Hathway Cable & Datacom IPO Analysis

In a highly competitive and capital intensive business

Due to the nature of business, the company continues to make losses in spite of being one of the oldest players in the analogue cable industry and the largest player in cable broadband

Hathway Cable & Datacom (Hathway), promoted by the Rahejas, is the leading cable television services provider in India as well as one of the leading cable broadband services providers The company offers analog and digital cable television services across 125 cities and towns and high-speed cable broadband services across 18 cities. The company owns and operates cable networks that reach approximately 8 million cable homes across India, supported by 71 analog head-ends, 19 digital head-ends and more than approximately 15,000 km of HFC network. The Company has acquired interest in more than 21 multi systems operators (MSO) and independent cable operators (ICO).

As of November 30, 2009, Hathway had 13,47,491 subscribers for its analog cable television services and 10,02,482 digital cable television subscribers, 2,59,392 Conditional Access System (CAS) subscribers and 7,43,090 voluntary subscribers. As of November 30, 2009, it had a total of 16,06,883 paying subscribers, which comprised the 13,47,491 analog subscribers and 259,392 CAS digital subscribers. As of December 31, 2008, its digital television subscriber base constituted approximately 42% of the total digital cable television market in India (Source: MPA Report).

In addition, the company had 3,22,135 broadband subscribers as of November 30, 2009. As per the company, it is currently India's largest cable broadband services provider, with 9,64,383 two-way broadband enabled homes passed, as on November 30, 2009. As of December 31, 2008, the subscriber base constituted approximately 54% of the total cable broadband market in India (Source: MPA Report).

In addition to its cable television and broadband service offerings, the company also generates advertising and airtime revenue from advertisements aired for and on behalf of channels owned by third parties, such as the Hindi movie channel, "Cine Channel", and the music channel, "iTV".

The issue includes fresh issue of shares as well as offer for sale by existing shareholders. Monet, holding 162.96 lakh shares at an average cost Rs 162.45 per share, is selling 72.10 lakh shares and its post issue share holding would be 90.86 lakh shares (6.36% of post issue share capital). Morgan Stanley Principal Investments Mauritius (MSPI), holding 46.41 lakh shares (on conversion of convertible debentures) at an average cost of Rs 212.80 per share, is selling 5.40 lakh shares and its post issue share holding would be 41.01 lakh shares (2.87% of post issue share capital).

The net proceeds of the issue would be utilized to acquire MSOs and local cable operators (LCO), development of digital cable television infrastructure & services, development of cable broadband services, repayment of debt and general corporate purposes.

Strengths

* As per FICCI KPMG Report 2009, the Media & Entertainment Industry is projected to grow at a CAGR of 12.5% over CY2009–13 to Rs 1052 billion by end CY 2013. The Television industry is expected to grow at CAGR of 14.5% over CY 2009–13 to Rs 472.6 billion. As per Pricewaterhouse Coopers (PWC)'s India Entertainment & Media Outlook 2009 Report, the TV distribution segment grew at CAGR of 18.8% to Rs 150 billion over CY2004-2008, contributing to 60% of the total television industry revenue of Rs 244.7 billion for CY2008. The television industry expected to grow at CAGR of 11.4% over CY2009 – 13 to Rs 420 billion. The distribution pie is expected to grow at CAGR of 10.8% to Rs 250 billion by end CY2013.

* The number of TV owning households would grow to 149 million by end CY2013. The cable households would increase from 72 million in CY2008 to 90 million in CY2013. Of this, the number of digital cable homes would increase from 2 million in CY2008 to 35 million in CY2013. The increased adoption of digitization would mean higher declaration leading to higher revenues.

* There were 623,000 cable broadband internet subscribers, or 11.3% of total Indian broadband internet subscribers, in India in 2008. The MPA Report 2009 predicts that the number of cable broadband internet subscribers will increase to approximately 2.30 million, or 16.5% of all Indian broadband internet subscribers, by CY2013.

Weaknesses

* The television distribution is highly competitive and is often subject to rapid and significant changes in the marketplace, technology and regulatory and legislative environments. The market is very fragmented with approximately 50,000 LCOs and 1,000 MSOs. Also, with increased adoption of Direct to Home (DTH) competition has increased further. The DTH subscriber base is expected to grow from 10 million in CY2008 to 28 million in CY2013.

* The cable distribution industry is prone to under-reporting by LCOs of the number of their subscribers thereby impacting revenues and results of operations.

* LCOs are the "last mile" link that connects the company's cable lines to the homes of the subscribers. The affiliation agreements are typically valid for a period of one year. However, an LCO may terminate the agreement on 30 days' notice. Also, the service quality of LCOs would also impact the subscriber preference.

Valuation

The company has seen good growth in revenues and operating profit over the last four years. Revenue reported a CAGR of 34.5% over FY2005 to FY2009 and operating profit improved from a loss of Rs 6.79 crore to a profit of Rs 93.9 crore, a margin of 14.2%. Though, the revenue for the six months ended September 2009 has been slower, the operating margin improved further to 19.1%. The company has seen a drop in both paid cable subscriber base and cable broadband base in the nine months ended December 2009. As per the management, the dip in cable subscriber base is mainly due to transitioning at a location from non-CAS to CAS. However, this could be taken an indicator of competition intensifying in the sector from competing players and competing platforms like DTH.

At issue price of Rs 240 – Rs 265, EV/sales as of March 31, 2009 comes to 5.3 – 5.5 times. Annualizing six months' financials, the EV/sales drops to 4.6 – 5 times. Den Network, which was listed in November 2009, has an EV/sales of 2.8 times on nine months' annualized basis. Wire & Wireless (India) is trading at EV/sales of 3.8 times on TTM basis.

Among the three companies, Hathway and Den Networks are positive at the operating level. On annualised EV/EBITDA, Hathway is trading at 24.2 – 26.2 times, whereas Den Network is trading at 29.3 times. Den Networks is a three-year old company, whereas Hathway has a long history in the cable business. It is also the leader in cable broadband services, whereas Den Networks is setting up its cable broadband service.