Hathway Cable - IPO

Given Hathway Cable's major expansion plans, it seems to be a good bet for investors

 

IPO details
Price Band: Rs 245-265
issue size: Rs 735 crore
Date: Feb 9 - 11

HATHWAY Cable & Datacom is entering the capital market with an offer of close to 2.7 crore shares at a face value of Rs 10 each. Established in 1995, the Rajan Raheja Group promoted company is a leading cable television services provider in India offering analogue and digital cable television services across 125 cities. It also provides high-end cable broadband services in 18 cities.

BUSINESS AND GROWTH PLANS:

The company has a decade of experience in providing cable television related services. It is a well known brand among broadband service providers and has around 3,22,000 subscribers as of the December 2009 quarter. 

   The company plans to mop up around Rs 735 crore (at the upper price band) through this initial public offering. Going forward, the company intends to expand its broadband penetration, going directly to the customer instead through a cable operator and digitise its existing analogue subscribers. Of the total proceeds, the company plans to use close to Rs 243 crore for acquisition of new customers. It also plans to invest around Rs 156 crore in digitising its analogue networks. Besides, the company also plans to invest Rs 83 crore in scaling up its broadband operations and plans to use around Rs 96 crore for repayment of loans. At the end of the December 2009 quarter, the company had an outstanding debt of Rs 400 crore. 

   The cable services continue to form a big part of the company's broad space; more than 80% of the company' revenue come from it. Of total revenues of Rs 340 crore in the sixmonth period, cable services accounted for Rs 280 crore. Being an early entrant in the broadband space has helped the company position its broadband services as one of the premium services. Of the two-million customer base, the company has 50%, which is one million. Going forward, broadband space would continue to be a significant revenue generator. The company hopes to increase its digital subscriber base through this subscriber base, which comes handy to it. However, the company, like many players in the industry, had to struggle hard to build its cable and digital subscriber base. Towards this, the company has taken recourse to a strategy of acquiring subscribers through the acquisition of local cable operator (LCOs). Over the past two years, the company has primarily grown inorganically, acquiring smaller multi system operators and LCOs. It now intends to convert its acquired-analogue subscribers to digital. The company would continue to pursue this strategy. More so, it intends to directly reach the subscriber with no intermediary. Though this strategy sounds good the company is struggling to become cash positive.

FINANCIALS AND VALUATIONS:

In the past four years ended FY09, the company's income from operations has increased at a CAGR of 34% while in the past four years, the company's operating profit expanded more than of 100%. Like any other cable operator, initially the company made losses, but has now break-even and is cash positive. During the year ended FY09, it reported cash profit (net profit + depreciation) of Rs33 crore. For the six-month period from April-September this fiscal, the company had a net loss of Rs 42 crore and recorded a positive cash profit of Rs 19 crore. Given that it is still making losses, it would be meaningless to evaluate the issue on the basis of the price to earnings multiple. The same applies to most of its listed peers as both wireless and dish TV have been making losses for years now. 

   Industry players have been making claims that it would take a few more quarters to become cash positive. The best is to compare companies on the basis of price to book value (P/B) ratio. At its upper price band, Hathway would command a P/B ratio of 3.2. This compares favourably with Wire & Wireless P/B ratio of 3.5 and Den Networks 4.1. Given this investors are advised to subscribe to the issue at the cut-off price.