Monetization of cable subs continues to disappoint and is an industry-wide issue. However the broadband business seems to be tracking well both in terms of subs addition and ARPU uptick. We are overweight on the stock due to cheap valuations and potential for strong EBITDA growth.
ARPU (net of taxes and LCO share) in Ph I was Rs 102 and in Ph II was Rs 83 in F3Q16. While the company hopes to exit FY16 with Rs 110-115 in Ph Iand Rs 100 in Ph II, this could be aggressive in our view. Also, it now expects Ph III monetisation to be pushed out by a quarter to F2Q17. The company, however, seems to be taking steps to improve monetization by introducing prepaid billing for its primary subs and launching Hathway Connect wherein LCOs can be closer to consumers and hence improve their service levels.
Hathway has witnessed reasonable traction in its broadband business which delivered 56% y-o-y growth in broadband sales in F9M16. It added 50,000 net subs in 3Q of which half were on Docsis 3. The company is now witnessing a monthly net add run rate of 20,000 subs (versus 17,000 in 3Q). Broadband ARPU was Rs 631 in 3Q up 29% y-o-y.
The cuts are primarily on account of- pushout of monetization of Ph III subs to F2Q17 from F1Q17; lower cable TV ARPU assumptions for Phases I and II and higher operational expenses as has been the trend in 9MFY16. The impact on net earnings, however, is exaggerated due to a low base and high financial leverage. Our price target change is largely a function of lower EBITDA.