Advent of digital platforms like DTH, subscriber’s demand for quality (digital) services and government policies ushered a wave of consolidation in the Indian cable TV industry. The sector is highly fragmented with around 1,000 multi-service operators (MSOs). Of late, the bigger MSOs like Hathway Cable & Datacom have been acquiring smaller players, upgrading subscribers to digital mode and rolling out broadband services to weather an increasing threat from alternative digital platforms and diversify revenue streams. Hathway is a leading MSO in the country with presence in 125 cities and household reach of 82 lakh.

As it unfolds its growth plans by strengthening and consolidating its base in the cable TV space, the company plans to mop up around Rs 480-530 crore through the current IPO. The balance Rs 186-205 crore is an offer for sale from existing investors. A loan of Rs 50 crore is also sanctioned by Vijaya Bank, which could be used towards the company’s expansion plans.

Opportunities galore

As per Media Partners Asia, DTH players are expected to grow at an average of around 32 per cent between 2007-08 and 2011-12, while cable pay TV homes are expected to grow at a modest pace of 3.5 per cent, thanks to a higher base. In absolute terms, the cable pay TVs subscriber base is expected to touch 9.5 crore by 2011-12 from 8.3 crore in 2007-08. This opens opportunities for a lot of players like Hathway who have been growing faster than the industry average during this period, through organic as well inorganic route.

For Hathway, it has acquired equity stakes in 21 MSOs and in around 500 LCOs (local cable operators), and this has partly helped the company to grow its subscriber base at 32 per cent annually since 2006-07. Going ahead, with growth prospects looking bright, the company is aiming to acquire cable operators, either through a complete equity buyout or by entering into joint ventures. Hathway proposes to spend around Rs 245 crore from the issue proceeds towards acquiring new customers.

In the digital cable TV space its subscriber base has grown 3.6 times since 2006-07 to about 10 lakh currently, which is the largest in the country. Going ahead, it intends to double its set-top box count to around 20 lakh by 2010-11. Another growth potential area is cable-based broadband. Hathway has been able to cross-sell broadband services to its cable TV customers; this business has grown at around 43 per cent on an average since 2006-07. It is estimated that broadband services would continue to contribute around 16-18 per cent of Hathway’s consolidated revenues in 2010-11.

The company plans to spend around 42 per cent or Rs 240 crore of the IPO proceeds towards digitalisation of its existing infrastructure and development of broadband services.

Resolving issues

The industry is currently plagued by huge under-reporting of subscribers and revenues by the LCOs who act as “last mile service providers”. For Hathway, out of the estimated household reach of 82 lakh, its paying subscriber base stands at around 16-16.1 lakh. Little wonder that players like Hathway and Den have been subsidising the cost of set-top boxes required to upgrade customers to the digital platform. While such a move involves capital expenditure in the initial stage, it is helping players overcome the menace of under-reporting.

Depreciation blues

During FY07-09, the company’s revenues grew at an average of 48 per cent, with cable TV revenues growing at 53 per cent. At the operating level, the company has been showing an improvement in the margins. EBITDA margins improved from 5 per cent in 2007-08 to 15 per cent in 2008-09, and further to 20 per cent in the first half of 2009-10. The company is benefitting on account of the economies of scale, leading to lower operating expenses.

For the first half of 2009-10, Hathway made a profit after operating expenses and interest costs of Rs 43.9 crore. However at the net level, the company has been incurring losses primarily on account of higher depreciation costs. Its net loss for the first half of 2009-10 stood at Rs 27.1 crore.

While depreciation costs may continue to inch up due to the company’s expansion and capex plans, Hathway proposes to clear loans to the tune of Rs 97 crore from the issue proceeds, which would nearly halve its debt-equity ratio to 0.3 post-issue.

Conclusion

The ability to deliver digital content and value-added services like broadband internet through a single source should help players like Hathway face competition from the DTH players in the long-run. The scale-up of operations, both through the organic and inorganic route, besides up gradation of analog cable consumers to the digital platform could lead to better growth rates and revenues for the company.

Hathway’s revenues are expected to go past Rs 1,000 crore in 2010-11 from around Rs 700 crore in 2009-10 (based on annualised first half revenues). Although the company might do well at the operating level, estimates suggest that the company could start making meaningful profits only from 2010-11.

Looking at comparable peers like Den, which is of similar size but enjoys better operating profit margins, the stock looks richly valued at a PE of 35 times (at lower price-band) its estimated 2010-11 earnings. However, given the growth potential in the sector, pan-India presence and future prospects of the company, investors with a two-three year perspective may consider investment at the lower IPO price-band.