Hathway Cable & Datacom's Q2FY19 results (Neutral) - All eyes on new promoter's future plans for HATH…

Q2FY19 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 was flat qoq at ~Rs1.3bn (3% miss) – HATH continues to churn out low data consumers (subscriber base stable at ~770k qoq; 30k customers lost in Q2 in addition to 2% monthly churn rate), while ARPU fell 3% qoq to ~Rs672 (due to subs down-trading to lower ARPU packs given that bandwidth limit has been increased across price points). EBITDA fell ~1% qoq to ~Rs466m (11% miss) due to forex fluctuations of ~Rs72m, while EBITDA margin declined ~40bps qoq to 35.7%. Adjusting for forex fluctuations, margin would have been at 41.2% (IDFCe: 39%) and EBITDA at Rs538m would be 3% above estimate. Net loss stood at ~Rs59m (vs ~Rs26m loss qoq) and expectation of profit of Rs33m as finance costs rose 33% qoq and due to the forex impact.
• Cable segment performance: ARPUs registered growth across phases in Q2. HATH had taken price hikes in May in Phase III/IV, while Phase I/II ARPUs were hiked in August. In Q2, Phase I/II/III/IV ARPUs rose 2%/3%/7%/7% respectively to ~Rs110/105/80/62 per month (net of taxes). Collection efficiency improved to 99% (vs 98% qoq). Cable subs rev. grew by a healthy 5% qoq to ~Rs1.7bn (in-line), Placement rev. grew 1% qoq, but Activation rev. fell 6% qoq. Thus, overall cable segment revenue grew 3% qoq to ~Rs2.6bn (in-line). Cable EBITDA came in at ~Rs371m vs Rs363m qoq, while margin shrank from 14.3% to 14.1%. Ex-activation cable EBITDA, was in line at ~Rs205m (vs ~Rs187m qoq), while margin improved to 8.3% (vs 7.9% qoq).

Key positives: Cable net-ARPU trend, high underlying Broadband margin..

Key negatives: Broadband subscriber additions stalled/ARPU decline.

Impact on financials: Unchanged.

Valuations & view

The high cash infusion (of Rs29bn) by RIL would alleviate two key issues (1) reduce HATH’s leverage, and (2) reduce possible competitive intensity from Jio Broadband; however, our key question on whether HATH 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. As a result our financials do not account for any economic benefit arising from the fund raise and given limited clarity we reinstate our Neutral rating on HATH (with a SoTP based price target of Rs30; cable/Broadband segment being valued at 7.5x/12.5x FY20E EV/EBITDA respectively).