Den scores over Hathway on prospects, valuations

Den Networks expected to benefit more from next phase of digitisation

With some progress on the issues that have hindered cable digitisation in the first two phases and rollout of the third phase over the next couple of quarters, cable companies are expected to log strong growth in subscriber base in the next year. Among the largest beneficiaries in the digital cable space, analysts are more bullish on Den Networks than Hathway Cable.

Den Networks is expected to benefit more from the next phase of digitisation given its larger presence in the smaller towns as well as attractive valuations. While both Den and Hathway are well funded to implement the digitisation process, given the valuation gap, Den could witness decent upsides as the gains from digitisation start reflecting on its financials. Abneesh Roy, associate director (research) at Edelweiss Securities, says: “Den has always traded at a discount in Hathway, as it does not have a broadband presence. However, Den is a net cash company, while Hathway is a net debt company. Thus, we believe Den is an attractive buy post its further under-performance with respect to Hathway.”

While the mandatory digitisation has been fairly successful (phase-I and -II) as far as seeding of set-top-boxes (STBs) is concerned, the key hurdles thus far have been largely on the back-end, especially billing, with delay in submission of customer application forms. Further resistance from local cable operators (LCOs) to implement the billing process capped realisation gains for these companies.

Thanks to a pro-active stance adopted by the regulators (Telecom Regulatory Authority of India, broadcasting ministry), these issues appear to be nearing an end. Multi-system operators (MSOs) started monthly billing of some digital clients in December (for November) and they expect this to reflect in their financials over the next few quarters. Most brokerages, thus, remain positive on the prospects of these companies. Notably, the divergent stock performance by the Hathway and Den scrips provides an interesting stock picking opportunity.

Hathway currently has 11 million television subscribers and it expects to take it to 15 million over the next three or four years. It has installed STBs at 7.6 million households. While the company's subscribers have gone up thanks to digitisation (up 25.3 per cent, compared to the September 2012 quarter), the benefits are not fully captured in its financials due to delayed billing (average revenues per user, or Arpu, unchanged at Rs 310, stagnant subscription revenues). Analysts, earlier expecting the gains to reflect in the current financial year numbers, now believe these benefits will only come by end-FY15.

"Hathway will be able to monetise its phase-I and -II STB investments over FY15, reaching close to full monetisation by the fourth quarter of FY15. This could help the firm reach positive free cash flow by FY16," says Ankur Rudra, media analyst at Ambit Capital.

With monthly billing kicking off in December, the company expects to start witnessing higher subscription revenues from the March 2014 quarter onwards. The firm also witnessed a sequential growth of 20 per cent in carriage fees primarily due to expansion into new territories. Not surprisingly, the stock has held up fairly well and continues to trade closer to its 52-week high. The scrip now trades at FY15 estimated price/ book value ratio of 3.3 times. Of the 18 analysts polled by Bloomberg since November, 10 have a ‘buy’ rating, three have a ‘hold’ rating and the rest have a ‘sell’ rating. Their average target price stands at Rs 298 a share, indicating an upsides of just eight per cent from current levels.

Den Networks has a total subscriber base of 13 million, of which 5.3 million are digitised. Its subscriber base has grown 18 per cent over the past year. The company will be a key beneficiary of Phase-III and IV of digitisation, as 55 per cent of its subscribers belong to these markets. With monthly billing starting December, the company should also witness an uptick in subscription revenues from the March quarter onwards. Den Networks, too, witnessed improvement in its carriage fees in the September quarter (up nine per cent sequentially), driven by new subscribers and more numbers of channels. Arpu has remained unchanged at Rs 180 over the past year. The stock has corrected significantly from its 52-week high of Rs 238 and appears attractively valued as compared to Hathway.

Of the seven analysts polled by Bloomberg since November, four have a ‘buy’ rating, two have a ‘hold’ rating and one has a ‘sell’ rating. Their average target price stands at Rs 208, indicating upsides of about 40 per cent from current levels. The stock trades at 1.8 times FY15 estimated book value and a sharp discount (44 per cent) to Hathway. Even on an EV/Ebitda basis, the stock trades at a 50 per cent discount.