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Den Networks' Q2FY18 results (Neutral) - Business on an uptrend, external risks remain…

Q2FY18 result highlights (Ind AS)

• Cons. revenue grew 4.4% qoq to Rs3.3bn (1.7% beat) led by higher than expected activation revenue (Rs370mn vs est. Rs235mn).
• Cable subscription revenue grew 6.5% qoq (vs 3.5% est) supported by net realization improvement across phases (Phase I/II/III/IV net ARPU stood at Rs117/90/61/46 vs Rs109/87/57/34 qoq respectively). Net realisation increase in Phase I is commendable. Carriage revenue slipped marginally to Rs860mn (2% qoq decline).
• Broadband revenue fell 9.5% qoq to Rs190mn. ARPU declined 8.4% qoq to Rs664 due to high competition from the wireless industry and focused shifting of customers from monthly packs to longer-duration packs (lower monthly ARPU but increases customer stickiness).
• DEN’s tight cost controls is reflective in its financials. Overall expenses fell 2.7% qoq (employee expenses down 14% qoq; other expenses down 6% qoq). This and higher than expected activation revenue led to a strong EBITDA beat of 28% at Rs816mn (+34% qoq).
• However, ex-activation, EBITDA came in at Rs446 mn (+17% qoq) vs. estimate of Rs404mn.
• Despite EBITDA beat, net loss was almost in-line at Rs52mn (IDFCe: Rs46mn) because of higher tax expenses (Rs84mn vs est. of Rs15mn).
• Net debt up marginally to Rs1.33bn from Rs1.23bn qoq.

Key positives: Qoq growth in cable realisations/higher subs. rev.

Key negatives: Higher than estimated tax expenses.

Impact on financials: Update it for higher activation rev., ex-activation EBITDA lowered by 16%/7% for FY18E/19E as we build lower broadband EBITDA.

Valuations & view

Den Networks suddenly seems to be a different organisation under the new management as net realisation improvement is finally happening. Longer term net of carriage content deals would ensure improvement in ex-activation EBITDA as net realisation improves. We had upgraded Den to a Neutral, post Q2FY17 results, as operating performance had started improving. However, Jio’s wireline broadband/TV ambitions remain a potent risk, maintain Neutral with revised PT of Rs90 (6.5x FY19E EV/ex-activation EBITDA). Key risk to our call is any telco led acquisition in the wireline broadband space.