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Den Networks' Q3FY18 results (Downgrade to Underperformer) - Business fundamentals more than priced in…

Q3FY18 result highlights (Ind AS)

• Cons. rev. came in flat qoq at Rs3.3bn (4.4% miss due to weaker than exp. broadband performance and lower carriage revenue qoq).
• Cable subs. rev. grew 6.1% qoq (broadly in line with IDFCe of 7.5%). While net realization improved across phases (Phase I/II/III/IV net ARPU at Rs120/96/64/56 vs Rs117/90/61/46 respectively), carriage rev. slipped marginally to Rs850mn (3.4% qoq decline; IDFCe: 1% qoq growth). Activation rev. declined 2.7% qoq (IDFCe: flat qoq).
• Broadband rev. declined sharply by 10.5% qoq to Rs170mn (15% miss) led by competitive pressures as ARPU fell 12.8% qoq to Rs579.
• Net (of carriage rev.) content cost increased 11% qoq and 9MFY18 net content cost increased by 55% yoy.
• Given flat top-line performance, EBITDA fell 3.3% qoq to Rs788mn (16.4% miss) while EBITDA margin declined 90 bps to 24.0%. Ex-Activation EBITDA came in at Rs428mn (25.3% miss).
• Although interest and D&A expense came in lower (thus leading to a PBT growth of 10.7% qoq, higher taxes and EBITDA miss led to a net loss of Rs32mn (post minority interest) vs. exp. of Rs106m profit.
• Den disclosed its active (paying) subs. base for the first time and it stood at 7.2m for FY17 and 7.4m for Q3FY18. Another ~1m active subs base sitting in its subsidiaries which is not consolidated due to Ind-AS.

Key positives: Continued qoq improvement in Cable ARPUs.

Key negatives: Weak broadband & carriage rev. performance.

Impact on financials: Cut ex-activation EBITDA by 21%/12% for FY18E/19E to factor in the big miss in this quarter. Introduce FY20E financials.

Valuations & view

DEN, under the changed management, has led the industry in monetisation which is expected to continue, albeit slowly. Its sharp stock price increase (of 42%) since Q2FY18 results has not only priced this in but also media reports of Reliance Jio looking to acquire DEN. But, we believe, that Jio’s primary interest is in owning the last-mile and wireline broadband, in both cases DEN is very weak. Moreover, we expect sharp increase in net content costs from here on. Jio’s broadband/TV ambitions remain a potent risk and the sharp price increase makes us downgrade DEN to Underperformer with revised PT of Rs111 (roll-forward to 6.5x FY20E EV/ex-activation EBITDA). Key risk to our call is any telco led acquisition in the wireline broadband space.