Changing content deals…. • Hathway Cable :: ICICI Securities, link

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Changing content deals….
• Hathway Cable’s revenues came in at | 262.8 crore, up 19.8% YoY,
higher than our expectations of | 238.5 crore on account of higher
activation income
• The EBITDA came in at | 40.2 crore, with margins at 15.3%, which
was higher than our expectations on account of higher revenues
• Net loss came in at | 39.3 crore aided by higher revenues, which
was, in turn, led by higher activation income
Partial benefit of digitisation accruing…
Hathway, one of the largest multi system operators (MSO) with a
subscriber base of 11.7 million subscribers has already digitised 8.4
million subscribers. It has seeded set top boxes (STB) in all the 6.8 million
subscriber households in Phase I and II cites. However, the shift to gross
billing or package linked billing has happened only in Delhi. Other metros
are facing considerable resistance from LCOs, which may delay the whole
process. Nonetheless, the company collects revenue on a per subscriber
basis in all its digitised cities. Though Hathway is negotiating with several
LCOs and has already started to bill most of them on a per subscriber
mode, current realisation is far lower than the true potential with the
Phase I market collection being ~| 95 crore. Nonetheless, subscription
income has grown since the digitisation process started and the same is
expected to grow as and when the gross billing is complete, even though
EBITDA impact will be limited owing to accounting of LCO commission.
Hathway derived | 650 crore from subscription revenue in FY14. Going
ahead, we expect it to grow at 14.4% CAGR over FY14-16E to | 850.3
crore (based on net billing and exclusive of activation revenues).
Re-negotiation of deals may lead to higher content costs…
There have been major changes in the content deals between Hathway
and the broadcasters. Zee and Star would be providing Star channels on
a cost per subscriber (CPS) basis and RIO basis, respectively. The deal
brings about some changes in the revenue model in terms of reduced
carriage and changes in costs in terms of higher content costs. Hathway
plans to take ARPU hikes in the coming quarters to offset the impact of
higher costs. However, the amount of ARPU hike benefit that will accrue
to Hathway after parting with LCO’s share remains to be seen. The
digitisation process has not panned out as smoothly as planned earlier.
With these changing deals and with subscribers seeing a sudden change
in the channel composition, they could shift to DTH players.
Broadband revenue picking up!!!
The broadband segment has been picking up quite strongly. There has
been a 32.4% YoY jump in broadband revenues to | 45.4 crore in the
current quarter. The ramp up in the segment has been coming from the
demand for DOCSIS 3.0 technology, which has a user base of 84000 at
the end of the current quarter. Owing to the increased demand, the
company was able to take a broadband ARPU increase to | 440 in the
quarter from | 405 a quarter ago. The current broadband subscriber base
stands at 0.42 million. We expect broadband revenues to grow at a 43.5%
CAGR in FY14-16E to reach | 350.3 crore from | 170.0 crore in FY14.
Digital cable revenue may get delayed; recommend HOLD
The overall opportunity from digitisation remains huge, even though its
monetisation will take longer. Moreover, newer deals could lead to
changes in revenues and margins. Owing to several uncertainties
surrounding the stock, we rate it as HOLD, valuing it at a target price of
| 320 on a DCF based methodology.

LINK
http://content.icicidirect.com/mailimages/IDirect_Hathway_Q2FY15.pdf