Analyst Corner: Maintain ‘hold’ on Den Networks, target price Rs 74

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Published: July 13, 2019 12:52:50 AM

Considering the tariff regime is in transition and the upcoming rollout of JioGigaFiber, we retain the 12- month forward EV/EBITDA of 8x and TP of Rs 74. Maintain ‘hold’.

However, potential benefit from the RJIO deal remains the key variable. Reliance (via group entities) owned 78.62% of Den Networks as on 31 March, 2019.However, potential benefit from the RJIO deal remains the key variable. Reliance (via group entities) owned 78.62% of Den Networks as on 31 March, 2019.

Den Networks (Den) reported Q1FY20 revenue in line with our estimate, but undershot on EBITDA. Key highlights: i) consolidated revenue grew about 15% Q-o-Q (flat YoY). ii) cable subscription revenue increased 8% Q-o-Q supported by the change in cable pricing in the wake of the tariff order and a pickup in subscription demand due to the cricket season. Iii) content cost shot up 26% Q-o-Q, iv) EBITDA expanded 10% Q-o-Q, but EBITDA margin contracted 50 bps Q-o-Q.

Considering the tariff regime is in transition and the upcoming rollout of JioGigaFiber, we retain the 12- month forward EV/EBITDA of 8x and TP of Rs 74. Maintain ‘hold’.

The management did not disclose cable business’s ARPU and subscriber count for Q1FY20 (similar to its stance in the previous quarter).

The last disclosed subscriber count was 7 million in Q3FY19. Overall, the cable business revenue grew about 8% Q-o-Q (flat Y-o-Y). Management also did not disclose the broadband business’s ARPU and subscriber count for Q1FY20. We believe competition from Airtel TV, Tata Sky and the expanding OTT space can exert pressure on cable ARPU.

However, potential benefit from the RJIO deal remains the key variable. Reliance (via group entities) owned 78.62% of Den Networks as on 31 March, 2019.

Reported net profit stood at Rs 14.30 crore, primarily due to other income of Rs 51.20 crore (other income for FY19 stood at Rs 46.30 crore). Gross debt as on 30 June, 2019 stood at Rs 404 crore, against Rs 482 crore as on March 31, 2019, with the company’s overall net debt standing at Rs 1,924 crore.

While the deadline for subscriber migration to the new tariff regime has elapsed, we will keep an eye out for further recalibration of bouquets offered to customers and customer migration to OTT platforms. Taking into account RJio’s plan to enter the distribution space and potential benefits thereof, we retain the 8x 12-month forward EV/EBITDA, which yields a TP of Rs 74. We maintain ‘hold/SU’. The stock is trading at FY20/FY21E EV/EBITDA of 6.4x/5.5x.

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