Sell Hathway Cable; target of Rs 42: ICICIdirect

ICICIdirect.com's report on Hathway Cable

Hathway Cable reported revenues of Rs 264.4 crore vs. our expectation of Rs 277.6 crore, on account of lower-than-expected subscription revenues that remained flattish QoQ. However, broadband revenues came in better-than-expected, at Rs 65.1 crore, versus expectation of Rs 57.7 crore. The EBITDA came in at Rs 32.7 crore, with margins at 12.4%, which was lower than our expectation of Rs 35.6 crore. Net loss, however, came in at Rs 44.0 crore, vs. expectation of Rs 52.6 crore on account of lower-than-expected depreciation & interest expense.

The margins in the quarter were below our estimates despite the higher-than-expected growth in the high margin contributing broadband revenues. The subscription revenues remained flat while administrative expenses came in higher-than-expected. Going ahead, margins will benefit slightly by increased seeding of boxes and a higher proportion of activation income in FY16 and FY17 due to Phase III & IV seeding. However, the newly signed content deals could impact content costs and, hence, margins. We have factored in consolidated EBITDA margins of 16.9% and 19.5% for FY16E and FY17E, respectively.

Though the management has guided for better monetisation in Phase I and II markets, we believe the shift would be very gradual. The core business model has not demonstrated any substantial benefits from digitisation. There has been increased focus by the company on growing its broadband business. While the broadband business is EBITDA accretive, it is exposed to competitive pressures from Reliance Jio. Owing to several uncertainties surrounding the cable space and increasing losses, we downgrade Hathway Cable to SELL rating, valuing it at a target price of Rs 42 on a DCF based methodology.

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