Hathway Cable & Datacom's Q3FY18 results (Neutral) - Decent performance across both Broadband & Cable…

Q3FY18 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 Rs1.4bn (1.7% beat), grew by 5.7% qoq, a good show in the current context of high competitive activity in the wireless broadband segment. It added 50K net paying subscribers and moved total paying base to 0.75m; ARPU stayed flat qoq at Rs717 as it gave higher discounts to longer-term (6/12 months) customers to ring-fence them against upcoming competition (Jio launching wireline broadband); new customer ARPU stands at Rs770. EBITDA stood at Rs601m (7.5% beat) with a margin of 43.3% (up 310bp qoq). This is a strong performance as it continues to drive cost efficiencies. PAT at Rs239m (+70.4% qoq, IDFCe: Rs119m) was higher than expected due to strong EBITDA performance and higher other income (Rs 59m vs est. Rs25m).
• Cable segment performance – management estimates: ARPU improvement was seen across phases, but was especially sharp in Phase III (+13.8% qoq to Rs66) and Phase IV (+26.8% qoq to Rs52). Phase I improved 2.9% qoq to Rs108 while Phase II rose 4.1% qoq to Rs102. Cable rev. grew 3.5% qoq to Rs2.5bn (+1% beat). Cable subscription rev. grew by decent 5.9% qoq (led by ARPU improvements across Phases; 4% qoq est.). Cable EBITDA came in at Rs360mn (vs Rs331m qoq) while margin improved from 13.5% to 14.2%. Ex-activation cable EBITDA increased to Rs124m (vs Rs73m qoq) with margins improving 210 bps qoq to 5.4%.

Key positives: Cable net ARPU improvement in Phase III/IV, broadband margin.

Key negatives: N/A

Impact on financials: FY18E/19E EBITDA increased by 9%/4% respectively. Introduce FY20E financials

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). The key upside risk to our target price is better-than-expected placement revenue in the new tariff order regime and any telco led acquisition in the cable space. We roll-forward our valuation to FY20E with a revised SOTP target price of Rs43.