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Den Networks' Q4FY19 results (Neutral) - All eyes on new promoter’s future plans…

Q4FY19 result highlights (Ind AS)

• Cons. rev. fell 11.4% qoq to Rs2.7bn (11% miss). Cable revenue fell ~12.5% qoq at ~Rs2.9bn (12% miss), while broadband revenue grew 7.0% qoq to ~Rs180m (3% beat).
• Cable subs. rev. fell 8% qoq at ~Rs1.6bn (7% miss). The fall was mainly due to the ground-level disruption post implementation of new TRAI tariff order. Performance details were not shared by DEN (we believe 2-3% qoq fall in ARPU, while the balance drop should be attributed to subs churn). Carriage too as a result fell 19% qoq to ~Rs660m, while activation revenue was up 4% qoq at ~Rs260m.
• Broadband rev. grew by healthy 7.0% qoq to Rs180mn (3% beat). DEN added ~2k subs (net) to its broadband base (~116k as of Q4) while ARPU increased marginally to Rs562 (versus Rs559 qoq).
• Although overall costs fell in Q4 (-9.4% qoq), EBITDA fell ~22.3% qoq to ~Rs374m (8% miss) due to weakness in cable business performance. Ex-activation EBITDA fell ~50.8% qoq to ~Rs114m.
• Higher other income (~Rs 280m vs Rs 49m qoq; Rs78m yoy) due to high cash balance post Jio equity infusion led to adjusted PAT coming in positive at ~Rs247m. One-off expenses taken during the quarter include impairments on receivables/equipment of ~Rs1.8bn and tax-related provisions of ~Rs265m.

Key positives: Broadband EBITDA positive in Q4.

Key negatives: Cable segment weakness continues.

Impact on financials: FY20E EBITDA cut by 30%. Introduce FY21E financials.

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. Jio (along with DEN/HATH) would be executing its market roll-out of Jio Broadband in the coming months (although details remain under wraps). Also, the promoter holding (Jio + existing promoter), post the open offer, now stands at 86.5%, and we believe that it is highly likely that DEN would be merged with one of Jio’s holding entities in the near future. We maintain our Neutral rating on DEN with a target price of Rs 68 (roll-over to FY21E estimates).