Hathway Cable & Datacom's Q1FY20 results (Dropping coverage) - Cable stabilizes post NTO; Future uncertainty prevails…

Q1FY20 result highlights

• Broadband segment (standalone): Revenue grew 1.0% qoq at ~Rs1.3bn (3% miss), mainly driven by subscriber additions (~30k qoq net additions), while ARPU fell ~1.8% qoq to ~Rs650. Weak performance on revenue was compounded by higher operating expenses (staff +13.9% qoq; operations +23.5% qoq). As a result, EBITDA fell 9.6% qoq to ~Rs383m (21% miss). APAT came in at ~Rs195m (-33.9% qoq) due to higher finance costs (+45.9% qoq) and tax payments (first time since FY10). However, higher than expected other income (+40.8% qoq) meant that APAT beat our expectations by 37%.
• Cable segment: Cable revenue grew ~27.1% qoq to ~Rs3.2bn on account of ARPU tailwinds post NTO and customers uptrading for sports packs to watch the Cricket World Cup during the quarter. Subscription revenue grew ~27.5% qoq to ~Rs2.2bn, while Placement revenue grew ~35.2% qoq to ~Rs787m. Activation revenue was flat qoq at ~Rs153m. However, overall cable business costs grew ~30% qoq, leading to EBITDA growth of only ~14.3% qoq at ~Rs549m. Ex-activation EBITDA grew ~22.5% qoq to ~Rs396m.

Key positives: Cable revenue growth of ~27% qoq.

Key negatives: Broadband ARPU falls; Cable expenses up ~30% qoq.

Impact on financials: N/A

Valuations & view

In the cable division, Q4FY18 was impacted because of disruptions on the ground led by NTO implementation and Q1FY20 has been better than our estimates as we were expecting the impact to continue for at least one more quarter. The superlative cable revenue growth (although costs grew faster) needs to be monitored if it’s sustainable or if it was benefited through one-offs due to various sports tournaments telecast in June. We also believe that DTH is gaining ground vs MSOs post NTO implementation as it is offering more value (higher no of channels. Given that Reliance Industries now owns ~72% stake in the company (~94% promoter holding in total), it is highly likely that HATH would be eventually subsumed into Reliance Jio as it would be more efficient from a structuring perspective. We believe that Jio will use HATH as a mere infrastructure facilitator (thus entailing them to earn distributor margins) while capturing all future economic value creation for itself. As a result, we drop coverage on HATH. Our last rating on the company was Neutral (TP Rs28). Our estimates have not been updated for Q1FY20 realities and should not be used for making any investment decision.