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Den Networks' Q1FY19 results (Upgrade to Neutral) - Below estimates; Industry awaits disruption…

Q1FY19 result highlights (Ind AS)

• Cons. rev. was flat qoq at Rs3.1bn (4% miss). Cable revenue was flat qoq at ~Rs3bn, while broadband revenue declined 6% qoq to ~Rs156m. Both cable and broadband were below expectations by 4%/3%.
• Cable subs. rev. fell 3.0% qoq (7% miss). Carriage rev. grew 2.4% qoq to Rs850mn (in-line). Activation rev. was flat qoq at ~Rs240m (in-line). Collection efficiency declined to 86% in Q1 (vs 91% qoq) due to delay in payments at the LCO end post issues with one broadcaster. Net ARPU for Phase I/II/III/IV stood at Rs122/93/68/54 in Q1 vs Rs122/96/66/56 qoq.
• Broadband rev. declined by 6% qoq to Rs156mn (3% miss) led by competitive pressures. ARPU fell by 2.3% qoq to Rs552.
• Content cost grew by 5.7% qoq / 21.8% yoy in Q1.
• Given weak top-line performance, EBITDA fell 18.4% qoq to Rs464mn (32% miss) while EBITDA margin declined 460 bps qoq to 14.8%. Ex-Activation EBITDA came in at Rs224mn (50% miss; 32% qoq fall).
• Losses widened qoq to Rs 307m (vs Rs108m qoq).
• DEN’s active (paying) subs. base was fell 3% qoq to 7.2m in Q1. (excl. ~1m active subs in JVs). Broadband subs fell ~1k qoq to ~106k. Net debt has increased to ~Rs1.9bn (vs ~Rs1.6bn qoq).

Key negatives: Weak ARPU trends across Cable/Broadband.

Impact on financials: Cut EBITDA by 13%/20% for FY19E/20E respectively.

Valuations & view

While DEN has been an industry leader in improving cable TV monetisation over the past two years, we believe that there are risks for distribution companies, especially in metro cities, as Jio has plans to tie up with LCOs for last-mile connectivity for its forthcoming JioGigaFiber launch. The current blip in ARPU notwithstanding, any aggressive push by Jio to capture LCOs away from incumbent MSOs could spell trouble for cable revenues. This, coupled with DEN playing catch-up in the Broadband space (through an untested franchise model), makes us cautious on the company. We have cut DEN’s cable segment's target multiple by 20% (now valued at 5.2x FY20E EV/EBITDA) and FY19E/20E EBITDA estimates by 13%/20%. However, the sharp stock price fall (post JioGigaFiber announcement) drives our Neutral upgrade (we had downgraded the stock to UP in Q3, post which the stock has corrected 65%). We remain structurally negative on the incumbent cable TV space.