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Den Networks' Q1FY20 results (Dropping Coverage) - Cable stabilizes post NTO; Future uncertainty prevails…

Q1FY20 result highlights (Ind AS)

• Cons. rev. grew 14.7% qoq to Rs3.1bn (15% beat). Cable revenue grew 15.7% qoq at ~Rs2.9bn (15% beat), while broadband revenue was flat qoq at ~Rs180m (6% beat).
• Cable subs. rev. grew 7.5% qoq to ~Rs1.7bn (13% beat). Although DEN has not shared Cable KPIs, we believe most of the growth has been ARPU led post NTO as customer tariffs rose. Subscribers may have also up-traded for sports packs for the Cricket World Cup during the quarter. Carriage revenue grew by 47% qoq to ~Rs970m (52% beat), while activation revenue fell 11.5% qoq to ~Rs230m.
• Broadband rev. was flat qoq at Rs180mn (6% beat). DEN has not shared Broadband KPIs this time.
• Content costs rose 26.5% qoq/6.2% yoy (net content cost grew ~4% qoq/fell ~4% yoy because of sharp increase in placement rev.), while overall costs grew 15.4% qoq. EBITDA grew 10.2% qoq to ~Rs412m (29% beat). Ex-activation EBITDA grew 60.0% qoq to ~Rs182m.
• High other income (~Rs512m vs Rs280m qoq; Rs88m yoy) due to high cash balance post Jio equity infusion, alongside good EBITDA performance, led to adjusted PAT (post MI) coming in at ~Rs112.3m (55% qoq decline due to lower minority interest share).

Key positives: Strong cable business performance.

Impact on financials: N/A

Valuations & view

Q4FY18 was impacted because of disruptions on the ground led by NTO implementation and Q1FY20 has been better than our estimates as we were expecting the impact to continue for at least one more quarter. However, we note that overall numbers are still weaker than pre-NTO implementation quarters. We also believe that DTH is gaining ground vs MSOs post NTO implementation as it is offering more value (higher no of channels. Given that Reliance Industries now owns ~79% stake in the company (~87% promoter holding in total), it is highly likely that DEN would be eventually subsumed into Reliance Jio as it would be more efficient from a structuring perspective. We believe that Jio will use DEN as a mere infrastructure facilitator (thus entailing them to earn distributor margins) while capturing all future economic value creation for itself. As a result, we drop coverage on DEN. Our last rating on DEN was Neutral (TP Rs68). Our estimates have not been updated for Q1FY20 realities and should not be used for making any investment decision.