MUMBAI: HSBC Securities and Capital Markets’ latest report on multi system operator (MSO) Hathway Cable & Datacom has improved its rating from ‘normal’ to ‘overweight’.
While it continues to value Hathway using a DCF based approach, it has raised the target price from Rs 276 to Rs 432. This is on the assumption of 12.5 per cent WACC, cost of equity of 13.5 per cent and cost of debt of 11 per cent.
One of the main reasons for this is the expectation of increase in Average Revenue Per User (ARPU). HSBC expects gross billing to increase in phase I markets by around 15 per cent and phase II by around 10 per cent over the next two quarters. Gross ARPU is estimated to grow at 16 per cent CAGR from its earlier 8 per cent.
Increase in ARPU would mean a near 10 to 20 per cent rise in cost, despite the incentives that are being offered by Star’s new RIO deals. The report also says that moving to prepaid would be necessary, even if it is restricted to Star channels for now as in the long run it would allow MSOs to scale up to full prepaid gradually over the next 18-24 months.
“LMOs will need to move to a prepay backend. Both these factors are positive for the sector and in our view build a long-term case for ARPU improvement, fewer bad debts, reducing friction between MSO and LMO relations, improving the industry structure and allowing the industry to benefit from sector consolidation,” it states.
The report also highlights that if Star is successful in reaping benefits out of its new RIO policy, other big networks may follow suit, though not in the immediate 12 months.
This apart, HSBC also sees broadband ARPUs increasing with a more robust DOCSIS 3.0 platform but with a slight concern on the slow pace of subscriber net addition. The delay in digitisation is positive for cable TV industry to consolidate market share in the first two phases. Side by side, issues such as revenue share and prepaid billing can be sorted and easily applied in phases III and IV.
HSBC has raised its medium- term EBITDA estimates by 11 per cent (FY16e-21e CAGR of 13.5 per cent), cable TV ARPU assumptions by 12 per cent (FY16e-21e CAGR of 11 per cent) and broadband ARPU by 8 per cent for the same period.
