Hathway Cable & Datacom's Q4FY19 results (Neutral) - All eyes on new promoter’s future plans…

Q4FY19 result highlights

• Broadband segment (standalone): Revenue fell 1.9% qoq at ~Rs1.3bn (3% miss). Net subscriber base improved to ~810k (vs ~780k qoq; net additions ~30k qoq) while ARPU was flat qoq at ~Rs662. We believe the revenue decline was due to lower oth. op. income (vs sequential quarter), while operating expenses rose ~7.7% qoq. As a result, EBITDA fell 17.5% qoq to ~Rs423m (20% miss). However, higher than expected other income (4x qoq; 8x vs expectation) led to adjusted PAT coming in at ~Rs296m (vs our est. of break-even). PAT is adjusted for ~Rs845m exceptional items (which include impairments on receivables and equipment) and another ~Rs2.7bn in deferred taxes.
• Cable segment performance: Cable subscription rev. was fell 2.2% qoq at ~Rs1.6bn (1% miss), mainly due to TRAI tariff order implementation issues (ARPU/subs data not disclosed). Placement rev. fell 27.7% qoq while activation rev. fell 1.8% qoq. Cable segment rev. as a whole fell 9.7% qoq to ~Rs2.4bn (8% miss). Cable EBITDA stood at ~Rs411m (vs ~Rs361m qoq; 20% beat on strong cost controls), while ex-activation cable EBITDA rose ~26% qoq to ~Rs254m (vs ~Rs201m qoq). Cable EBITDA margins rose 350 bps qoq to 17.0% (IDFCe: 13.0%). Ex-Activation EBITDA margin improved 320 bps qoq to 11.2%.

Key positives: Cable EBITDA margins rose 350 bps qoq to 17.0%.

Key negatives: Weakness in both Cable/Broadband revenue.

Impact on financials: 9% cut in FY20E EBITDA. Introduce FY21E financials.

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. Jio (along with DEN/HATH) would be executing its market roll-out of Jio Broadband in the coming months (although details remain under wraps). Also, the promoter holding (Jio + existing promoter), post the open offer, now stands at 94.1%, and we believe that it is highly likely that HATH would be merged with one of Jio’s holding entities in the near future. We maintain our Neutral rating on HATH with a target price of Rs 28 (roll-over to FY21E estimates) until further clarity on business strategy.