Consolidation gains steam in broadband as Mukesh Ambani's RIL readies entry

At the heart of it all is the clamour for last-mile connectivity, prompting deep-pocketed players such as RIL to go after cable companies

A year after DEN Networks was in talks with Mukesh Ambani’s Reliance Industries (RIL) for a possible sale of its broadband business, it is now rival Hathway Cable & Datacom that is exploring a similar option. While Hathway on Thursday clarified that it could not comment on market speculation and that it was simply evaluating business options from time to time, the buzz of a sale has refused to die down.

At the heart of it all is the clamour for last-mile connectivity by deep-pocketed players such as RIL, said experts, prompting it to go after cable companies, who typically have good relationships with last-mile cable operators, who liaise with consumers. For cable companies, on the other hand, it is a chance to exit while the going is good, given that laying fibre to home is capital intensive and the ability to improve average revenue per user (ARPU) in a competitive market remains weak.

For instance, Hathway's ARPU in the April-June period declined to Rs 690 from Rs 710 sequentially. DEN, meanwhile, has seen a sharper drop in ARPU to Rs 562 in the April-June period versus Rs 632. The two are also saddled with debt, implying that the ability to raise significant resources for expansion purposes will not be easy, analysts at SBI Cap Securities said. 

“Intense competition in the broadband business prompts us to be cautious. Continued investments in broadband and growing competition will exert pressure on profitability and may lead to prolonged cash burn," Dipesh Mehta, an analyst at SBI Cap Securities, had said about Hathway and Den in August, following first-quarter results of the two companies.

For the year ended March 31, Hathway's consolidated debt was nearly Rs 17 billion while DEN's consolidated debt stood at Rs 5.31 billion. While Hathway did receive board approval end-August to raise nearly Rs 1 billion as part of its endeavour to deleverage its balance sheet, this may not be enough, said analysts.

The move comes as Hathway's promoters look to pump in nearly Rs 5 billion by 2020 for growth plans. But competing with the likes of Reliance Jio, which is readying a broadband entry, requires more funds, experts said. "There is a reasonably good chance," said Abneesh Roy, senior vice-president, research, institutional equities of Edelweiss. "That cable companies could be part of the consolidation drive in broadband. This is because they are under stress and the ability to sustain themselves against bigger rivals will increasingly get difficult," he said. 

The 18-million-strong fixed broadband market in India is dominated by a cross-spectrum of players, including telecom operators (telcos) such as BSNL, MTNL, and Airtel at one end, pure-play broadband operators or internet service providers on the other, including names such as ACT and Spectra and cable companies such as Hathway and DEN in between.

Telecom experts said the cable companies had been slower to 'fiberise' in comparison to telcos and internet service providers operating in the space. This has left them vulnerable at a time when Reliance Jio is preparing to disrupt the market with bundled services and low tariffs.

Even rival Airtel is preparing for an onslaught in broadband. It is rolling out last mile connectivity to over 20 million addressable homes in 100 cities in the next few years. It is also rolling out fibre-to-home to counter Jio, experts said.

As a top executive at Spectra, which runs broadband operations in Delhi-NCR and other metro markets in the country, said, "Don't be surprised if the Airtel-Jio war spills over into broadband. Smaller firms could be potential acquisition targets because it is difficult to carry on in a market that has giants operating with deep pockets."

The battle has just begun.