Hathway is second-biggest investment of Reliance in digital ecosystem: Ind-Ra

MUMBAI: India Ratings and Research (Ind-Ra) has affirmed Hathway Cable & Datacom Ltd’s (HCDL) Long-Term Issuer Rating at ‘IND AAA’. The Outlook is Stable.

Hathway is of strategic importance to Reliance Industries Ltd. In H2 FY19, RIL, through group entities, acquired a 72% stake in Hathway for a total consideration of Rs 41.2 billion. The acquisition is part of RIL’s core strategy to increase the share of its consumer business in overall profitability closer to the share of its energy business over the next decade.

Ind-Ra noted that Hathway gives RJio direct access to 6 million digital cable households, which represents about 12% of RIL’s targeted FTTH client base of 50.0 million. Through Hathway, RJio can address the last-mile connectivity challenge for its FTTH network and explore additional revenue streams beyond cable TV subscriptions.

RIL has provided tangible support to Hathway in the form of a preferential equity investment of Rs 29.4 billion, thereby making Hathway a net cash company. In addition, with a total investment of Rs 41.2 billion, Hathway is the second-biggest investment of RIL in the digital ecosystem so far, after RJio.

As per Ind-Ra’s understanding, Hathway’s core strategic initiatives such as go-to-market plan and customer-acquisition objectives would now be aligned with those of RJio.

Strong Operational Linkages Between Hathway and RJio: Hathway’s cable TV and broadband business is operationally integral and core to RJio’s FTTH business. In Ind-Ra’s view, the core business functions of Hathway and RIL are integrated, with RJio having a close oversight on Hathway’s strategy, debt and liquidity management functions. The 10-member board of Hathway includes three representatives from RIL and two members from the Raheja family.

As per the shareholder agreement, RIL has the right to appoint the majority of the directors to the board of Hathway. In Ind-Ra’s opinion, the ground-level operational strategy of Hathway would be in line with RJio’s FTTH business plans.

Legal Linkages Weak, Albeit Underpinned by Large Shareholding: RIL has not provided any explicit support to Hathway in terms of corporate guarantees and/or cross-default clauses with regard to the latter’s debt. However, Ind-Ra derives comfort from RIL’s implicit support, exemplified by its 72.0% ownership in Hathway. In addition, the agency derives comfort from the fact that RIL had fully consolidated Hathway in its financial statements, effective FY19..

Leading Market Position: Hathway has a leading market position in the cable and broadband businesses in India. Hathway is one of the largest multiple-system operators in India, with 6 million digital cable subscribers and around 5.5 million broadband home passes in over 350 cities across 13 states. Hathway has a market share of over 24% in key cities such as Mumbai, Delhi, Bengaluru, Pune, Indore and Raipur. In addition, it has a market share of over 50% in growing urban hubs such as Hyderabad, Jaipur and Bhopal.

Additionally, Hathway holds a 37.3% stake in GTPL Hathway, which has 7.75 million subscribers and a 67% and a 24% market share in Gujarat and West Bengal, respectively. In Ind-Ra’s opinion, RJio’s growth strategy is likely to enhance Hathway’s market share over the next few years.

Business Profile Likely to Improve: According to Ind-Ra, RJio would be able to consolidate customer spending on cable TV and broadband subscriptions through its bundled product offerings in the FTTH segment. In Ind-Ra’s opinion, the consolidation could boost Hathway’s ability to manage the local cable operator ecosystem, which would be a key monitorable. Also, a high share of prepaid customers, along with the pay-as-you-watch business model, is likely to improve the collection efficiencies, which should be augmented by increasing online collections (FY19: 70.0%; FY18: 50.0%).

Improvement in Financial Profile in H1FY20: The first half of FY20 has seen Hathway register strong year-on-year growth, with revenues rising 15% yoy to INR8,919 million and EBITDA margin improving to 22.3% (H1FY19: 17.9%). The improvement in EBITDA was predominantly due to increased control over pay channel costs, and stability in overall selling and administration expenses. As a result, the gross interest coverage of Hathway improved to 1.5x in H1FY20 from 1.2x in H1FY19.

Deterioration in Standalone Financials: In H1FY20, HCDL’s broadband revenues improved roughly 5% to INR2,732 million from INR2,604 million in H1FY19. Despite the improvement in revenues, operational expenses increased, leading to EBITDA falling to INR678 million from INR935 million, with margins, though strong, deteriorating to 24.8% in H1FY20 (H1FY19: 35.9%).

Liquidity Indicator – Adequate: Hathway has been generating positive Cash Flow from Operations (CFO) since FY14 (FY19: INR316 million). Moreover, the Company has leveraged its improved credit profile and has been successful in refinancing its existing term loans at a lower interest rate. However, as per Ind-Ra’s expectations, CFO will likely not be enough to fund future CAPEX. The agency does derive comfort from Hathway’s cash and cash equivalents of INR31.5 billion as of March 2019.

Highly Competitive Industry with High Customer Churn: Hathway operates in a fragmented and unorganised cable TV distribution industry. The growing competition from alternative TV distribution technologies, particularly direct-to-home, rapidly grew over FY14-FY18. Hathway faces risk from potentially disruptive technologies such as over-the-top platforms and Internet TV, as well as high capital intensity.

The industry is vulnerable to fast-changing customer preferences. However, the new tariff order by Telecom Regulatory Authority of India is likely to substantially de-risk the business models of multiple system operators by providing stability to revenue streams. The competition risk from RJio, as envisaged by Ind-Ra, does not exist now as Hathway has become an integral part of RJio’s overall digital ecosystem.

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