Hathway Cable & Datacom

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Media October 17, 2013

Institutional Equities Hathway Cable & Datacom India Research Bloomberg: HATH IN INITIATION REPORT Reuters: HAWY.BO BUY

Digitally Yours Recommendation CMP: Rs263 With the Indian Government’s commitment to stick to its deadlines for DAS Target Price: Rs342 implementation, digitization benefits have begun to accrue to the MSOs. Upside (%) 30% Hathway Cable and Datacom with its strong subscriber base should be one of the major beneficiaries of the same. We initiate coverage on Hathway with Stock Information a “BUY” rating and DCF‐based target price of Rs.342 (30% upside). Market Cap. (Rs bn / US$ mn) 39/631 52‐week High/Low (Rs) 307/216 Paying Cable Subscriber to grow 3x over FY13‐16E: Phase 1&2 digitization 3m ADV (Rs mn /US$ mn) 28/0.5 will boost Hathway’s paying subscriber base 3x over FY13‐16E this coupled Beta 0.9 with ARPU CAGR of 5% shall result in revenues CAGR of 34% over FY13‐16E Sensex/ Nifty 20,548/6,089 vs 22% for industry. Beyond FY16E, as Phase 3&4 digitization gets Share outstanding (mn) 148 implemented – albeit at a slow pace (due to its geographical reach and Stock Performance (%) fragmented subscriber base) – all MSOs including Hathway will stand to gain. 1M 3M 12M YTD Surge in digitization: With the surge in the digitization drive, cable industry Absolute (3.8) (10.5) 21.1 (7.8) would score over the DTH as similar content packages and quality can be Rel. to Sensex (7.7) (12.7) 10.3 (12.8) delivered at a lower price by the cable provider. This is substantiated by the Performance fact that out of 9mn STBs seeded between Feb13 and Jun13, ~8mn (~88%) were seeded by the cable industry. Of all the MSOs we prefer Hathway due to its 21,500 350 19,500 300 dominance in Phase 1&2 cities, its ability to collect subscription. 250 17,500 Carriage and Placement Revenue to remain robust: Even though C&P 200 15,500 150 revenue as a proportion of Total Revenue is expected to drop from ~40% to 13 13 12 13 13 13 12 12 13 13 ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ~15% FY15E onwards, we believe this drop will be on account of substantial ‐ Jul Jun Oct Oct Apr Feb Aug Dec Nov rise in subscription revenue. Absolute C&P will still be necessary to carry the Mar Sensex (LHS) Hathway Cable channel on a particular slot or particular channel. Broadband is the Dark Knight: Although currently side tracked by Hathway Source: Bloomberg due to its focus on main stream digitization, broadband has tremendous potential. Increasing internet penetration in India will lead to staggering 100% increase in subscriber base till FY17E to ~0.8mn from ~0.4mn. Even though ARPU remaining flattish at Rs.377 (nominal increase of 5% CAGR), we estimate Broadband revenue of Rs.3,503 (21% CAGR) for FY17E.

Initiate Coverage with BUY: Target Price Rs.342/share

We initiate the company with a BUY stance and DCF‐based target price of

Rs.342/share. Our target price implies 24.4 P/E for FY15E. We believe the near term catalysts are: (i) expansion of paying subscribers; (ii) monetization of revenue and (iii) governments commitment to stick to deadlines

Key Financials (Consolidated) Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E FY16E Analysts Contact Net Sales 10,121 11,325 12,515 23,725 27,057 Sagar Shah 022‐6184 4316 EBITDA 1,676 2,800 4,235 6,777 6,899 [email protected] EBITDA Margin (%) 16.6 24.7 33.8 28.6 25.5 PAT (adjusted) (469) 277 535 2,135 1,810

EPS (Rs.) (3.3) 1.9 3.5 14.0 11.9

RoE (%) (5.7) 3.4 5.5 17.3 12.7 P/E (x) (82.2) 139.8 76.7 19.2 22.7

Source: Company, Karvy Institutional Research

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Hathway Cable & Datacom

Company Financial Snapshot Consolidated Profit & Loss Company Background Y/E Mar (Rs mn) FY13 FY14E FY15E FY16E Mumbai‐based Hathway Cable & Datacom – promoted by Net sales 11,325 12,515 23,725 27,057 Raheja Group – is a major Cable TV service operator and EBIDTA 2,800 4,235 6,777 6,899 one of the largest MSO & cable broadband service providers in India. Hathway offers Cable TV services across 140 Depreciation 1,661 2,391 2,834 3,306 locations and high‐speed cable broadband services across 21 Interest Expense 602 1,003 937 905 locations. It has established 20 digital head‐ends in India. PBT 695 997 3,163 2,845 Tax 179 220 569 512 Hathway holds a pan‐India ISP license and is the first cable Adj. PAT 277 535 2,135 1,810 TV services provider to offer broadband Internet services. It EPS (Rs) 1.9 3.5 14.0 11.9 is currently India’s largest cable broadband services Profit and Loss Ratios provider, with ~1.4 mn two‐way broadband enabled homes. Its subscriber base constitutes ~52% of the total cable EBIDTA Margin % 24.7 33.8 28.6 25.5 broadband market in India. Adj Net Margin % 2.4 4.3 9.0 6.7 Valuation Multiple Providence Equity Advisors India (Providence) is a major P/E (X) 139.8 76.7 19.2 22.7 corporate shareholder of the Company and holds 9.9% in the EV/EBIDTA (X) 16.8 11.8 7.7 7.3 equity share capital of the Company.

Consolidated Balance Sheet Consolidated Cash Flow Y/E Mar (Rs mn) FY13 FY14E FY15E FY16E Y/E Mar (Rs mn) FY13 FY14E FY15E FY16E Total Assets 17,193 22,945 26,038 26,163 Net Income 219 535 2,135 1,810 Net Fixed Assets 17,110 17,259 21,724 21,598 Depreciation 1,661 2,391 2,834 3,306 Net Current Assets (2,980) 2,659 1,234 1,633 Tax 179 220 569 512 Other Assets 1,641 1,641 1,641 1,641 Change in Wkg Cap 2,057 (3,405) 44 (190) Total Liabilities 17,193 22,945 26,038 26,163 CF from Operations 4,703 680 6,420 6,247 Networth 8,224 11,304 13,439 15,040 Capex (6,846) (2,541) (7,353) (3,031) Debt 6,691 9,120 9,620 7,620 Investments (32) 82 ‐ ‐ Current Liabilities 8,788 5,778 10,091 10,506 CF from Investing (6,722) (2,302) (7,196) (2,874) Deferred Tax 167 167 167 167 Change in Equity 3 2,498 ‐ ‐ Balance Sheet Ratios Change in Debt 3,481 2,430 500 (2,000) RoE % 3.4 5.5 17.3 12.7 Dividends Paid ‐‐ ‐209 RoCE % 5.9 7.8 13.7 11.8 CF from Financing 2,308 3,924 (437) (3,114) Net Debt/Equity 0.8 0.8 0.7 0.5 Change in Cash 212 2,302 (1,214) 259 Equity/Total Assets 0.5 0.5 0.5 0.6 P/BV (x) 4.7 3.6 3.1 2.7

Shareholding pattern as on Sep 13 Revenue Distribution FY13

Others Broadband 4% Revenue (incl Misc DII income) 13% 13% Subscription 28% Promoter 49% Placement FII 41% 34% Activation Revenue 18%

Source: BSE, Karvy Institutional Research Source: Company, Karvy Institutional Research 2

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Hathway Cable & Datacom

Investment Rationale

Our investment argument is based on the following premises: . Curb on Under Reporting to Accentuate Multi‐fold Increase in Revenue – Fresh Revenue Distribution Model . Cable v/s DTH: Cable is the lucrative choice . Carriage & Placement (C&P) Revenue to Remain Significant . Higher Direct Subscriber Base to Boost Margin Post‐Digitization – Consolidation on the Cards . Highest Presence in Phase‐I & II Cities; Phase‐III & IV will Prove to be Game Changer ARPU to Treble Post‐Digitalization . Broadband Revenue: The Dark Knight? A. Curb on Under Reporting to Accentuate Multi‐fold Increase in Revenue – Fresh Revenue Distribution Model It is estimated that ~85% of the revenue was under reported by LCO’s due to technological limitation faced by MSO’s. Thus MSO’s had no control over its subscriber base and had to rely on LCO for total reach estimates. Now with STBs installed over each TV sets MSO’s will not only have the total subscriber reach number but also geographical distribution of subscribers, preference of channel package region wise, amount contributed by each subscriber etc. We estimated that the subscription income for Hathway will shoot 6.6x from the current levels of Rs.3,265mns to Rs.21,768mns Exhibit 1: Hathway’s revenue distribution Pre and Post digitization Area Number of Blended ARPU Potential Subscription Pre Digitization Post Digitization Net Subscribers per month Revenue revenue (due to 85% revenue (assuming 0% Increase in under reporting) under reporting) Revenue Phase 1 2.5 180 5,400 810 5,400 4,590 Phase 2 4.2 180 9,072 1,361 9,072 7,711 Phase 3&4 3.8 160 7,296 1,094 7,296 6,202 TOTAL 10.5 173 21,768 3,265 21,768 18,503

Source: Company, Karvy Institutional Research

APRU to move in lumpy fashion & Rise in “paying” subscribers to fuel the growth Cable TV subscription ARPU will move in a lumpy fashion due to lumpiness in the seeding of the STB’s in phased manner and lag in monetization of the subscription revenue. Blended ARPU will go down from Rs.145 in FY13 to Rs.111 in FY14 due to addition of paying subscribers in Phase 1&2 where the monetization of new subscribers will have a lagged effect. Again, for FY15 the ARPU will shoot to Rs.203 & drop to Rs159 for FY16 as Phase 3&4 subscribers will be added and stabilize at around Rs.200 levels on a long term basis.

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Hathway Cable & Datacom

Exhibit 2: Blended Cable ARPU Exhibit 3: Hathway paying subscribers

250 12000 10763 214 202 188 200 10000 167 145 8000 6622 6832 150 100 6000 100 3820 4000 1640 1815 1944 50 2000

0 0 FY 12 FY 13 FY 14E FY 15E FY 16E FY 17E FY 10 FY 11 FY 12 FY 13 FY 14E FY 15E FY 16E

Blended Cable Subscription ARPU per month Total paying subscribers (in ʹ000)

Source: Karvy Institutional Research Source: Karvy Institutional Research

The TRAI has mandated the installation of SMS at every MSO, which will enable Paying subscriber base to increase to 10.8mn every MSO to capture the details of every subscriber and their preferred package. in FY16 from 3.8mn currently In the event of default, the MSOs will have the power to “pull the plug” and the particular STB linked to the SMS will black out. This digital addressability will lead to conversion of subscribers into “paying” subscribers. Our View: Hathway’s paying subscriber base has rose from 1.6 mn in FY09 to 3.8 mn in FY13 and it is expected to rise to 10.8 mn by FY16‐end, which will boost growth in revenue.

India: Relatively cheap in terms of ARPU India is one of the lowest ARPU countries India remain one of the most lucrative markets for entertainment industry with with an ARPU of just $3/month ~126 mn pay TV subscribers and still ~80 mn households untapped. India & China are few countries where ARPU remains low. In India it is very low compared to other nations, as monthly ARPU is as low as $3 in India vs. $79 & $38 in the US & UK. Even in the EMs like Indonesia, the monthly ARPU remains high at $12.5. The ARPU of DTH industry is likely to remain slightly higher than cable industry. Currently, cable industry enjoys ARPU of Rs. 166, while for DTH it is ~Rs. 220. Exhibit 4: Small ARPU compared to other countries Exhibit 5: ARPU per month

120 350 289 293 100 300 266 80 240 260 220 230 250 227 60 194 170 40 200 166 174 20 150 0

100

UK 50 India USA Kong Japan Korea China

Lanka

Taiwan Zealand Vietnam Pakistan

Thailand Malaysia 0 Australia Sri Indonesia Singapore Phillipines

Hong 2012 2013P 2014P 2015P 2016P 2017P New Cable DTH ARPU in US$

Source: Media Partners Asia 2013, Karvy Institutional Research Source: KPMG FICCI 2013, Karvy Institutional Research Our View: With dual advantage of digitization in the forms of increased number of addressable subscribers, and potential rise in ARPU, the ARPU of Cable & DTH is likely to rise by ~74% to Rs.289 & Rs.293, respectively till 2017.

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Hathway Cable & Datacom

Fresh Revenue Distribution Model for Industry One of the major turnaround stories in the digitization revolves around the MSO’s and DTH players are expected to inequitable distribution of the subscription revenue. Currently in the analog mode, increase their revenue by 3.3x and 3.6x 85% of subscriber base is under reported leading to vast gap in revenue respectively distribution. Importantly, the advertising revenue – which is likely to grow by 14% CAGR to Rs.240bn in FY17 – is totally gulped by the broadcasters. However, with the implementation of DAS, every player in the value chain will be benefitted except the LCOs. Broadcaster are expected to increase their revenue 2.5x, while the MSOs & DTH are expected to increase their revenue by 3.3x & 3.6x, respectively. Exhibit 6: Exhibit 15: Revenue Distribution Pre & Post digitization

Pre‐Digitization Revenue distribution FY 12 Post‐DigitizationRevenue distribution FY 17 E

Broadcaster Advertising Advertising Broadcaster 195 bn Revenue 104bn Revenue 240 bn 492 bn (14% CAGR) MSO’s share MSO’s share 28 bn 93 bn Subscription Revenue Subcription Revenue Rs 245bn LCO’s Share Rs 607 bn LCO’s Share 101 bn (20% CAGR) 103 bn

DTH DTH 45 bn 162 bn

Source: KPMG FICCI 2013, Karvy Institutional Research

Subscription revenue is likely to rise by 20% CAGR due to larger addressable LCO’s share in the subscription revenue is subscribers, reaching at Rs.607bn in next 4 years. This pie is shared by all players expected to decrease from 41% in pre‐ digitization era to 17% post digitization in the value chain. Of this pie currently LCOs share as high as 41% pre‐ digitization, which is expected to drop to 17% post‐digitization. Revenue Distribution Pre‐Digitization Scenario (FY12): Out of the total 130 mn Pay TV households, 58 mn are analog, 28mn are digital & 44mn are DTH subscribers. Cable TV still has remained the preferred choice even though DTH has shown a very strong growth since its launch. 70% of Pay‐TVs are cable and with an ARPU of Rs.150 pm the total subscription for cable comes to Rs.104bn. Of which a gigantic share, ~85%, is underreported by the LCOs and rest is passed on upstream to be shared by MSOs and the broadcasters.

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Hathway Cable & Datacom

Exhibit 7: Distribution of Revenue Pre‐digitization

Source: Company, Karvy Institutional Research

In contrast, the DTH operator – who themselves provide “last‐mile” connectivity unlike the MSOs – enjoys the higher share of the ARPU. Total subscription is estimated to be ~Rs.245bn of which a major chunk of ~41% is shared by the LCOs followed by broadcasters ~28%, DTH 18% and lastly MSOs 11%. This architecture is set to change post digitization. Exhibit 8: Distribution of Revenue Post Digitization FY 2017E

3 mn Analog ARPU Total Subscription 85% LCO’s Share Cable Household Revenue Rs 5.4 bn 4.6 bn Rs150 pm

15% MSO’s share 0.4 bn Balance Rs 0.8 bn Broadcaster 0.4 bn Broadcaster share 252 bn

LCO’s Share MSO’s share 93 bn 98 bn

90 mn Digital ARPU Total Revenue 33% MSO’s share LCO’s Share 103 bn Household Rs260 pm Rs 281 bn 93 bn

Broadcaster DTH share 162 bn 90 bn

TOTAL SUBSCRIPTION REVENUE 610 bn Broadcaster Share 162 bn 90 mn DTH ARPU Total Revenue Households Rs300 pm Rs 324bn DTH Share 162 bn

Source: Company, Karvy Institutional Research

Post Digitization Scenario (FY17): The subscription revenue is likely to rise by 20% CAGR to Rs.610bn by 2017 and distribution is expected to change drastically. Out of this total pie, the broadcasters are likely to share the maximum share of 41% followed by DTH players with 27% & MSOs with 15%. Thus broadcasters & DTH players are set to increase their share 3.6x post digitization where the MSOs by 3.3x, and the LCOs will be the biggest loser in new scenario.

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Hathway Cable & Datacom

B. Cable v/s DTH: Cable is the lucrative choice We did the comparative analysis of the cable and DTH industry based on the various parameters. Our ratings indicate the on an average Cable is the preferred choice over DTH Exhibit 9: Cable v/s DTH

Cable TV Rating DTH Rating

Lower: SAC is range of Rs.500‐600 per subscriber Subscriber Acquisition Higher: SAC ranges from Rs.1,800‐2,300 per

Cost (SAC) Cost of STB is Rs. 1,500; Recovery is ~Rs. 900‐ subscriber 1,000 Dependant: MSOs depend on LCOs for ʺlast‐ ʺLast‐mileʺ Independent: DTH gives ʺlast‐mileʺ mileʺ connectivity. Bigger MSOs have direct connectivity connectivity as signals are directly beamed primary subscribers but only to the extent of 4‐ from satellite to home 5% of total subscriber base Huge: Cable TV requires robust infrastructure, Less: Due to this inherent advantage DTH Infrastructural which is challenging given the potential 80 mn operators can capture rural India before Requirement subscribers – most of whom are rural – yet not Cable can lay their footholds penetrated with TV Higher: Basic pack starts from Rs. 220 ARPU Lower: Basic pack ranges from Rs.150‐160 in making it an expensive alternate for the cable industry making it more affordable subscribers Limited: DTH players can offer up to 300‐350 Vast: After digitization, the channel carrying Bandwidth Capacity channels, as the content is transmitted to Cable TV operators can provide up to 1,000 transponder (each transponder can carry up channels to 25 SD channels)

Weather Immunity Immune: Almost immune to extreme weather Not Immune: Prone to adverse weather

conditions conditions resulting in distorted transmission

Local Content Feasible: It is possible to provide the regional Not Feasible: DTH providers can’t give local content as signal to every single STB can be localized content as signal is beamed on Pan‐ controlled India level Serious Focus Area: DTH player have big Almost Non‐Existing: MSOs – barring few bigger Marketing Capabilities pocket thus can market themselves in a better players – don’t have necessary & Customer Servicing way. Also customer servicing can be better funds/professionalism to match marketing and in much professional way compared to capabilities of DTH players. cable

Broadband Feasible: Possibility of 2‐way communication Not Feasible: DTH canʹt offer broadband due enables the MSOs to offer Broadband service to only 1‐way communication

Feasible: MSOʹs can package the cable service Bundling of Services Not Feasible: Bundling of service is not and broadband service and offer an attractive possible as DTH can’t offer broadband price.

AVERAGE RATING

Source: Karvy Institutional Research; Note: Strong; Relatively Strong; Average; Relatively Weak Weak

Competitive pricing to make cable a preferred choice DTH clearly emerges as an expensive choice compared to cable. The basic pay packs for an DTH starts from Rs.220 for most of the players. Cable starts its basic pay pack at ~Rs.160. The TRAI mandates the offering of FTA channels @ Rs.100 per month. Clearly Cable emerges as the cheaper option compared to DTH.

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Hathway Cable & Datacom

Exhibit 10: Comparison of Basic Packs for SD Basic Pay Pack No. of Company Type Monthly Channels Airtel Digital* DTH 220 155 Dish TV * DTH 220 220 Videocon d2h* DTH 220 296 Reliance Big TV* DTH 220 131 Sun Direct* DTH 200 143 Tata Sky* DTH 200 82 Digi Cable # Cable 180 154 Den Networks # Cable 180 187 Siti Cable # Cable 170 170 Hathway Cable # Cable 160 199

Source: Karvy Institutional Research; *DTH packages are inclusive of Service tax and Entertainment tax /; # Cable Basic pack are excluding of Service Tax & Entertainment Tax

Channel Carrying Capacity Constraint: The drawback which currently DTH DTH players have 12‐15 transponders which industry is struggling with is typical “mix n match” of the channels to meet the can carry 25 SD channels majority of the subscribers requirement due to the limited channel carrying capacity. A typical transponder can carry up to 25 standard definition channels even with the best of compression technology (MPEG 4). Currently, a majority of DTH players have anywhere between 12 and 15 transponders on different satellites, only exception being Dish TV which has 18 transponders. Thus DTH player has only ~350‐375 channels to offer. Also, each HD channel will consume bandwidth capacity of almost three standard definition channels. This reduces the offering of channels even further. With a mammoth basket of over 800 satellite channels to offer in India, and many SD channels are getting converted into HD channels, DTH players role has become more like a juggler where channels are juggled are per the regions and tastes of the subscribers to retain the base. DTH Cannibalization: Fear bigger than the Fact: Prior to DAS rollout, one of the major fears that Cable TV was the cannibalization of subscribers by the DTH players. But figures suggest otherwise. As per the report released by the I&B Ministry, out of 9.5 mn STBs seeded between 22nd Feb and 23rd Jun 2013, staggering 8.5 mn (i.e. ~89%) boxes were seeded by the cable industry. To the cheer of the cable player only 1 mn boxes that were seeded in Phase‐II & III were from DTH players.

C. Carriage & Placement (C&P) Revenue to Remain

Channel Capacity in Analog Era Significant Band Number of Channels Carriage & Placement (C&P) revenue formed staggering ~40‐45% of total revenue Prime 11 for Hathway. While addressing the biggest concern of likely erosion of C&P revenue of the MSOs, we analyzed the issue with the help of value‐chain and met C band 6 the management of few MSOs to understand the dynamics of C&P fees. We have S band 19 compared two phases of digitalization (pre and post) to understand implications H Band 20 of C&P revenue. UHF Band 50 Pre‐Digitization: In the analog era, the bandwidths were limited and the cable Total 106 distributors were blessed as there were only ~100 channels that can be carried on Source: Karvy Institutional Research various bands. As the frequency of bandwidth increased, the reach to number of subscribers reduced as Analog TV had limited channels. Thus the lower your channel is on a bandwidth higher the subscriber base you will get. A typical analog television had various bandwidths depending upon the make and type of a television. Every analog television had Prime Band; almost 80% also had C Band

October 17, 2013

Hathway Cable & Datacom

and number kept reducing as the band kept increasing. To get the viewership it became necessary for a broadcaster to have their channel placed in the lowest possible range. The “demand‐supply” mismatch forced broadcasters to shed huge C&P for the same. Exhibit 11: C&P Revenue of Hathway

6,000 60%

5,000 50%

4,000 40%

3,000 30%

2,000 20%

1,000 10%

0 0% 2010 2011 2012 2013 2014E 2015E 2016E

C&P Revenue % of Total Revenue

Source: Company, Karvy Institutional Research Post‐Digitization: With digitization, the cable distributors will be flourished with the channel carrying capacity and it is believed that the broadcaster will no longer have to pay for C&P. Why broadcaster would still pay carriage? Meanwhile, the advertisement revenue forms ~35% of the total revenue for a broadcaster. For a bigger broadcaster like Zee Network, the advertisement revenue forms 50% of total revenue (Exhibit 13). Now, the advertisement revenue of a Advertisement revenue form ~50% of total channel is depended on TRP, which in turn is depended on two factors: TRP = revenue for a broadcaster like Zee Network (total reach) X (time spent by the subscriber). With digitization “total reach” is taken into consideration. Though the time spent by a subscriber on a channel is not in broadcaster’s control, if the channel is strategically placed in a particular sequence then the probability of higher viewership is increased. Exhibit 12: Distribution of Channels of Hathway Channel Nos. Channels Channel Nos. Channels 101 342 … Hindi GEC … Hindi News 135 385 136 386 … English GEC … English News 160 410 200 420 … Hindi Movies … Sports 225 432 250 435 … English Movies … Music 260 453 261 466 … Lifestyle Infotainment … Spiritual 310 502 320 … Kids 333

Source: Karvy Institutional Research

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Hathway Cable & Datacom

For instance: The slots allocated for Hindi GEC are from 101‐135, Hindi Movies 200‐225, English Movies 251‐260 and so on. From a viewer’s point of view, it is hammered in its brain that English Movies starts from channel no 251. So he will start with that number and scroll to other channels and the viewership of that channel number will be highest amongst English Movie bouquet. Also special number channels which can be easily remembered viz. 111, 222, 333, 100, 200, 300, 123, 456 and so will be in great demand and broadcaster would want to pay to get placed in these slot. Our View: C&P revenue of the MSOs won’t decline drastically rather it will still remain significant contributor to their total revenue. Although in absolute terms in may remain stable at around Rs. 4.39 bn level till FY16, on relative basis C&P revenue as a percent of total revenue it will drop to 15% of revenue due to explosion in subscription revenue. Exhibit 13: Zee Enterprise Revenue Break up Exhibit 14: Ad Revenue as Percentage of Broadcasting Industry’ Total Revenue

25,000 (mn) 60% 1000 40% 58% 800 20,000 56% 30% Rs. 54% 15,000 600 52% 607 20% 50% 518

10,000 Billion 400 427 48% 345 In 245 281 10% 46% 200 194 214 5,000 140 158 169 44% 180 207 240 71 82 88 103 116 125 139 157 0 42% 0 0% 2007 2008 2009 2010 2011 2012 FY08 FY09 FY10 FY11 FY12 FY13 2013P 2014P 2015P 2016P 2017P

Advertisement rev Subscription rev Advertising Rev Subsciption Rev Ad revenue as a % of Total rev Ad revenue as a % of total rev Source: Company, Karvy Institutional Research Source: FICCI‐KPMG 2013, Karvy Institutional Research

From the perspective of the Broadcaster: Carriage Expense relatively small compared to their Net Income To understand the completeness of the subject of Carriage expense, we analyzed the expense from the Broadcasters perspective. For one of the big broadcaster like Zee Enterprise; Carriage expense forms the part of “Marketing, Distribution and Promotion Exp” which was Rs.1,923mn and Rs.1,624 for FY13 and FY12 respectively. Even if we consider carriage expense to form 85% of the expense, Zee must have spent Rs.1,635mn and Rs.1,380mn on Carriage for FY13 and FY12 respectively. Compared to their PAT of Rs.7,196mn and Rs.5,891mn, Carriage expense amount is relatively low. Also if we consider that Top 5 MSO’s cover ~50% market share Zee would pay most of the carriage to those players only. So at the Hathway level Zee’s carriage expense would be ~327mn (1635mn /5) which would be ~4.5% of their PAT. Our view: We believe that by paying ~4.5% of their PAT as a carriage fee Zee would atleast ensure larger viewership and in turn give them strength to negotiate with the advertisers. On the cost‐benefit front we believe that broadcasters would continue to pay Carriage & Placement fees at the current levels.

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Hathway Cable & Datacom

D. Higher Direct Subscriber Base to Boost Margin Post‐ Digitization – Consolidation on the Cards Globally, digitization has proved to be a game changer and has lead to major Out of ~ 91mn cable subscribers, Top 4 consolidation of the players leading to big structural change. The companies in player’s carter close to ~38.4mn subscribers thus controlling about 42% market countries like US, Japan, Korea, Taiwan, Europe etc which have more direct subscriber have shown average EBITDA margin between 40‐60%. Indian cable industry is very fragmented and the market is estimated to have ~6,000 MSOs & ~60,000 LCOs. The direct subscribers which are known as the primary subscribers are extremely low for most of the MSOs. Currently in India there are ~ 91 mn cable subscribers out of which the Top‐4 players carter to ~38.4 mn subscribers thus controlling ~42% market. This number is likely to increase largely post‐digitization. Currently, Hathway has ~642,000 primary subscribers, which is 7% – highest in the Hathway has a primary subscriber base of 7% industry – of its total subscriber base of ~8.9 mn. Den Networks – another large MSO i.e. 642,000 subscribers which is h highest in the industry – has only ~200,000 primary subscribers out of the total reach of ~11 mn. Exhibit 15: Primary Subscribers as Percentage of Total Subscribers

12 11 8% 10 10 8.8 8.5 8.5 6% 8

6 4% 4 7% 2% 2% 2 5% 0% 1% 0 0% DEN Networks Hathway Indusind Siti Cable Digicable

Reach Number of Primary Subscribers % of Direct subscribers

Source: DEN QIP 2013, Karvy Institutional Research Our View: Hathway’s primary subscriber base is expected to remain stable as new rooting of subscribers will be done through the LCOs, while primary conversion will remain insignificant. Exhibit 16: ~38 mn subs out of ~91 mn catered by Top‐4 MSOs

Hathway, 10%

Den, 12%

Others, Incable, 9% 58% Siti Cable, 11%

Source: Hathway Investor Presentation

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Hathway Cable & Datacom

Exhibit 17: Digitization Era around Major Countries Launch of Country Year Pre Consolidation Post Consolidation Digital Era USA 1970 50+ large MSOs 1998 Top 5 players: 85% market share UK 1980 50+ players 2011 Virgin Media: 95% market share Japan 1993 686 players 2003 Top 3 players: 65% market share Taiwan 1980 600+ players 2009 Top 4 players: 80% market share Korea Late 1990s 1,000 players 2005 Top 5 players: 75% market share

Source: Media Partners Asia, Karvy Institutional Research

Small MSOs will be squashed under high capex: Digital conversion will require Estimated payback period of 29 months for big dents in the pockets of the MSOs. Major investment required for digitization small MSOs for the investment required in digital conversion includes: Head ends cost, STBs subsidization cost, Subscriber Management System (SMS) – Both Capex & AMC cost, and leased from existing telecom players / laying‐out of Fiber Optic Cable. In our estimate, a small MSO with a subscriber base of 500,000 will require Rs.527mn investment and the pay‐back period of this investment will be 29 months as follows. Exhibit 18: Pay‐back period for a smaller MSO Cost Required Rs. mn Subscribers Acquisition Cost 400 (assumed to be Rs.800) Cost of the Digital Head end 100 Subscriber Management System Capex 15 AMC (Re. 1 per sub per month) 12 Catering max 2.5mn subs Total Investment Required 527 Average ARPU pm 180 Small MSOʹs Share 20% Pay Back period (in months) 29

Source: Karvy Institutional Research

Sustenance for small MSOs will be challenging as cost of technical upgradation and infrastructure will be massive leading to the consolidation in sector, which we believe to be the key factor for consolidation.

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Hathway Cable & Datacom

E. Highest Presence in Phase‐I & II Cities; Phase‐III & IV will be the Game Changer The Ministry of I&B has set “sun set dates” for the DAS roll‐out in four phases. While this time, the Ministry is committed to digital implementation; it has also taken strict measures like total blackout for non compliance of deadlines. Exhibit 19: Phases of Digitalization & Due Date of Roll‐out Phase Cities Covered Sunset Date Phase‐I 4 Metros 30‐Oct‐12 Phase‐II 38 Cities (population >1 mn) 31‐Mar‐13 Phase‐III All Urban Areas 31‐Dec‐14 Phase‐IV Pan India 31‐Dec‐14

Source: I&B Ministry

The Phase‐I of digitization is almost complete amid few hiccups in Chennai. While Hathway has already started monetizing Phase‐I & Phase‐II digitization, the full impact of which is likely to flow from FY15 onwards. The Company has shown the dominance in Phase‐II amongst the MSOs with presence in 25 out of 38 cities covered under Phase‐II. (Refer Appendix) Exhibit 20: MSOs’ Presence in Phase‐II Cities

40 38

30 25 19 18 20 16 13 10

0 Total Phase II Hathway Den Digicables Siti Cables Incable Cities No of Cities

Source: Company, Karvy Institutional Research Phase‐III & IV: To Prove to be Game Changer: Phase‐III & IV are the key areas to focus in digitization roll‐out, as 96 mn – comprising 75% of total pay TV viewers out of total estimated 129 mn of Pay‐TV viewers – will be covered in the process. The tiff between DTH and the Cable players will be intense in these phases due to their geographical feasibility. While DTH will have an upper hand in terms of direct reach, Cable have an added advantage of giving localized content along with affordability i.e. lower ARPU. Exhibit 21: Number of Subscribers Phase‐wise

150

100 60

129 50 36 20 0 13 Phase 1Phase 2Phase 3Phase 4Total

Number of Subscribers

Source: I&B Ministry

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Hathway Cable & Datacom

Transition to B2C Model to Ensure Transparency Unlike the pre‐digitization B2B model era – where the MSOs had negligible control over the subscribers and billed the LCO on net basis – in post‐digitization B2C era the MSOs would own and control most of the infrastructure and the role of the LCOs will be like an agents who will be responsible for collection and servicing. But, the cooperation of the LCOs would remain to be critical as they will provide “last‐ mile” connection. Gross Billing vs. Net Billing: Hathway expects to start gross billing in Phase‐1 cities of Delhi & Mumbai from Q2FY14 onwards. Kolkata is proving to be challenging and gross billing will start from Q3FY14. Although Hathway is expects gross billing in Phase‐2 cities from Q4FY14, we expect couple of months delay. From FY15 onwards, gross billing should start in all Phase‐1 & 2 cities.

F. Broadband Revenue: The Dark Knight Broadband revenue contributed ~13% of the total revenue for FY13. Despite of sluggish increase in subscriber base of ~6% YoY FY13, its ~0.4mn subscriber will be the major growth driver on the plot of rising internet penetration in India and quicker payback period. Hathway is the market leader in cable broadband space with a market share of 40%. Better Product offering: DOCSIS 3.0 technology is about to bring a revolutionary change in broadband business. Hathway has already started deploying DOCSIS 3.0 technology in South Mumbai and is expected to ”hard” launch the same in Mumbai & Delhi in Q3FY13. Competitive pricing of Rs.599‐Rs.1,499 per month for the speed range of 15mbps to 50mbps has potential to change the matrix of revenue for Hathway. Quick Payback Period: Broadband subscriber acquisition cost of ~Rs.3,500 with an average ARPU of Rs.350 per month gives the payback period of less than a year. As the ARPU increases further, the payback period is further reduced making the broadband business extremely lucrative. To explore its full potential this business needs to be nurtured well which will happen post digitization FY16 onwards. Exhibit 22: Market Share of Broadband service provider Exhibit 23: Revenue distribution for FY13

OCL Others Broadband 5% 8% Revenue (incl Misc Subscriptio ASCL income) ns 11% 13% Hathway 28% 40% You Placement Telecom 41% 36% Activation Revenue 18%

Source: Company, Karvy Institutional Research Source: Company, Karvy Institutional Research

Strong Subscribers Base: Hathway has managed to increase its home pass by 50% between FY10‐FY13, from 1mn to 1.5mn of which subscriber base is ~0.4mn (giving the conversion rate of 28%). While management primary focus remains digitization, broadband will remain behind the curtains till FY17E posting a marginal rise of 5% in homes passed taking its home passed to 2mn. But with increasing need of internet we estimated conversion rate of 38% taking its

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Hathway Cable & Datacom

subscriber base to ~0.8mns. With ARPU remaining sticky at Rs.377 (increase of 5% YoY), conversion of the existing home passed will drive the broadband revenue from Rs.1,658mn to Rs.3,503 FY17E (@ 21% CAGR). Exhibit 24: Broadband reach and subscriber base

2,500 50% 40% 2,000 37% 40% 34% 26% 28% 31% 1,500 27% 30% 1,000 20% 500 10% 0 0% 11 12 13

14E 15E 16E 17E

FY FY FY FY FY FY FY

Broadband Reach Broadband Subscriber base % of total reach

Source: Company, Karvy Institutional Research Exhibit 25: Broadband Revenue and Growth Exhibit 26: Broadband ARPU per month 377 4,000 25% 30% 400 342 359 23% 310 326 22% 25% 289 306 3,000 18% 300 20% 11% 12% 2,000 15% 200 10% 1,000 100 5% 0 0% 0 12 13

11 12 13

14E 15E 16E 17E

FY FY FY FY FY FY FY FY FY FY FY FY FY Broadband Revnue Growth ARPU per month

Source: Company, Karvy Institutional Research Source: Company, Karvy Institutional Research

October 17, 2013

Hathway Cable & Datacom

Revenue & YoY Growth Financial Overview 30,000 100% 20,000 A. Revenue to Register Phenomenal Growth 50% 10,000 Hathway will see a spur in the top‐line with CAGR of 34% during FY13‐FY16 0 0% period. The total paying subscriber base is expected to rise from 3.8 mn in FY13 to 10.7mn in FY16. We expect that since Phase‐1&2 have been duly complete barring FY12 FY13

FY14E FY15E FY16E few cities, Phase‐3&4 will also be substantially taken care by the TRAI with a delay Revenue YoY Growth of 12 months, which will ensure phenomenal jump in the revenue. Post FY16, the industry will stabilize registering 10‐15% CAGR. Revenue Mix Over View: Hathway will leverage on huge growth opportunities on account of 30,000 high subscriber base and faster seeding of STBs. 20,000

10,000 B. Broadband Revenue to Register 19% CAGR

0 Revenue‐mix clearly suggests that cable subscription income is going to be the FY 13 FY 14E FY 15E FY 16E dominator going forward. As “home‐passed” number increases from 1.5 mn in FY13 to 1.8 mn in FY16, the broadband subscribers are also likely to rise by 50% Subscription P&C Broadband from 427,000 to 668,000. The broadband revenue is expected to increase from Rs.

EBITDA (ex‐Activation Income) & 1.65 bn to Rs.2.8 bn posting a 19% CAGR. EBITDA Margin Over View: With the implementation of DOCSIS 3.0 technology and large number of “homes passed” broadband revenue can prove a dark knight for Hathway. 8,000 30% 6,000 20% 4,000 C. EBITDA (ex‐ Act Income) to Surge 10x on account of 10% 2,000 Spurt in Subscribers Base 0 0% Hathway will see an exuberant spurt in revenue due to its digitally addressable FY 13 FY 14E FY 15E FY 16E customers. This will shoot the FY13 EBITDA (ex‐activation income) from Rs.883mn EBITDA (ex‐activation income) to Rs.6,339mn till FY16. Activation Income is a onetime income and not recurring EBITDA Margin hence EBITDA (ex‐activation income) truly reflects the business. EBITDA margins (ex‐activation income) will also show an uphill trend rising from 8% in FY13 to Net Income & Net Income Margin 23% in FY16. We expect EBITDA to remain at this level in the longer run. 4,000 10% Our View: We believe that higher subscriber conversion will prove to be the catalyst for EBITDA margins. 2,000 5% D. Return Ratios Suggest Sturdiness of Sustainable 0 0% FY 13 FY 14E FY 15E FY 16E Business Net Income Net Income margin Hathway’s RoE & RoCE ratios stood at 3% & 5%, respectively in FY13 due to low profitability on account of smaller base of monetization of subscribers. As the RoE & RoCE conversion to digital era happens progressively the returns are also expected to 20% rise. In FY16, the Company’s RoE is estimated to be ~13.1% while RoCE is seen at 15% ~12.1%.

10% Our View: With the likely total digitization by FY15, from FY16 onwards

5% Hathway’s returns shall start flowing and reflecting the long‐term trend. Reasonably good RoE & RoCE reflects the sturdiness of the sustainable business 0% FY 13 FY 14E FY 15E FY 16E ROE ROCE

Source: Company & Karvy Institutional Research

October 17, 2013

Hathway Cable & Datacom

Key Risks:

Delay in Implementation of Phase‐III & IV beyond Three Months: Revising the sunset date for Phase‐III, the Ministry of Information & Broadcasting has stipulated December 14, 2013 as sunset date for both Phase‐III & Phase‐IV. In the event of delay beyond three month – which we have assumed – in seeding the STBs can delay the revenue generation. Meanwhile, as there is a likelihood of General Elections during that time, there also exists a possibility that the new government may not continue the pace of seeding STBs. Dispute between LCOs & MSOs on Revenue Sharing: The dispute between the LCOs & MSOs on revenue sharing can lead to slowdown in whole process. As the MSOs will have to rely on LCOs for providing last‐mile connection and seeding of STBs, any dispute can lead to further delay in seeding of STBs. Though the TRAI has recommended revenue‐sharing between MSOs & LCOs in 65:35‐ratio in case of dispute, in case the likely dispute goes to litigation, the conversion process will come to a halt. Churning of Subscribers to Big‐pocket DTH Operators: Retaining the analog customers is one of the keys to the success of the cable industry. Thus any competitive strategy by the DTH players in form of attractive package would lead to less‐than‐expected revenue growth for cable industry. Although we expect nominal churn to DTH players, any substantial change in the subscriber base can distort our assumptions. Non‐cooperation from telecom players: In Phase 3&4 cable industry will have to lease lines from telecom players as setting up their own infrastructure will not be financially viable. But if telecom companies, because of 3G/4G auctions, are not able to generate any spare capacity of bandwidth to lease out to cable operators, then cable industry will face the road block. Thus the success of the Phase 3&4 will depend telecoms ability to share the leased line

October 17, 2013

Hathway Cable & Datacom

Valuations We believe that free cash flow to firm (FCFF) model is a good measure and will depict the intrinsic value while considering the long term cash flows. Based on the DCF‐model we arrive at a TP of Rs.341 i.e. an upside of 30% from its CMP of Rs.263 Our valuation assumptions imply the EBITDA to grow @31% CAGR till FY20. We have valued the company on the basis of DCF based valuation. We have assumed the WACC of 13.9% and terminal growth rate of 4%. Exhibit 27: DCF Valuation FY14E FY15E FY16E FY17E FY18E FY19E FY20E EBIT 1,844 3,943 3,594 6,101 8,629 11,556 13,922 Less: Tax 407 710 647 1,098 1,553 2,311 3,063 Net Operating Income after tax 1,437 3,233 2,947 5,003 7,076 9,244 10,859

Add: Non‐cash charges Depreciation & Amortization 2,391 2,834 3,306 3,617 3,968 4,357 4,785 Gross Cash Flow 3,828 6,067 6,252 8,620 11,043 13,601 15,644

Net Capex (2,496) (7,353) (3,031) (3,750) (4,036) (4,697) (4,974) Decrease/ (Increase) in working capital (3,405) 44 (190) (860) 194 (643) (421) Free Cash Flow to Firm (FCFF) (2,073) (1,242) 3,031 4,010 7,201 8,262 10,250

PV of FCFF (2,073) (1,090) 2,334 2,710 4,271 4,301 4,681

Source: Karvy Institutional Research

Exhibit 28: Value per Share DCF Valuation FY15E Value of operations (in mn) Sum of PV of FCFF 17,243 PV of terminal value 55,792 Value of operations 73,035

Less: Net Debt FY15E (7,987) Total Equity Value 65,048 Equity Value for Hathway shareholders (80%) ** 52,039 Total diluted shares (mn) 152 Value per share 342 Upside/downside (%) 30%

Source: Karvy Institutional Research ** We have discounted the value for minority interest

October 17, 2013

Hathway Cable & Datacom

Exhibit 29: Revenue Assumptions Phase Number of Subscribers Full Implementation FY14E FY15E FY16E Avg ARPU Rs. 65 for 7 months Phase 1 2.5 30‐Jun‐12 Rs.184‐for 12 months Rs.194‐for 12 months Rs. 175 for 5 months Phase 2 4.2 31‐Mar‐13 6months Analog Rs.13 Rs.184‐for 12 months Rs.194‐for 12 months 3 months Rs. 45 2 months Rs.65 1 month Rs.180 Rs. 50 ‐ 9months Phase 3&4 3.8 31‐Dec‐15 Rs. 10 ‐ 3 months (Analog) Rs. 175 for 3months

Source: Company, Karvy Institutional Research

Exhibit 30: Subscriber Assumptions FY17E Particulars FY14E FY15E FY16E onwards Estimated subscriber base (m) 9.39 10.06 10.76 11.31 Estimated paying subscriber base (m) Phase 1 2.4 2.4 2.4 2.4 Phase 2 3.7 3.9 4.0 4.1 Phase 3 0.4 0.4 3.7 4.0 Phase 4 0.1 0.1 0.7 0.9 Total 6.7 6.8 10.8 11.3

Source: Company, Karvy Institutional Research

October 17, 2013

Hathway Cable & Datacom

Media & Entertainment Industry – At a Glance

TV Still Remains Most Dominant Source of Entertainment In spite of low daily viewing compared to the world, TV still remains one of the Televisions contribution to M&E industry most dominant forms of entertainment. It is the highest contributor in the Media & revenue in 2012 was 45% followed by 27% by Print media Entertainment (M&E) industry revenue. Of this the major contribution comes from TV followed by print media. In 2011 the revenue of M&E was ~Rs.728bn which rose by 12.6% in 2012 to Rs.821bn. TV contribution was 45% followed by 27% by print media. The M&E industry is expected to grow 2x to 1,661bn till 2017. Exhibit 31: Revenue break‐up of M&E industry for 2012

Films Radio Music 14% 2% 1% OOH Print Animation 2% 27% and VFX Gaming 4% 2% TV 45% Digital Advertising 3% Source: KPMG‐FICCI 2013

India has the highest number of non‐TV India – Hub of Largest non‐TV Population albeit Low Penetration population with ~81 mn untapped households India has the highest number of non‐TV population with ~81 mn untapped households, which provides a mammoth opportunity for Cable & DTH players. Also the penetration rate of TV sets is low compared to other countries like China & Brazil, while there are over 234 mn households in India, only 65% households have TVs in 2013. But the number of household with TV and penetration rate has risen from 73% FY09 to 95% in FY13, indicating better prospects for the industry. Exhibit 32: Exhibit 2: Growth of TV HHs and Penetration

250 65% 66% 64% 64% 200 61% 62% 60% 150 60% 58% 100 58% 56% 50 54% 0 52% 2009 2010 2011 2012 2013

Total Household TV Household TV Penetration%

Source: TAM Media Research 2013

..and yet it has 2nd largest number of Pay‐TV households Globally, the number of pay TV households (analog and digital) reached 772mn by India’s Pay‐TV penetration rate is ~92% of the 2012, up from 585 mn in 2008. India has 129 mn pay‐TV households and ranks 2nd TV households only after China in number of Pay‐TV households in the world. Thus there is a huge potential for subscription revenue. Even with the lower TV penetration, the pay‐TV penetration is astoundingly high compared to the major countries. India’s Pay‐TV penetration is ~92%, which is fairly high compared to the UK which is 55%, US (~89%) and EMs like China & Brazil which have pay TV penetration of only 57% & 23%, respectively.

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Hathway Cable & Datacom

Exhibit 33: Top Nations with highest Pay‐TV viewers Exhibit 34: Pay TV penetration (2012)

233 200 100% 250 92% 85% 200 77% 82% 80% 150 73% 150 117 100 60% 100 100 50 25 24 22 16 16 14 13 40% 0 50 20% UK USA India Japan Brazil Korea China 0 0% Russia

Mexico

Germany 2009 2010 2011 2012 2013

No. of Households (mns) South TV Household Pay TV households Cable Penetration

Source: Digital TV Research, Karvy Institutional Research Source: TAM Media Research 2013, Karvy Institutional Research

Digital TV Penetrations extremely poor The proportion of the Digital cable compared to total pay‐tv television is mere 40% which is quite miniscule compared to other western nations. In spite of low TV household penetration of around 65% India has astonishingly high Pay TV Penetration rate of ~92% compared to the other countries. The arch reason for such high penetration in India is that the content quality of FTA channels is India in very poor leaving very limited scope for the consumers. Also, with the digitization era picking up, this number is expected to surmount substantially. Countries like US, UK and Spain has almost digitized all of their subscribers and India is now headed towards that journey. Exhibit 35: Pay TV Penetration around the World 100% 11 7 1 8 6 24 22 45 38 36 37 36 43 65 66 73 77 50% 89 93 99 92 94 76 78 55 62 64 63 64 57 35 34 27 23 0% UK IRE ITA ESP JPN CHI IND RUS POL FRA GER BRA USA AUS SWE NED CAN Pay TV % Free TV %

Source: TAM Media Research 2013, Karvy Institutional Research

Exhibit 36: Proportion of Digital & Analog Cable as on 2011

100% 1 3 7 11 0 10 13 23 17 80% 34 33 38 31 60 60 57 60% 99 97 93 89 100 90 40% 87 77 83 66 67 62 69 20% 40 40 43 0% US UK Italy India Spain Japan Brazil China Russia France Poland Ireland Canada Sweden Australia Germany

Digital Analog

Source: OfCom/IDATEs

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Hathway Cable & Datacom

Average Viewing Hours still at nascent stage On an average Indians spent ~119 minutes a day watching television which is India’s average viewing time per day: quite low compared to other countries. The US leads the space by an average 119minutes. Global average: 211 minutes consumer spending ~293 minutes a day glued to TV. India is far below the world average of ~211 minutes and thus the average viewing is expected to grow, going forward. With the huge subscriber base under its belt TV is expected to remain the dominant entertainment medium, going forward. Exhibit 37: Average Time spent on TV Per Day (in minutes)

350 293 300 242 253 240 239 242 227 225 225 220 250 205 189 191 200 211 162 163 150 119 100 50 0 UK IRL ITA ESP IND RUS POL FRA GER BRA USA AUS SWE NED CAN CHN

Average TV viewing per Day (in mins) Average Viewing Time

Source: Ofcom, Karvy Institutional Research

Demand for Digital TVs Continues to Surge Out of 14 mn units sold in 2012, TV sales mix reveals that the demand for digital TV is increasing. The desire and aspiration are the key elements for the bloating sales of high‐end TV sets. It is estimated that out of total sales in 2012 LCD and LED panels account for ~40% and this number is likely to surge up to 100% by 2017. Sale of digital TVs like LCD & LED is likely to rise by 2x in next 5 years. Again a major portion of sales represents replacement of old TV sets, institutional TV sales, and additional TV set in the household. As per the estimates of the I&B Ministry, institutional and multi TVs account for ~17% of TV sets in metro cities that indicates that the consumers are willing to pay for digital sets even if the average cost for digital TV is relatively high. Exhibit 38: TV Sales

18 16 16 15 15 15 16 14 15 0 1 14 3 12 4 2 5 8 10 11 millions 3 14

in 3

8 6 12 2

Units 10 1 4 8 7 5 2 4 1 0 1 2010 2011 2012 2013 2014 P 2015 P 2016 P

CRT LCD LED Plasma

Source: FICCI‐KPMG 2013, Karvy Institutional Research

October 17, 2013

Hathway Cable & Datacom

DTH Industry: The Challenger DTH has shown phenomenal growth story since its launch in 2007. With mere 2.2 mn subscribers in CY07 it has grown to 45mn subscribers in CY13 CAGR of 65%. The inherent advantage that DTH industry possesses over cable is the “last‐mile” connectivity. The entire blanket of subscriber base is primary and there is no revenue sharing with the other player in value chain except broadcasters, unlike MSOs who split their pie of ARPU with LCOs. With humongous base of 80mn non‐TV households, India is one of the most non‐TV populated countries in the world. Thus DTH player have an added advantage given that the infrastructure in the rural India is poorly laid or the quality is inferior. To get their hand laid in remote areas of Phase‐III & IV, it is a necessity for the cable industry to have the infrastructure set‐up. Major DTH Players: The current battle in the DTH industry is amongst 7 players. These include a) DD Direct Plus, which is owned by Doordarshan– a public service broadcaster and currently provides free DTH services – and, b) six private players – Airtel Digital TV, Big TV, Dish TV, Sun Direct, Tata Sky & Videocon d2h – who offer DTH services. Dish TV is the leader in subscriber base with the market share of 27% followed by Tata Sky with 20%. The following exhibit depicts the comparison of industry structure of MSO and DTH. Exhibit 39: Cable TV vs. DTH Transmission

Up‐linking of signals by Broadcasters

The “last‐ mile” connectivity

Down‐linking of signals by MSOs and DTH

Source: Karvy Institutional Research Exhibit 40: DTH Subscriber Base Exhibit 41: DTH Market Share

50.0 45 Reliance Big TV 40.0 32.4 7% 28.7 SUN TV 30.0 13% 22.2 Dish TV 27% 20.0 13.5 7.5 Videocon 10.0 2.2 14% TATA Sky Airtel 20% 0.0 Digital 2007 2008 2009 2010 2011 2012 2013 19%

Subsriber base (in Mns)

Source: Media Partner Asia 2013, Karvy Institutional Research Source: Dish TV investor presentation Aug 13, Karvy Institutional Research

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Hathway Cable & Datacom

Financials

Exhibit 42: Income Statement (Consolidated) Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E FY16E Net sales 10,121 11,325 12,515 23,725 27,057 YoY Growth (%) 14.7 11.9 10.5 89.6 14.0 Operating Expense 8,445 8,525 8,281 16,948 20,158 EBITDA (Core) 1,676 2,800 4,235 6,777 6,899 YoY Growth (%) 21.1 67.0 51.2 60.0 1.8 Margin (%) 16.6 24.7 33.8 28.6 25.5 Depreciation 1,443 1,661 2,391 2,834 3,306 Other income 71 157 157 157 157 EBIT 234 1,140 1,844 3,943 3,594 Interest paid 520 602 1,003 937 905 Pre‐tax profit (214) 695 997 3,163 2,945 Tax 153 179 220 569 512 Others (Minorities, Associates) 102 219 242 459 523 Net Profit (adjusted) (469) 277 535 2,135 1,810

Source: Company, Karvy Institutional Research

Exhibit 43: Balance Sheet (Consolidated) Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E FY16E Cash & Bank Balance 968 545 2,847 1,634 1,892 Liquid Investments ‐‐88 8 Debtors 2,414 3,474 3,476 5,931 6,764 Inventory 55 275 47 47 47 Loans and Advance ans Other Current Assets 982 1,634 2,255 4,068 3,842 Current Assets 4,420 5,928 8,626 11,680 12,545 Current Liabilities & Provisions (4,958) (8,907) (5,966) (10,447) (10,912) Net current assets (538) (2,980) 2,659 1,234 1,633 Other Non‐current Assets/Others 1,104 1,641 1,641 1,641 1,641 Other Non‐Current Liabilities (151) (113) (113) (113) (113) Investments 52 84 47 47 47 Gross block 12,125 25,298 27,839 35,138 38,318 Depreciation 5,156 8,189 10,580 13,414 16,720 Net block 11,160 17,110 17,259 21,724 21,598 Capital WIP 1,005 1,452 1,452 1,506 1,358 Total Assets 12,633 17,193 22,945 26,038 26,163 Deferred tax liability (net) 103 167 167 167 167 Long Term Loans 2,700 6,691 9,120 9,620 7,620 Equity capital 1,429 1,432 1,520 1,520 1,520 Reserves & surplus 6,598 6,792 9,784 11,919 13,520 Shareholders funds 8,028 8,224 11,304 13,439 15,040 Minority Interest 1,802 2,112 2,354 2,812 3,336 Total Liabilities and Equity 12,633 17,193 22,945 26,038 26,163

Source: Company, Karvy Institutional Research

October 17, 2013

Hathway Cable & Datacom

Exhibit 44: Cash Flow Statement (Consolidated) Y/E Mar (Rs mn) FY12 FY13 FY14E FY15E FY16E Net Income (338) 219 535 2,135 1,810 Depreciation 1,443 1,661 2,391 2,834 3,306 Chg in working capital (448) 2,057 (3,405) 44 (190) Interest 520 602 1,003 937 905 Others 542 165 155 470 416 Cash flow from operating activities 1,719 4,703 680 6,420 6,247 Capital expenditure (2,599) (6,846) (2,541) (7,353) (3,031) Chg in investments 1,040 (32) 82 ‐‐ Others 44 157 157 157 157 Cash flow from investing activities (1,515) (6,722) (2,302) (7,196) (2,874) Equity raised/(repaid) ‐ 3 2,498 ‐‐ Incr / (decr) in borrowings 358 3,481 2,430 500 (2,000) Interest paid (505) (1,176) (1,003) (937) (905) Dividend Paid ‐‐‐‐(209) Cash flow from financing activities (147) 2,308 3,924 (437) (3,114) Extraordinary item ‐ (78) ‐‐‐ Net chg in cash 57 212 2,302 (1,214) 259

Source: Company, Karvy Institutional Research

Exhibit 45: Ratio Analysis Y/E Mar FY12 FY13 FY14E FY15E FY16E EBITDA margin (%) 16.6 24.7 33.8 28.6 25.5 EBIT margin (%) 2.3% 10.1% 14.7% 16.6% 13.3% Net profit margin (%) (4.6) 2.4 4.3 9.0 6.7 Net debt: equity (x) 0.3 0.8 0.8 0.7 0.5 RoCE (%) 4.2 5.9 7.8 13.7 11.8 RoIC (%) 14.0 19.8 23.0 30.5 28.3 RoE (%) (5.7) 3.4 5.5 17.3 12.7

Source: Company, Karvy Institutional Research

Exhibit 46: Valuation Parameters Y/E Mar FY12 FY13 FY14E FY15E FY16E EPS (Rs) (3.3) 1.9 3.5 14.0 11.9 Book value per share (Rs) 56.2 57.4 74.4 88.4 99.0 P/E (x) (82.2) 139.8 76.7 19.2 22.7 P/BV (x) 4.8 4.7 3.6 3.1 2.7 EV/EBITDA (x) 25.2 16.8 11.8 7.7 7.3 EV/Sales (x) 4.2 4.2 4.0 2.2 1.9 EV/Subscribers base 4,848 4,809 5,012 5,305 5,166 EV/ Paying Subscribers 22,320 21,724 12,323 7,523 7,610

Source: Company, Karvy Institutional Research

October 17, 2013

Hathway Cable & Datacom

Appendix

Exhibit 47: Phase‐II Digitization Status – As on 23rd June 2013 Total TVs to be digitized by making provision Cable TV TOTAL Total TV DTH Total DTH % Cable % State City of 20% for STBs already Cable Households Households Subscribers seeding achieved achieved multiple TVs in installed + DTH houses and TVs in offices/shops AP Hyderabad 881,512 746,818 896,182 369,772 1,613,819 1,983,591 41.26 180.08 221.34 AP Visakhapatnam 542,692 443,176 531,811 42,966 244,639 287,605 8.08 46 54.08 Bihar Patna 281,986 233,091 279,709 65,355 232,754 298,109 23.37 83.21 106.58 Gujarat Ahmadabad 1,176,055 982,156 1,178,587 357,039 696,136 1,053,175 30.29 59.07 89.36 Gujarat Rajkot 285,991 248,364 298,037 77,411 158,047 235,458 25.97 53.03 79 Gujarat Surat 958,294 633,622 760,346 188,717 608,667 797,384 24.82 80.05 104.87 Gujarat Vadodara 396,140 335,210 402,252 117,034 313,590 430,624 29.09 77.96 107.05 Haryana Faridabad 287,848 236,373 283,648 147,338 265,187 412,525 51.94 93.49 145.44 J&K Srinagar 164,000 150,254 180,305 37,467 63,500 100,967 20.78 35.22 56 Jharkhand Ranchi 199,475 155,215 186,258 74,579 158,277 232,856 40.04 84.98 125.02 Karnataka Banglore 2,169,428 1,890,237 2,268,284 599,839 1,901,875 2,501,714 26.44 83.85 110.29 Karnataka Mysore 209,527 182,776 219,331 55,591 137,253 192,844 25.35 62.58 87.92 MP Bhopal 371,722 287,501 345,001 87,267 198,203 285,470 25.29 57.45 82.74 MP Indore 385,756 328,408 394,090 128,906 322,521 451,427 32.71 81.84 114.55 MP Jabalpur 209,452 169,305 203,166 34,153 189,923 224,076 16.81 93.48 110.29 MH Aurangabad 226,073 176,829 212,195 108,375 120,589 228,964 51.07 56.83 107.9 MH Kalyan Dombivli 293,574 260,987 313,184 27,457 210,649 238,106 8.77 67.26 76.03 MH Nagpur 506,353 440,484 528,581 46,370 459,282 505,652 8.77 86.89 95.66 MH Nashik 319,100 265,442 318,530 93,026 249,742 342,768 29.2 78.4 107.61 MH Navi Mumbai 257,601 216,350 259,620 56,290 202,707 258,997 21.68 78.08 99.76 MH Pimpri Chinchwad 410,858 328,226 393,871 60,532 303,697 364,229 15.37 77.11 92.47 MH Pune 733,990 645,695 774,834 461,585 335,607 797,192 59.57 43.31 102.89 MH Sholapur 184,971 132,282 158,738 76,150 88,158 164,308 47.97 55.54 103.51 MH Thane 418,629 353,602 424,322 253,036 292,617 545,653 59.63 68.96 128.59 Punjab Amritsar 237,346 215,801 258,961 76,797 224,957 301,754 29.66 86.87 116.52 Punjab Ludhiana 347,643 294,711 353,653 153,666 407,992 561,658 43.45 115.36 158.82 Rajasthan Jaipur 575,268 484,107 580,928 277,455 372,792 650,247 47.76 64.17 111.93 Rajasthan Jodhpur 176,352 143,361 172,033 93,318 129,740 223,058 54.24 75.42 129.66 TN Coimbatore 280,560 256,247 307,496 98,220 0 98,220 31.94 0 31.94 UP Agra 240,831 213,564 256,277 42,137 272,723 314,860 16.44 106.42 122.86 UP Allahabad 155,071 133,688 160,426 35,043 250,827 285,870 21.84 156.35 178.19 UP Gaziabad 323,380 276,798 332,158 159,450 215,585 375,035 48 64.9 112.91 UP Kanpur 486,382 380,613 456,736 93,979 397,850 491,829 20.58 87.11 107.68 UP Lucknow 512,519 414,999 497,999 165,467 333,429 498,896 33.23 66.95 100.18 UP Meerut 228,991 179,005 214,806 99,161 157,023 256,184 46.16 73.1 119.26 UP Varanasi 180,805 146,086 175,303 39,021 202,658 241,679 22.26 115.6 137.86 UT Chandigarh 214,973 179,676 215,611 70,910 216,283 287,193 32.89 100.31 133.2 WB Howrah 230,520 183,157 219,788 40,338 177,458 217,796 18.35 80.74 99.09 TOTAL 16,061,668 13,344,216 16,013,057 5,011,217 12,726,756 17,737,973 31% 79% 111%

Source: Ministry of Information and Broadcasting

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INSTITUTIONAL RESEARCH Analysts Industry / Sector Desk Phone Email ID

Amey Chalke Research Associate ‐ Pharmaceuticals +91 ‐22 61844325 [email protected] Ankur Lakhotia Derivatives and Quant Associate +91 ‐22 61844327 [email protected] Hatim Broachwala, CFA Banking +91‐22 61844329 [email protected] Kruti Shah, CFA Economist +91‐22 61844320 [email protected] Manoj Kumar Manish Derivatives and Quant Analyst +91‐22 61844343 [email protected] Maruti Kadam Research Associate +91‐22 61844326 [email protected] Mitul Shah Automobiles +91‐22 61844312 [email protected] Parikshit Kandpal Infra / Real Estate / Strategy +91‐22 61844311 [email protected] Rahul Sharma Pharmaceuticals +91‐22 61844310 [email protected] Rahul Singh Textiles +91‐40‐44857911 [email protected] Rajesh Kumar Ravi Cement & Logistics +91‐22 61844313 [email protected] Rupesh Sankhe Power/Capital Goods +91‐22 61844315 [email protected] Sagar Shah Media & Entertainment +91 22 61844316 [email protected] Varun Chakri Research Associate +91 22 61844326 [email protected] Vinay Nair Oil & Gas +91‐22 61844319 [email protected] INSTITUTIONAL SALES Celine Dsouza Sales +91‐22 61844341 [email protected] Edelbert Dcosta Sales +91‐22 61844344 [email protected]

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Disclosures Appendix

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