FREE

Den Networks' Q2FY19 results (Neutral) - All eyes on new promoter's future plans for Den…

Q2FY19 result highlights (Ind AS)

• Cons. rev. was flat qoq at Rs3.1bn (3% miss). Cable revenue was down ~2% qoq at ~Rs3bn (4% miss), while broadband revenue grew 6% qoq to ~Rs165m (3% beat).
• Cable subs. rev. grew 1.2% qoq to ~Rs1.7bn (2% miss). Carriage rev. fell ~5% qoq to Rs810mn (5% miss). Activation rev. grew 4% qoq at ~Rs250m (in-line). Collection efficiency jumped back to 94% in Q2 (vs 86% qoq) after its LCO payments for one broadcaster problem was sorted out. Net ARPU for Phase I/II/III/IV stood at Rs124/90/73/53 in Q1 vs Rs122/93/68/54 qoq.
• Broadband rev. grew by 6% qoq to Rs165mn (3% miss) on a relatively weak base. ARPU was flat qoq at Rs554.
• Content cost was flat qoq / +12% yoy in Q2.
• EBITDA grew ~10% qoq to ~Rs508m (in-line) as the company controlled costs very well during the quarter. Ex-activation EBITDA grew ~15% qoq to ~Rs258m (in-line).
• Net loss reduced to ~Rs280m (vs ~Rs307m qoq; IDFCe: ~Rs214m loss). Loss was higher than expected due to higher than expected tax outgo during the quarter.
• DEN’s active (paying) subs. base fell to 7.1m in Q2 (vs 7.2m qoq). (excl. ~1m active subs in JVs). Broadband subs increased by ~6k qoq to ~112k, while Homes Passed increased to 944k (vs 927k qoq). Net debt fell to ~Rs1.5bn (vs ~Rs1.9bn qoq).

Key positives: Better than expected Broadband performance.

Key negatives: Higher tax outgo.

Impact on financials: Unchanged.

Valuations & view

The high cash infusion (Rs20.5bn) by RIL would alleviate two key issues (1) provide funds for future broadband expansion, and (2) reduce possible competitive intensity from Jio Broadband; however, our key question on whether DEN would be able to book the economic gains arising from future broadband subscriber additions or would it act as a mere facilitator for Jio’s own subscriber base remains unanswered. As a result our financials do not account for any economic benefit arising from the fund raise and given limited clarity we reinstate our Neutral rating on Den Network (with a SoTP based price target of Rs74; valuing both Cable/Broadband at 7.5x FY20E EV/EBITDA).