S.P.

Jain Institute of Management & Research

BlackTaurians

Hathway Cable and Datacom

Company profile:
Hathway Cable & Datacom (Hathway) is one the largest MSOs as well as one of the leading cable broadband service providers in India. Having entered the cable and entertainment business in 1995, the company offers three broad services—Analog cable television, Digital cable television and Broadband internet. Its key promoter is the Rajan Raheja Group with ~49.6% stake. Hathway currently provides Analog TV services in 140 cities, and it is the largest digital cable TV provider in India. Hathway holds a pan‐India ISP license and is also the first cable TV service provider to offer broadband services in 21 cities. Its subscriber base constitutes 52% of the total cable broadband market in India. It is currently India’s largest cable broadband services provider, with ~1.4 MN two‐way broadband enabled homes. The company has bagged Indian Television Awards’ ‘Best Cable TV Operator of the Year’ award eight times.

BUY
Price Target: CMP: Market Cap: 316 277.5 38,499mn 52week high/low: 307.8/227.1

Shareholding Pattern:
16%

With the Indian Government’s commitment to stick to its deadlines for DAS implementation, digitization benefits have begun to accrue to the cable companies. 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 a “BUY” rating and DCF‐based target price of Rs.316. Hathway Cables & Datacom Ltd reported mixed standalone results for Q1FY14 with topline at `2.33 bn (up 71%), EBIDTA at `761 mn (up 219%) & Adj.PAT at `56mn (up 135%) on a YoY basis. On a consolidated level the economic interest in subsidiaries stood at `960 mn. Key Highlights of Q1FY14 results: 1. Subscriber Base: Hathway’s Pan India Subscriber base stands at 7.05 mn TV homes connections of which nearly 3.92 mn are paying subscribers. On a consolidated basis, Hathway seeded 1.8 million set top boxes this quarter while adding 1.1 million at the standalone level. Overall subscribers of Hathway have expanded to 10.5 million, of which currently 7 million are already digital (highest in the industry) 2. Subscription revenue visibility & collection: From Q1FY14, Hathway has started collecting Net ARPU of ~ 65 rupees per subscriber. 3. Broadband Connections: Hathway has added 27K subs in its Broadband segment raising its total base to 0.44 mn customers at the end of Q1FY14. Broadband ARPU stands at around 310 per month. 4. Cable ARPU: Currently Cable ARPU stands at ~ `170 -180 per month. With the implementation of packages for phase I & A-La-Carte rates of individual channels, digital ARPU are set to witness an increase of about 30-40%. 5. Broadcasters and LCO share: Management has guided that nearly 70% of Subscription revenue would be shared amount Broadcasters (content cost ~ 30%) and LCOs (commission ~ 40%). 6. Significant Improvement in EBITDA margins: The standalone EBITDA margin showed an improvement of 1521 bps YoY to 32.7% due to a jump in activation income from seeding of set top boxes. However, since the company seeded lower STB in comparison to last quarter and the content cost increased (9 crore) due to digitisation, margins fell 557 bps this quarter. 7. Expansion in new cities propels content, employee costs: Hathway reported activation revenue of INR730mn in Q1FY14 (INR876mn in Q4FY13). Content costs catapulted ~50% YoY due to renegotiation of Phase 1 deals while employee costs increased by 36% due to increase in staff strength and entry in new cities like Kolkata, Agra and Jabalpur.

53% 31%

Ownership (Institutional) Ownership (Retail & Other) Ownership (Insider)

Analysts: Devang Rajkotia Harshal Doshi Sanket Kothari

Stock Price:

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BlackTaurians - SPJIMR

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Activation charge per subscriber also has increased by INR100-150 QoQ to INR700-750 in Q1FY14 resulting in higher revenues. as Phase 3&4 digitization getsimplemented – albeit at a slow pace (due to its geographical reach andfragmented subscriber base) – all MSOs including Hathway will stand to gain. Bangalore. BlackTaurians . etc. New Subscribers (mn) 150 100 50 0 Phase 1 Phase 2 Phase 3 Phase 4 Total Rising subscriber base is an opportunity for growth: Total digital subscribers of Hathway cable & datacom as on date stand at 7mn.Hathway is strongly positioned within a lucrative industry      A large subscriber base of 80mn subscribers to be digitized over 4 phases Indian ARPU is USD 4. MSOs. cable industrywould score over the DTH as similar content packages and quality can bedelivered at a lower price by the cable provider and is not affected by weather conditions. The following factors will play a significant role:  Increased Bandwidth: Niche channels which were excluded from the Analog bouquet will be available  Choice of channels: Addressability will ensure to subscribers and improve transparency  Quality: Broadcasters will now invest to provide high quality viewing experience to the subscribers  Satellite revenues: Content providers like Eros International will benefit from higher revenues & pay per view opportunities  Carriage revenues: MSOs would experience a decline in carriage revenue per channel due to higher bandwidth & increased channels  Subscription income: MSOs and broadcasters are likely to post ~20% 10 year CAGR.Allahabad. 60000 LCOs& 7 national DTH players. while as at Q1FY14 end the base was 6. ~8mn (88%) wereseeded by the cable industry. consolidation will be imminent for sustenance Low broadband penetration in India (12%) is another opportunity for growth Digitization to drive revenues: The Government mandated Digital Addressable System (DAS) process is expected to provide a level playing field to all the stakeholders in the industry – broadcasters. Hathway has also strengthened its position in various other cities like Faridabad.SPJIMR . its ability to collect subscription. considering that the estimated digitization scheduled would suffer a cumulative delay of 2-3 years. Of all the MSOs Hathway would be preferred due to itsdominance in Phase 1&2 cities. LCOs and subscribers. Beyond FY16E. With the surge in the digitization drive. This is substantiated by thefact that out of 9mn STBs seeded between 1Q14.8mn. the lowest among the Asian countries with huge scope for improvement Digital cable industrywould score over the DTH as similar content packages and better quality can bedelivered at a lower price With 6000MSOs. Phase 1&2 digitization will boost Hathway’s paying subscriber base 3x over FY13‐16E this coupledwith ARPU CAGR of 5% shall result in revenues CAGR of 34% over FY13‐16Evs 22% for industry.

There are 134mn cable and satellite households in India.7% respectively BlackTaurians . The average monthly ARPU is INR 160. However. higher subscription and placement revenue in Phase 1 cities led to stablerevenue QoQ. Thus. LCOs have been enjoying a monopoly. we expect robust revenue growth on the back of growingdigital subscribers. Further. only 20% of the subscribers are declared by the LCOs.5 million.Going forward. up from 65 in last quarter and 40 in Kolkata. ARPU would remain under pressure in short term due to competition to acquire new digital subscribers but ARPU would increase gradually over the long term The standalone EBITDA margin showed an improvement of 15. Overallsubscribers of Hathway have expanded to 10. of which currently7 million are already digital (highest in the industry). the total TV subscription revenue in India stands to ~INR 255 bn. ARPUs in India have been almost stagnant for the past 10‐15 years.7% and10.1 million at the standalone level. ARPU (USD/month) 60 50 40 30 20 10 0 50 40 30 20 10 0 -10 -20 % EBITDA PAT Standalone activation revenue dipped INR140mn QoQ to INR730mn inQ1FY14. As per industry estimates. 13% 18% 41% Revenue Distribution Placement Subscription Activation Broadband 28% Hathway seeded 1.2% YoYto 32. the LCOs snare a huge 80% of the INR 255bn size industry. leading to an average annual ARPU of INR 1900.1% and 25. there is a huge variance in ARPUs across locations in India. The management indicated Hathway hasbooked revenue from LCOs net of their commission at 85 per subscriber in Delhi and Mumbai. However.0 4.7% due to a jump in activation income from seeding of set topboxes. Since.margins fell 557 bps this quarter. since the company seeded lower STB in comparison tolast quarter and the content cost increased (9 crore) due to digitisation.8 million set top boxes thisquarter while adding 1.SPJIMR .5% in FY14 and FY15 at expanding margins of 25. addressability of digital subscribers and ARPU (net ofLCO commission) increase.0 0. We expect revenue growth of 34.Subscribers (mm) 6. the result is arbitrary pricing with ARPUs varying from INR 149 in Kochi to INR 322 in Shillong.0 2.0 Increase in revenues expected due to better margins: ARPUs in India are much lower than global peers. Currently. among whom about4 million are revenue paying.

DTH players like Dish TV and Tata Sky already have a well‐entrenched brand and are affiliated to broadcasters like ZEE and STAR. smaller MSOs will find it difficult to fund the STBs.5% from FY13-23E in ARPU. We believe that the larger MSOs like Hathway.3. Siti Cable has same promoters as ZEE Hathway Digitization opportunity Broadband operations Funding capacity STB features Brand strength HD experience/capability Call center capability Primary v/s Secondary Affiliation to broadcaster * V V V V V T * @ Siti cable * R V V V T T R * DEN Network * R T V V V T R T InCable V R V T T T R R @ Dish TV V @ V * * * * * * Tata Sky V @ V * * * * * * * – maximum Note:@ – minimum The total paying digital TV subscriber base is expected from its currently negligible level to 75mn by 2023. Subscription revenues for MSOs will post a CAGR of 20% and will surge to INR 120bn in 2023 vis-à-vis INR 18bn in 2013. BlackTaurians . With a CAGR of 8. Despite of sluggish increase in subscriber base of ~6% YoY FY13. Hathway is the only player who has a significant broadband presence. currently.500mn investment and the pay‐back period of this investment will be over 2 years Banks are usually reluctant to fund the smaller MSOs due to poor disclosure levels and lack of collateral. However. In the subsequent phases of digitization. DEN Networks and Siti Cable will eventually buy out smaller MSOs Comparison of Key Metrics for MSOs & DTH operators: Strong national MSOs like Hathway. there are 7 DTH operators.4mn subscriber will be the major growth driver on the plot of rising internet penetration in India and quicker payback period. Similarly. Of the MSOs.000 MSOs and ~60.Market leader in Broadband internet Broadband revenue contributed 13% of the total revenue for FY13. its ~0.SPJIMR . Also. With estimates pegging digitization funding requirement at INR200‐250bn. and leased from existing telecom players /laying‐out of Fibre Optic Cable. To explore its full potential this businessneeds to be nurtured well which will happen post digitization FY16 onwards Consolidation across Industry Imminent With 6. brand strength of DTH players is far superior to MSOs. Subscriber Management System (SMS) – Both Capex & AMC cost. These smaller MSOs will eventually find it viable to partly sell their stake or sell out altogether. the total digital TV subscription revenue can be expected to touch INR 375bn by 2023. Broadband subscriber acquisition cost of ~Rs. we perceive a strong possibility of consolidation taking place in the Indian TV industry. a small MSO with a subscriber base of 5mn will requireRs.500 with anaverage ARPU of Rs.000 LCOs. Hathway is the market leader in cable broadband space with a market share of 40%. the payback period is further reduced making thebroadband business extremely lucrative. Digital conversion will require major investment by MSOs for: Head ends cost. the Indian TV industry is hugely fragmented. Asthe ARPU increases further. respectively. STBs subsidization cost.In our estimate.350 per month gives the payback period of less than a year. DEN Networks and Siti Cable will gain immensely due to DAS.

0x 30.0% 50.SPJIMR .0x 0.0x 3.0x 1.0 10.00% 80.0% 20.0x 5.0x 2.0 15.0x 20.0 0.0% 60.0% 70. Hathway is highly leveraged compared to its peers which reduces its cost of capital and margins are also improving indicating a robust business.00% 40. Stock performance 30.0x 300x 250x 200x 150x 100x 50x 0x Leverage Ratios 4.0 25.00% 100.0% 0.00% 20.0x 10.00% 60.0% 40.00% 120.0 Nov/11 Feb/12 May/12 Aug/12 Volume (mm) Nov/12 HATH IN Feb/13 May/13 SENSEX Aug/13 250% 230% 210% 190% 170% 150% 130% 110% 90% 70% Nov/13 Total Revenue (INR bn) 40 35 30 25 20 15 10 5 0 80.0 20.00% Total Debt/EBITDA EV/Revenue EV/EBITDA P/E Debt/Equity Net Debt/EBITDA BlackTaurians .0x 0.0% Revenue Growth Total Revenue ('000) Rev Growth (1 Year) REV Growth (5 Year) Multiples 35.0x 140.0x 25.0x 15.3%.0% 30.00% 0.Strong financial performance over the years Hathway Cable & Datacom has been a strong performer in equity markets with stock price implying a 3 year CAGR of 33. The top line has been growing gradually over the years with rapid expansion expected due to digitalization.0% 10.0 5.

9 – 357.82% Sales growth: 40% over next 2 years &linearly reducing towards 10% over 5 years Tax rate: 30.0% Risk free rate: 8.Valuation show an upside of 15% over current market price Weighted Average Cost of Capital Analysis 7% 14% Capital Structure Market Cap LT Debt 79% ST Debt Assumptions: WACC: 10. 10% thereafter CAPEX growth: Based on digitalisation plans Valuation: Intrinsic value in range of INR 283.SPJIMR .9% premium over CMP BlackTaurians .0%-4.58% EBIT margin: 9.15% Terminal Growth rate: 2.95%-12.6 per shareimplying 2.5% next 5 years.2% to 28.

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