Hathway Cables' Q2FY18 results (Neutral) - Broadband doing satisfactorily; stock reacting to deal buzz...

Q2FY18 result highlights

• Hathway results are not comparable yoy because till FY17, Hathway’s standalone business was reflective of its cable and broadband business combined whereas from Q1FY18 onwards, the cable business has been demerged into a 100% subsidiary and now the standalone business is reflective of its broadband business only.
• Broadband segment (standalone): Revenue at Rs1.31bn (in line), grew by 1.7% qoq which is reasonable in the current context of high competitive activity in the wireless broadband segment. It added 30K paying subscribers and moved total paying base to 0.69m; however, ARPU fell to Rs717 from Rs730qoq as it gave higher discounts to longer-term (6/12 months) customers to ring-fence them against upcoming competition (Jio launching wireline broadband); new customer ARPU stands at Rs770. EBITDA stood at Rs527m (5% beat) with a margin of 40.2% (up 210bp qoq). This is a strong performance as it continues to drive cost efficiencies. PAT at Rs140m (+40% qoq, IDFCe: Rs106m) was higher than expected because of dividend income (of Rs42m) from its 37.3% held associate company GTPL.
• Cable segment performance – management estimates: Net ARPU for Phase I was flat at Rs105 qoq, Phase II increased from Rs95 to Rs98 qoq, Phase III improved from Rs55 to Rs58 while monetization in Phase IV has begun as net ARPU increases qoq to Rs41 from Rs9. Cable rev. grew by 3.6% qoq to Rs2.45bn (2% beat). Cable subscription rev. grew by decent 5.7% qoq (led by Phases III/IV monetisation), placement rev. also improved by 5.4% qoq. Cable EBITDA came in at Rs331m vs Rs272m qoq and margin improved from 11.5% to 13.5%. Ex-activation cable EBITDA increased to Rs73m from Rs30m qoq and margin came in at 3.3% (from 1.4% qoq).

Key positives: Monetisation of Phase IV begins.

Key negatives: Broadband ARPU/subs additions could have been better.

Impact on financials: Unchanged.

Valuations & view

We have a Neutral rating on Hathway as Jio’s impending launch will continue to weigh heavily on the broadband business (key value driver). The key upside risk to our target price is better-than-expected placement revenue in the new tariff order regime and any telco led acquisition in the cable space. Our SoTP based price target of Rs34 is explained inside.