RESULT UPDATE HATHWAY CABLE & DATA COM Activation boom spurs growth India Equity Research| Media EDELWEISS 4D RATINGS Hathway Cable & Datacom’s ( Hathway) Q4FY13 numbers were well ahead of our estimate due to strong surge in activation revenue Absolute Rating BUY (INR876mn). Other key positives were: (1) robust subscriber addition at Rating Relative to Sector Outperformer 1.5mn (seeded ~0.73mn in Q3FY13); (2) huge 2,106bps YoY EBITDA Risk Rating Relative to Sector Medium Sector Relative to Market Overweight margin expansion in spite of 27.6% YoY jump in pay channel costs; and (3) net profit of INR283mn after nine quarters of losses. The only key concern was jump in interest costs to INR141mn (up 23% QoQ) due to MARKET DATA (R: HAWY.BO, B: HATH IN) substantial increase in borrowings (to fund set top boxes). Success in CMP : INR 280 subscriber KYC data and package selection will be important milestones Target Price : INR 352 going forward. With rapid digital subscriber additions, Hathway continues 52-week range (INR) : 307 / 155 to execute the best amongst all MSOs. Maintain ‘BUY’. Share in issue (mn) : 143.2 M cap (INR bn/USD mn) : 40/ 715 Avg. Daily Vol.BSE/NSE(‘000) : 246.7 This report also contains Q4FY13 earnings call highlights. SHARE HOLDING PATTER N (%) Surge in activation revenue; margin expands 2,106bps YoY Current Q3FY13 Q2FY13 Hathway’s net revenue increased 70.7% YoY to INR2,312mn. As percentage of sales, Promoters * 49.5 49.5 49.6 pay channel cost and other operating expenses plunged 723bps and 1271bps YoY, MF's, FI's & BK’s 21.2 19.2 19.5 respectively, which helped EBITDA margin soar 2,106bps YoY. FII's 23.4 23.9 23.7 Others 6.0 7.4 7.2 Subscriber addition remains robust * Promoters pledged shares : NIL (% of share in issue) Phase II digitisation has helped Hathway garner subscriber addition of 1.5mn in Q4FY13. Total digital subscribers as on date stands at ~6mn while as on FY13 end stood PRIC E PERFORMANCE (%) at ~4.9-5.0mn. Over 60% of data collection from subscribers has been achieved in EW Media Mumbai and Delhi and management expects to complete the process by end June. Stock Nifty Index Hathway has also strengthened its position in cities like Faridabad, Allahabad, 1 month 10.8 3.3 4.8 Bengaluru, etc. It is further targeting new cities and phase 3 as well. 3 months 15.9 7.6 4.3 12 months 68.9 23.7 63.1 Outlook and valuations: Positive; maintain ‘BUY’ Hathway is the best placed MSO to capitalise on the huge digitisation opportunity. It seeded more than 2mn boxes in phase I cities. Also, there is a huge opportunity of adding new subscribers in Phase 2. Currently, the stock is trading at EV/EBITDA of 16x and 12.5x FY14E and FY15E, respectively. Maintain ‘BUY/Sector Outperformer ’ with a target price of INR352. Financials (INR mn) Year to March Q4FY13 Q4FY12 % change Q3FY13 % change FY13E FY14E FY15E Abneesh Roy Revenues 2,312 1,355 70.7 1,544 49.7 11,325 15,666 18,562 +91 22 6620 3141 [email protected] EBITDA 885 233 279.5 355 149.5 2,738 3,073 4,047 Reported PAT 283 (68) NM (74) NM 157 (199) 137 Alankar Garude Dil. EPS (INR) 2.0 (0.5) (0.5) 0.9 (1.4) 1.0 +91 22 6623 3301 [email protected] EV/EBITDA (x) 17.3 16.0 12.5 Note: Quarterly numbers are on standalone basis May 30, 2013 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Media Conference call: Key highlights Digital subscriber: Total digital subscribers are currently ~6.2mn for Hathway. The company added ~2.4mn subscribers in phase 1, ~3.3mn in Phase 2 and ~0.5mn in Phase 3 (adjoining parts of Phase 1 and 2, but officially part of phase 3). Of the 6.2mn subscribers, ~0.6mn are primary while the balance are secondary subscribers. Hathway seeded ~3mn boxes in FY13. In April and May, the company seeded 1mn boxes and will seed another 0.5mn in June. This pace is expected to slow down going forward. Exit number of boxes seeded in Q4FY13 stood at 1.8mn. Activation revenue: Hathway’s activation revenue stood at a robust INR876mn in Q4FY13. For FY13 standalone, it stood at INR1,420mn against INR200mn in FY12. At the consolidated level, activation revenue was INR1,940mn in FY13 against INR300mn in FY12. Subscription revenue: Hathway’s subscription revenue increased by INR170mn YoY in FY13. The number was similar at the consolidated level as consolidated numbers include only nine month numbers of GTPL. Subscription revenues will start kicking in from next quarter, which would aid profits. Expansion: Hathway has entered several new cities in some states where it has strong presence. The company has also strengthened its position in cities like Faridabad, Allahabad, Bengaluru, etc. Inventory: Over 1mn boxes of inventory. Phase 3: Phase 3 seeding in a major way will start from Q4FY14. The company is looking to increase its presence in West Bengal, Maharashtra and Andhra Pradesh during Phase 3. Carriage revenue: Although carriage revenue for existing channels has been declining, Hathway is earning revenue from new channels and new geographies. Currently, there are near 250 channels which will increase to 300 in FY14. Billing system: Currently, net billing in Mumbai is ~INR85 (Delhi’s net billing stands at ~INR65). This will increase to INR105 by end June. Thereafter, at gross billing basis, the amount will move up to INR180 (INR80 billed to LCOs and INR100 to Hathway). Broadband: Hathway’s broadband subscriber base remains at ~0.416mn. Its broadband ARPU is INR300. Mumbai, Pune, Bengaluru and Hyderabad are important cities where the company is looking to improve its technology, which will help increase ARPUs. Receivables: Receivables increased significantly; however, due to: (1) activations being billed in March; and (2) higher carriage and placement receivables. Adjusting for these, receivables will be flat YoY. Entertainment tax: MSOs have to pay entertainment tax in Delhi. In Mumbai, there is still ambiguity regarding the same, but is likely to follow the Delhi method. Only some states have decided on this. The company has already started paying the entertainment tax. Data collection from subscribers: Over 60% has been achieved in Mumbai and Delhi. Management expects to complete the process by end June. 2 Edelweiss Securities Limited Hathway Cable & Datacom Gross capex FY13 (standalone): INR5.73bn; of which INR5.51bn is capex related to cable TV, the balance capex is related to broadband. Standalone balance sheet: Hathway’s standalone gross debt stands at INR7.12bn and net debt at INR6.74bn at end FY13. However, debt has jumped in May and currently, gross debt stands at INR10.4bn and net debt at INR10.05bn. Debt/Equity: D/E ratio stands at 1:1. Cost of debt: The cost of debt would be ~11% in FY14. Other key developments TRAI prescribes standard tariff packages for STBs Telecom Regulatory Authority of India (TRAI) has issued two tariff orders which prescribe standard tariff packages for set top boxes for DAS and consumer premises equipments for DTH service providers. The objective of this order is to make available STBs and CPE at a reasonable price while protecting the interests of service providers. The order contains four options that can be provided to consumers with different rentals and security deposit plans. The standard tariff package is to be mandatorily provided for by DTH and cable TV operators. As per the order, DAS service providers can provide STBs at a monthly rent of INR55.66 or INR50.66 (excluding taxes) if the security deposit is INR400 and INR800, respectively. For DTH service providers, the monthly rent for the CPE can be offered at a rental of INR71.75 per month and INR65.50 per month if the security deposit is INR500 and INR1,000, respectively. DAS service providers can offer STBs at a monthly adjustable rent of INR46.80 or INR32.93 if the security deposit is INR400 and INR800, respectively, while DTH service providers can provide STBs at a monthly adjustable rent of INR60.66 and INR43.32 if the security deposit is INR500 and INR1,000, respectively. Hathway consolidates to gain from Phase 2 Hathway acquired complete control of its cable TV joint venture with DB Corp’s Bhaskar in which it held 51%. The company acquired the balance 49% stake in the JV Hathway Bhaskar Multinet. Hathway Bhaskar is a cable TV distributor in Bhopal, Indore and Jaipur. This underscores the company’s increased focus on digitisation as it will help increase its footprint in tier 2 and 3 markets. Jayaraman leaves Hathway for Zee Mr. K Jayaraman, Managing Director and CEO, Hathway, left the company and joined the Zee Group as head of distribution and placement business. He took over the new role from March 12. Mr. Jayaraman had resigned from Hathway after Mr. Jagdish Kumar took over as MD and CEO of the company. Hathway appoints President for digital platform and EVP for operations Mr. K V Anand, Tata Sky’s ex-Chief Service Officer, has been appointed as President of Hathway’s digital platform. He will be reporting to Mr. Jagdish Kumar, MD and CEO. He has about 20 years of experience in the broadcast and distribution industry. Hathway also appointed Mr. Jagadesh Babu Botta as EVP operations. 3 Edelweiss Securities Limited Media Table 1: Hathway’s presence in Phase 2 cities: Immense potential Presence of MSO Sizeable presence City State State government Hathway DEN Siti Cable IMCL ZEE Sun TV Bengaluru Karnataka Congress Hyderabad Andhra Pradesh Congress Jaipur Rajasthan Congress Ahmedabad Gujarat BJP Surat Gujarat BJP