Hathway Cable & Datacom's Q3FY19 results (Neutral) - All eyes on new promoter’s future plans for HATH…

Q3FY19 result highlights

• HATH’s standalone business includes its Broadband Business only. The cable business had been demerged into a 100% subsidiary.
• Broadband segment (standalone): Revenue was up 3.3% qoq at ~Rs1.35bn (in-line). Net subscriber base improved to ~780k (vs ~770k qoq; net additions ~15k qoq) while ARPU came off by ~1.5% qoq to ~Rs662. Reported EBITDA at Rs544m grew by 17% qoq and was 1% ahead of est. However, adj. for forex fluctuations (~Rs31m gain in Q3; ~Rs72m loss in Q2), EBITDA fell ~10.3% qoq to ~Rs482m (10% miss), while adj. EBITDA margins shrank ~540bps qoq to 35.8% (IDFCe: 40.1%). Higher employee/operational expenses have led to adj. EBITDA shrinkage qoq. Higher than expected other income (~Rs86m; 12.2% qoq) and lower than expected finance costs (~Rs206m; 36.2% qoq fall), led to HATH reporting a net profit of ~Rs95m (versus loss of ~Rs59m qoq; IDFCe: PAT break-even).
• Cable segment performance: HATH focused on streamlining its systems/subscriber base to comply with the new tariff order in Q3. As a result, ARPUs remained flat qoq across phases at Rs110/105/80/62 in Phase I/II/III/IV. Collection efficiency was steady qoq at 99%. Flat ARPUs/stable subs. base (~7.1m) meant that cable subscription rev. was flattish qoq at ~Rs1.7bn (3% miss). Placement rev. grew 3.9% qoq while activation rev. fell 3.6% qoq. Cable segment rev. as a whole grew 2.1% qoq to ~Rs2.7bn (broadly in-line). Cable EBITDA stood at ~Rs361m (vs ~Rs371m qoq; 18% miss due to higher than exp. content cost), while ex-activation cable EBITDA fell marginally to ~Rs201m (vs ~Rs205m qoq). Cable EBITDA margins came off 60 bps qoq to 13.5% (IDFCe: 16.5%). Ex-Activation EBITDA margin came off 30 bps qoq to 8.0%.

Key positives: Lower finance costs in broadband business

Key negatives: Weak ARPU (both segments)

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 maintain 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).