Hathway Cable & Datacom's Q1FY19 results (Neutral) - Headwinds in broadband on the horizon…

Q1FY19 result highlights

• HATH’s standalone business includes its Broadband Business only. The cable business has been demerged into a 100% subsidiary.
• Broadband segment (standalone): Revenue declined ~11% qoq to ~Rs1.3bn (14% miss) – the miss was driven by subscriber base being culled by ~57k (lower ARPU/lower usage; net subs loss of ~30k to 770k), which also led to blended ARPU falling to Rs690 (vs Rs710 qoq). EBITDA at ~Rs469m fell ~21% qoq (26% miss) while margins shrunk ~440 bps qoq to 36.1%. Adjusting for ~Rs84m forex loss, adjusted Broadband EBITDA margin would stand at ~42.6% (IDFCe: 41.6%). Net loss stood at ~Rs26m (interest exp up 42% yoy).
• HATH has removed ~57k subscribers who were in the 0-20 GB bracket, with avg. data consumption of ~12 GB but paying ARPU in excess of ~Rs700. Since these customers were demanding a lower ARPU (through deals) and their usage was low but they were blocking bandwidth and other back-end infra which hampered ability to serve high usage consumers, HATH chose to cull this portion of the base.
• Cable segment performance: ARPU was steady for Phase I/II at Rs108/102 resp. Phase III/IV ARPU grew 7%/5% qoq to Rs75/58 resp. HATH had taken price hikes in May in Phase III/IV whose full impact would be visible in Q2. Phase I/II ARPUs hiked in August. Collection efficiency stood at 98% in Q1. Cable subs. rev. grew 3% qoq (in-line), Placement rev. was flat qoq, while activation rev. fell 22% qoq. This led to overall Cable revenue coming in flat qoq at Rs2.5bn. Cable EBITDA came in at Rs363m vs Rs401m qoq and margin shrank from 15.8% to 14.3%. Ex-activation cable EBITDA increased to Rs187m from Rs174m qoq and margin came in at 7.9% (from 7.4% qoq).

Key positives: Cable business ARPU trend.

Key negatives: Broadband EBITDA subs/ARPU decline.

Impact on financials: FY19E/20E EBITDA cut by 1%/10% respectively.

Valuations & view

We have a Neutral rating on HATH as Jio’s impending launch will continue to weigh heavily on the broadband business (key value driver) as it could increase churn, lead to fall in ARPU and consequently margin. (although cost cutting initiatives remain impressive). The key upside risk to our rating is any telco led acquisition in the cable/broadband space. Our revised price target is Rs22 (SoTP based on FY20E; we lower our target multiple of Broadband to 10x from 12x and Cable segment target multiple is reduced by 20% to 5.6x).