Hathway Cable & Datacom's Q4FY18 results (Neutral) - Strength in Broadband but industry might get extremely competitive…

Q4FY18 result highlights

• Hathway results are not comparable yoy because till FY17, Hathway’s standalone business was reflective of its cable and broadband business combined whereas from Q1FY18 onwards, the cable business has been demerged into a 100% subsidiary and now the standalone business is reflective of its broadband business only.
• Broadband segment (standalone): Revenue at ~Rs1.5bn grew at a decent 5.1% qoq (in-line), despite the intensified competitive activity in the wireless broadband space. HATH added 50k net paying subscribers during Q4, taking its total paying base to 0.8m. ARPU slipped by ~1% qoq to Rs710/month as HATH continued to attempt to ring-fence its customer base against competition (both current and upcoming). New customer ARPU stood at Rs720 (vs Rs770 qoq). EBITDA came in at ~Rs590m (-1.7% qoq; 6% miss) due to forex loss of Rs49m; adj. for same EBITDA came in at Rs639m (in line) with adj. margin of 43.9% (+60bp qoq). PAT at ~Rs135m (42% miss) fell by 43% qoq led by forex loss and higher interest expense.
• Cable segment performance: Phase I/II ARPU was flat qoq (Rs108/Rs102 respectively). However, Phase III/IV ARPU improved at a healthy 6% qoq each to Rs70/55 respectively. Cable segment rev. was flat qoq at ~Rs2.5bn (in line). Cable subs. rev. grew 2.9% qoq led by Phase III/IV ARPU improvement (est. +2%). Cable EBITDA grew at a robust 11.4% qoq to ~Rs401m (vs flat qoq est.) while margin improved 160 bps qoq to 15.8%. Ex-activation cable EBITDA grew 40.3% qoq to ~Rs174m (IDFCe: Rs130m) with 7.5% margin (+210bps qoq).
• FY18 performance: Cons. rev. grew ~14% yoy to ~Rs15.3bn while EBITDA jumped ~70.6% yoy to ~Rs3.4bn (IDFCe: Rs3.7bn) with margin of 21.9% (+730bp). Cons. ex-activation EBITDA increased to Rs2.4bn  (IDFCe: Rs2.7bn) from Rs1.14bn yoy.

Key positives: Cable business performance (ARPU/Rev./EBITDA).

Key negatives: Broadband EBITDA decline qoq

Impact on financials: FY19E/20E EBITDA cut by 3.4%/7.8% 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. The key upside risk to our rating is any telco led acquisition in the cable space. Our price target is Rs34.3 (SoTP based on FY20E).