Den Networks, GTPL, Hathway top picks in cable space

While there are about 5,000 MSOs in the country, the top five have a 50% share of India's cable television base

The stocks of Hathway Cable & Datacom and Den Networks saw a sharp uptick on reports that Reliance Jio was planning to acquire a company in the cable television space to improve its broadband reach. In fact, in the past few months, stocks of cable companies, or listed multi-system operators (MSOs), have been in demand (see chart). However, the road ahead may not be smooth, even as there is scope for consolidation and potential for growth.

MSOs provide fixed-line paid cable services mainly to local cable operators (LCOs), which in turn carry the feed to end consumers. They also provide broadband services, which are yet to contribute significantly to revenues for most of them. 

While fixed broadband is expected to grow at a rapid pace given the penetration of under 7 per cent compared to 20-50 per cent in key developing economies, higher competition from mobile players could limit the gains for MSOs. Further, the entry of Reliance Jio, which already has an MSO licence, could aggravate the situation for them. Rajiv Sharma of HSBC believes that the Indian residential broadband market is supply starved, significantly fragmented, and mostly served by balance sheet-constrained cable TV players.

While there are about 5,000 MSOs in the country, the top five have a 50 per cent share of India’s cable television base. This has resulted in low entry barriers and hampers their ability to drive higher monetisation from LCOs who operate the last mile. 

The other issue for some of the MSOs is the stretched balance sheets. Continued investments in expanding their networks coupled with lower subscriber realisations have translated into muted cash flows. Net debt-to-operating profit range from one time to as high as eight times (very small companies have high debt), constraining their ability to make higher investments. Though leverage ratios are expected to come down going ahead given monetisation (utilisation of investments in capex) in the phase III and phase IV and moderating investments, whether the higher cash flows generated can be enough to counter higher competition both from mobile and fixed line operators needs to be watched out for.

The management of Den Networks, which had recently demerged its broadband business to increase its focus on the segment, indicated after the June quarter results that broadband average revenue per user (ARPUs) and subscriber addition would remain under pressure because of intense competition from telecom players. 

Some of the pressure is visible in the June quarter results of two largest cable broadband players. Hathway Cable and Den Networks reported muted sequential broadband revenue growth 1-2.5 sequential growth. Given that monthly ARPUs for the broadband business is Rs 500-Rs 800 as compared to the cable TV ARPUs which are a third of this number, any downward pricing pressure on broadband segment will impact operating profit margins of the cable players. Given the continued investments and monetisation challenges, analysts at SBICAP Securities continue to prefer direct to home or DTH players over cable operators.

Among cable operators, analysts prefer GTPL Hathway as the best play in the cable space. Analysts at JM Financial in a recent report said the company, which is only profit-making MSO in the listed space, thanks to its regional domination and efficient operations would double its operating profit and triple its net profit over the next three years. They added the stock at 5.7 times its FY19 enterprise value to operating profit of 5.7 times (Den is valued at 6.6 times on this parameter) is undervalued. Given their target price of Rs 200, there is potential upside of over 50 per cent in the stock.

Hathway Cable owns about 37 per cent in GTPL among other companies, which is one reason its consolidated debt-equity is close to two times; the standalone number is less than one. On the other hand, Den is well placed with almost Rs 350 crore cash in hand, adjusting for which its consolidated debt-equity is under 0.2 times. Interestingly, these top companies make decent profit at operating level, which is more than enough to service debt. The net loss is due to high depreciation. So, what holds key is their ability to expand revenues, both cable and broadband, amidst strong competition.