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 October 17, 2013 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 October 17, 2013 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.