Newspaper reports suggest that the government is likely to amend the Cable TV Regulation Act (Digitalisation Bill) through an ordinance and get the Bill ratified by Parliament. Key highlights of the bill include transition of all analogue cable networks to digital in four phases starting March 2012, removal of pricing caps for channels at retail level and transmission of all channels to be in digital mode only. Checks with leading multi system operators (MSOs) indicate that the bill was due to be tabled in the winter session and the Government is keen to get the bill cleared. We have assumed revenues from digitalisation to occur from 2Q FY13.
The bill would help improve subscriber declaration levels for MSOs and increase penetration of digital TV (digital cable & DTH). If cleared we expect Hathway to benefit given strong presence in Metros. Hathway has about 40% market share in Mumbai and 25% market share in Delhi. Even assuming churn of 20-30% to DTH players, we expect number of paying subscribers to increase from 1.8 million currently to 6 million over next 3-4 years. We expect revenues to double and PBIT to jump 5 times over next 2-3 years.
Hathway runs cable operations across 127 cities and towns and high speed cable broadband services across 19 cities in India. We believe Hathway is well placed to capitalise on imminent digitalisation in India. Digitalisation will enable the company to capture its true share of subscription revenues, which is not possible currently, given significant under-reporting of subscriber data by local cable operators, given the fragemented industry structure and the large analogue dominance. Given its strong foothold in markets such as Mumbai & Delhi, it stands to gain the most from digitalisation when compared to peers.
While we believe digitalisation is inevitable, even assuming the worst-case scenario of a perpetual delay in digitalisation, we see upside of 25% from current levels.
We retain our Buy rating on the stock, with a price target of R130.
While we value the stock at 6 times EV/EBITDA FY13E, we believe valuations could expand to 9 times as clarity emerges on timelines for implementation.
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