Hold Siti Networks; target of Rs 16: JM Financial

JM Financial's research report on Siti Networks

Siti stock has declined 38% since we initiated with a Sell nine months ago. We lower our TP to INR 16 (Jun-19) from INR 19 (Mar-19), noting poor growth outlook for broadband, but upgrade Siti to a Hold, based on: (1) in-line, 52% EBITDA growth in FY18, albeit off a low base; (2) sustainable turnaround in video/cable business, driven by improving monetisation [subscription revenue up 41% yoy in FY18], moderation in content cost growth [c.16% vs. 41% in FY17], and optimisation in non-content opex or NCO; (3) a modest 3-4% upside potential on TP; and (4) reasonable valuations—just under 7x EV/EBITDA on FY20 forecasts. Last month, Madras High Court upheld TRAI’s TV tariff order [TTO]. Notwithstanding further court delays (Tata Sky, Airtel have challenged the TTO in Delhi HC), we see limited upside potential from any future implementation as: (1) 15% cap on bouquet discount has not been upheld—may result in TTO dilution; (2) real bottleneck is/remains getting a higher/fair share of customer ARPU from LCOs; and (3) our forecasts already bake-in a significant growth in net video ARPUs (i.e. net of content and carriage)—we forecast Siti’s net ARPU to increase from INR 42/month in FY18, to INR 50/55 in FY20/22. The only material TTO upside could be front-loading of ARPU growth for the MSOs. Downside risk to our Siti TP is higher capex.

Outlook

We believe the company needs to focus on minimising video capex and boosting BB investments with renewed focus, or pursue M&A opportunities to create LT shareholder value.

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