Will gains from GTPL Hathway IPO be enough?

Given Hathway's high leverage and investments in broadband business, sale proceeds appear minuscule

Hathway Cable and Datacom (Hathway) was the largest gainer in Monday's trade with the stock going up as much as 5 per cent intra-day. A positive report by leading foreign brokerage Morgan Stanley coupled with the upcoming initial public offering (IPO) of its subsidiary GTPL Hathway (GTPL) are the key triggers behind this rally. Hathway is looking to raise as much as Rs 120 crore from the sale of shares in GTPL, which will pare its stake in the subsidiary from the prevailing 50 per cent to 36 per cent. While there is no clarity on how it plans to use this money, analysts believe it could look at toning down its debt a bit or invest in its broadband business. But, this amount is too small to have a meaningful impact on Hathway. The company is focusing on growing its broadband business, which entails slightly higher investments than the cable business. Given its high debt of about Rs 1,700 crore, investors would watch out how this expansion is funded. 

Additionally, the issue will lead to value unlocking for the parent company. Analysts at UBS Securities, for instance, ascribe a value of Rs 15 to Hathway’s stake in GTPL on a post-IPO basis. The brokerage has started valuing Hathway on a sum-of-the-parts basis now and has also raised its price target by 22 per cent in May to Rs 55 apiece. GTPL offers cable TV and broadband services in regional pockets and contributes a third of Hathway's consolidated revenues. GTPL also plans to raise money through issue of fresh shares and deploy it to halve its debt by Rs 230 crore, which will aid its profits. This, in turn will also rub off favourably on the parent company. 

Stronger than expected Ebitda margin was the key highlight of Hathway's March quarter results and were a function of lower employee costs. The company's revenues grew in line with the Street’s estimates but strong margins led to net losses being much lower than expected. The company needs to improve its average revenue per user consistently in order to improve its financials even further. 
 

Though the company stands to gain from digitisation, rising competitive intensity from the likes of DD Free Dish, particularly in Phase IV of digitisation, will be a key monitorable. Possible entry of Reliance Jio in the broadband business could lead to higher pricing pressure for the incumbents and impact their prospects. 

Most analysts covering the stock have a buy rating and their average target price of Rs 49 indicates upside potential of 17 per cent from current levels. But, any disruption caused by relatively new players is a key downside risk going forward.