidation should also help.
…and valuation: EV/EBITDA multiples of 7.9x (F12e)
and 6.0x (F13e) indicate upside in view of our projected
EBITDA CAGR. We estimate that the current stock price
assigns an unfairly low value of Rs36 per share to
Hathway’s cable business without placement fees. Full
digitization in itself could be worth Rs144 per share,
though in our base case we include only Rs60.
Sentiment Close to Bottom, Earnings Looking Up; Stay OW
Why Overweight?
Potential from digitization: Hathway’s earlier strategy to
grow via forward integration (i.e., by acquiring Local Cable
Operators) does not seem to be working. However, the
government is considering mandatory phased digitization of
India’s entire ~85m analog TV base by F15. We do not agree
with the market’s fears that DTH will snatch large market share
from digital cable. While DTH’s growth has been very strong
and may remain strong in the next 2-3 years, digital cable too
should see growing penetration in the next 6-8 quarters with
analog cable losing out.
Strong infrastructure and brand: Hathway is among India’s
leading cable TV providers by several measures:
• Total subscriber base of about 8m
• Paying subscriber base of about 1.8m
• Directly held subscriber base (primary points) of 560k
• Digital subscriber base of 1.3m
• Cable broadband subscriber base of 367k
With solid infrastructure in place, we think it is well positioned to
gain from the increasing digital penetration in India’s cable TV
market.
Valuations look attractive… Hathway’s share price has
declined 28% year-to-date and 45% over the last year, vs. a
10% decline and 7% rise for the Sensex. In our view, the stock
seems to be reflecting just about 25% of potential upside from
digitization – which in our view is unfair – and no gains from the
possibility of ARPU increases.
…even after curtailing our earnings forecasts by 78% and
51% for F12 and F13: We are revisiting our forecasts after 12
months. Even after this current round of EPS reductions,
though, we are forecasting a CAGR of 31% in EBITDA for
F11-F13, which we feel is quite healthy.
Exhibit 1
What’s Changed: Earnings Estimates
F10 F11e F12e F13e
Revenue
Old 7,325 9,299 12,081 15,033
New 7,328 8,827 9,888 11,302
EBITDA
Old 1,416 2,913 4,048 4,691
New 1,259 1,621 2,083 2,773
PAT
Old -622 269 606 721
New (654) (219) 133 351
Source: Company data, Morgan Stanley Research (e) estimates
We cut our price target from Rs257 to Rs138: This reflects
to the following changes in our assumptions:
1) Decrease in growth CAGR of primary points acquisitions
for F10-F13e from 45% earlier to 7% now.
2) Decrease in carriage and placement fees at a CAGR of
35% now vs. 1.5% earlier for F13-F18
3) Increase in WACC from 12% to 13% due to an increase in
risk free rate and risk premium from 8% and 6% to 7.86%
and 6.5%, respectively.
4) Reporting level: from 20% earlier to 60% now by F18
5) Decrease in broadband ARPU and subscriber addition
CAGR from 8% and 28% earlier to 7% and 18% now, for
F11-F13.
What’s in the price? We estimate that the current stock price
assigns only Rs23 per share to Hathway’s cable business,
keeping out the value of carriage and placement fees. In our
view, the stock is reflecting a scenario where the process of
digitization is extremely slow – accordingly, where Hathway’s
subscriber base declines 7.6% p.a. in F11-F16, and even by
F16, digital penetration is a downbeat 41%.
We like this stock more from a one-year perspective: We
acknowledge that strong catalysts – news flow on concrete
progress on mandatory digitization, demonstration of earnings
from voluntary digitization – may take 2-3 quarters to emerge.
We still prefer Dish TV over Hathway: We cite higher
visibility on DTIL’s near-term earnings growth and less
dependence on regulatory factors for DTIL.
Hathway’s Earnings Outlook: What’s Changed
LCO acquisition has not gone according to plan… In the
last 3-4 quarters, the main reason for the earnings
disappointments and clouding of future trends for Hathway has
been its inability to proceed with its previously stated plan to
grow via acquisition of local cable operators (LCOs). Lower
primary points growth drive a reduction in our forecasts for
paying subscriber base as well as ARPU for F11-F13. However,
higher carriage and placement fees have been the redeeming
feature for Hathway.
…but we think a tipping point is not far off: Resistance of
the LCOs to sell out of their business even when up against the
advertising might and digital quality of DTH companies has
surprised us. However, we think that we are not too far from a
tipping point where the LCOs’ ability to under-report the actual
subscriber numbers falls drastically.
We cite the following factors:
1) DTH penetration as a proportion of total cable and satellite
homes has grown from 4% at end-F08 and 16% at
end-F10 to 24% in F11. By the end of F12 and F13, we
expect this to be 31% and 36%. We think that at around
30-35%, most LCOs will see the inevitability of digitization
and will start selling out to MSOs or will agree to report a
higher proportion of subscribers.
2) As DTH penetration spreads, further consumer awareness
grows – hence demand for digital delivery becomes
stronger. We think this can also break down LCOs’
resistance to digitization in the next 6-8 quarters.
3) Acceleration in government efforts to phase out the analog
system – again boosted by growing consumer acceptance.
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