Hathway Cable & Datacom Ltd Management Discussions.

OVERVIEW OF ECONOMY GLOBAL ECONOMY OVERVIEW

The global economy is projected to expand 2.9% in 2019, down 0.1 percentage points from last months forecast. For 2020, the global economy is projected to grow 2.9% again. Global economic growth is expected to decelerate this year mostly due to softer dynamics among developed economies, which are approaching the tail-end of their current economic cycles. Nevertheless, the global economy is seen benefiting from tight labour markets, still accommodative monetary and policy stimulus in some countries like China.

The growth rate for emerging market and developing economies is estimated to rise to 5.0 percent in 2019-20. This Growth forecast primarily reflects stronger projected activity in emerging Europe and Asia economies for 2017 to 2019. With growth in advanced economies projected to gradually decline toward potential growth rates of about 1.7 percent once economic slack is eliminated, the further pickup in global activity is entirely driven by emerging markets and developing economies. In these countries, growth is projected to increase to 5 percent by the end of the forecast period, with their impact on global activity boosted by their rising world economic weight.

INDIAN ECONOMY OVERVIEW

The Indian economy started the fiscal year 2018-19 with a healthy 8.2 percent growth in the first quarter on the back of domestic resilience. Growth eased to 7.3 percent in the subsequent quarter due to rising global volatility, largely from financial volatility, normalized monetary policy in advanced economies, externalities from trade disputes, and investment rerouting. Further, the Indian rupee suffered because of the crude price shock, and conditions exacerbated as recovery in some advanced economies caused faster investment outflows. Going ahead, the Indian economy is likely to sustain the rebound in FY 2018-19 growths is projected to be in the 7.2 percent to 7.5 percent range and is estimated to remain upward of 7 percent for the year ahead. These projections could be attributed to the sustained rise in consumption and a gradual revival in investments, especially with a greater focus on infrastructure development.

Among all large economies, India is likely to demonstrate a rapid and sustainable growth, at a CAGR of 9.46% from 2016 to 2021, driven by strong manufacturing-led industrial expansion and consumption demands from the private sector. According to Frost & Sullivans analysis based on data from 2017 IMF WEO Update, the countrys GDP is well positioned to cross USD 3,000 Bn ( 200 Tn) by 2020; in the event of accelerated manufacturing and investment, this figure could even potentially balloon to USD 3,600 Bn ( 240 Tn). India is expected to be the third largest consumer economy as its consumption may triple to USD 4 Tn by 2025, owing to shift in consumer behaviour and expenditure pattern, according to a Boston Consulting Group (BCG) report; and is estimated to surpass USA to become the second largest economy in terms of purchasing power parity (PPP) by the year 2040, according to a report by PricewaterhouseCoopers.

The Interim Budget 2020 of the Government of India has given a consumption-based push to the economy. First, in the form of direct transfers to farmers, a budgetary commitment for र 200 billion in FY19 and र 750 billion in FY20 has been provided. Secondly, the standard deduction for salaried employees has been raised from र 40,000 to र 50,000, which would increase their disposable income. Third, a tax relief has been given to the low and middle income groups with a taxable income of less than र 500,000 which may be claimed as a rebate.

These programs are likely to add to the private disposable incomes of low to middle income segments in 2019-2020. They have the potential of raising consumption demand in the economy and correspondingly advertising spends, since the relatively lower income groups tend to have a higher marginal propensity to consume. Further, this fiscal stimulus is likely to have a stronger positive effect on growth rather than inflation since food inflation in December 2018 was contracting at (-) 2.5% y-o-y and the overall CPI inflation was quite low at 2.2%.

Source: EY Analysis March 2018

MEDIA & ENTERTAINMENT INDUSTRY

According to FICCI-EY report, the Indian Media & Entertainment (M&E) sector in 2018 reached र 1.67 Tn, a growth of 13.4% over 2017. With the current trajectory, it is expected it to grow to र 2.35 Tn by 2021.

(in Bn) 2017 2018 2019E 2021E CAGR 2018-21
Television 660 740 815 955 8.8%
Print 303 306 317 338 3.4%
Filmed entertainment 156 175 194 236 10.6%
Digital media 119 169 223 354 28.0%
Animation and VFX 67 79 93 128 17.4%
Live events 65 75 86 112 14.0%
Online gaming 30 49 68 120 35.4%
Out Of Home media 34 37 41 49 9.2%
Radio 29 31 34 39 8.0%
Music 13 14 16 19 10.8%
Total 1,476 1,674 1,887 2,349 12.0%

Source: EY Analysis March 2018

Strong and consistent economic growth fueled by a rise in consumption and growth in digitization has boded well for the M&E industry which has grown at a CAGR of ~11 percent over 2014-18 to reach र 1,674 Bn in 2018. However, in recent years, the sector was affected by major regulatory interventions by the government around demonetisation and GST.

These initiatives had a temporary adverse impact on both consumption and advertising spends, resulting in a slower than expected growth rate in 2018. However, the industry is now well on the road to recovery and aided by a buoyant Indian economy, strong domestic demand and growing digital access and consumption, the sector is expected to grow at a CAGR of 12% to reach र 2,349 Bn by 2021.

Rural India and Tier II and Tier III cities are asserting their power over the M&E sector in recent years. While television broadcasters have launched a number of free-to-air (FTA) channels to tap rural and semi-urban markets, availability of data at affordable rates increased the reach of digital platforms into rural areas driving a significant growth in digital usage and changing the demographics of digital consumption from niche to mass. The Indian M&E industry has entered into a mature phase, and the growth is expected to come from untapped rural markets. The key growth will come in digital only, tactical digital and bundled digital customer segments.

2018 2021
Digital only 1- 1.5 Mn 5 Mn
Tactical digital 6 Mn 25 Mn
Bundled digital 155 Mn 376 Mn
Mass consumers 464 Mn 387 Mn
Free consumers 155 Mn 180 Mn

Source: EY Analysis March 2018

The impact of the TRAI Tariff Order can have implications on total viewership, free television uptake, channel MRP rates and advertising revenues. While its implementation could take up-to six months, we can expect a lot of changes. OTT platforms are sure to benefit due to increased parity between television and OTT content choice and costs. Since large broadcasters have removed their content from FreeDish, its attractiveness may be impacted.

INDIAN BROADBAND INDUSTRY

Despite of the data big-bang, which was triggered by incumbent players in to the market-place, 2018, has been among the lowest growth years for broadband subscribers in India. Interestingly, India witnessed the maximum addition in broadband subscribers in the year 2016.

Overall broadband subscribers have grown at a CAGR of 37% in the past 4 years taking the total number of subscribers to 540 Mn. This has created the demand for the fixed broadband continues by end of 2018, fixed broadband subscribers reached to 18.27 Mn as on January 2019. (Source TRAI January 2019).

Consumers, who have at least one OTT subscription and Pay TV subscription and/or are driven by sachet pricing of content, would provide a high volume-lower value subscription base to content distributors. This segment could, on the back of digital and micro payment systems being rolled out in the country, reach as high as 20 Mn households from 6 Mn in 2017. We expect by 2021 this will reach to 30-35mn. Digital subscription grew by over 250% with Indians opening their purse strings to pay for online content.

The next wave of this connectivity - high speed broadband - has already set the wheel in motion to further transform Indias economy. India is at the cusp of a digital revolution, with high speed broadband serving as a critical pillar. The Governments Digital India vision envisages quality broadband for the masses as a basic infrastructure for every citizen. High speed broadband has the potential to act as substitute infrastructure for other critical sectors.

The cost of high physical infrastructure in sectors such as banking, healthcare, education, governance and retail can be offset by using a digital platform for delivery of services. The ubiquity of the mobile handset, and availability of high speed broadband have the ability to bring the benefits of these critical sectors to the masses.

Digital India: Data to unlock new opportunities

The online population is expected to grow exponentially from 446 Mn in 2017 to 840 Mn by 2022; 60% increase out of which 135 Mn with fixed internet users by 2022. The average broadband speed was 9.5 Mbps in 2017 and expected to increase to 31.2 Mbps where 89% of fixed broadband connections will be faster than 10 Mbps by 2022 up by 28% today. Goverment is expected to lay the foundation for fiber to

2,50,000 Kms a step providing fixed broadband access to 50% households by 2022. 4G being a dominant technology , 5G roll outs expected by 2022 in tune with the global launches.

Wireline Broadband Internet penetration in India

The Telecom Regulatory Authority of India (TRAI) in its Telecom Subscription Data Report for the month of March 2018 has revealed that Wired Broadband subscriber base in India were 22.81 Mn at the end of March 2018.

According to ICRA, the wireline broadband subscriber base can increase to 100 Mn households by 2024, and the revenue generated from these segments could expand to र 80,000 crores as against र 14,500 crores in India. In order to monetize the wired broadband networks (copper or FTTH) better, players in many mature markets like USA, UK, Germany offer integrated services - television, wireline services, and home broadband through a single tariff plan, at a significant discount to the individual services. A similar trend is expected to play out in India as well.

India has only 0.5% penetration for FTTH compared to global countries such as Singapore with 95%, South Korea with 83% penetration, Hong Kong at 71% and Malaysia 16% which are way ahead. In India, FTTH model is currently expensive compared to other countries and its standalone viability remains uncertain. This is majorly due to lack of a financially viable business case for deployment of FTTH. The future fixed broadband deployments in India will be led by FTTx-based technologies such as GPON.

India has one of the lowest broadband ARPUs across Asia Pacific, but the scale of the market puts it in the top five in terms of broadband revenue. While the initial investments are huge, rewards are considerable including new revenue streams such as residential broadband and enterprise services. For telcos to fully monetize the spectrum they have purchased over the past two years, they will have to add more fiber to their networks. With a promise of 10Gbps speed, less than 1 ms latency and 90% reduction in network energy utilisation, 5G will spur the next round of telecom infrastructure investments. The fact that 5G network will have to support very high data from emerging applications like video on demand (VoD), IoT, smart Cities, and the like also makes backhaul a critical concern. As demand for 4G and then 5G grows, networks will become denser and deeper.

INDIAN DIGITAL CABLE TELEVISION INDUSTRY

According to BARC, television owning households increased to 197 Mn, which is a 7.5% increase over the previous Broadcast India survey. During the same period, total Indian households increased 4.2% to reach 298 Mn. Correspondingly, TV penetration increased to 66% in 2018 from 64% in 2016.

Television grew 12% in 2018 to reach र 740 Bn. Growth was led by a 14% increase in advertising revenues and 11% increase in subscription revenues.

88% of television connections were digital

According to BARC, 31% of TV viewing households had paid DTH, 13% had free DTH and 44% had digital cable. This number indicates a 15% growth over 2016 and has contributed significantly to the growth in end-subscriber pricing. Digitization led to increased collections from end customers in DAS-III and DAS-IV markets, with many cities crossing the र 200 per month number. DTH ARPUs have been affected by a change in the subscriber mix with incremental subscribers coming at a lower price point and the movement of subscribers to lower value regional packs.

Markets 2017 2018
( per month) ( per month)
DAS-I 250-350 250-350
DAS-II 200-325 200-325
DAS-III 150-225 175-225
DAS-IV 125-200 125-225

HD channels grew from 78 in 2017 to 92 in 2018 (18% growth). HD viewership has grown at the rate of 57% in 2018 to reach 874,000 impressions.

TRAIs New Tariff Order (NTO)

The new tariff order is set to dramatically change the distribution landscape in India. It will bring in far greater transparency and overall it will be good for all stakeholders, this lead to fair share allocation of subscription revenues within the stake holders.

Some of the key features for the New Tariff Order are as below:

• Every broadcaster is required to declare the maximum retail price (MRP) of its pay channels on a-la-carte basis. However, such MRP shall be uniform for all types of addressable systems.

• Every Broadcaster must declare a distribution fee at a minimum of 20% of the MRP of pay channel or bouquet of pay channels which can be upto 35%.

• In addition to the distribution fee, Broadcasters may offer discounts to distributors which cannot exceed 15% of the MRP of pay channels or bouquet of pay channels. However, in no case, the sum of distribution fee declared by a broadcaster and discounts offered can exceed 35% of the MRP of pay channel or bouquet of pay channels, as the case may be.

• Every broadcaster should publish, on its website, the Reference Interconnection Offer (RIO) containing the information such as MRP of its pay channels and bouquet of pay channels, distribution fee, discounts etc.

• Every broadcaster is required to enter into written interconnection agreements on the basis of the RIO published by it for providing signals of pay channels to a distributor of television channels.

• Similarly, every distributor of television channels is required to publish RIO on its website for carrying a channel on its distribution network. Such RIO must necessarily contain the information such as target market, rate of carriage fee, manner of calculation of carriage fee etc.

• The rate of carriage fee has been capped at Re. 0.20 per Standard Definition channel and Re. 0.40 per High Definition Channel. The manner of carriage calculation is as prescribed in the regulations. The distributor can offer a discount on the carriage fee. However, such discount cannot be more than 35%.

• Every distributor is required to enter into written agreement, on the basis of its published RIO, with the broadcaster for carrying television channels in respect of which the request has been received from such broadcasters.

• Any other kind of fee for a channel such as marketing fee, placement fee etc. between two service providers should be made part of interconnection agreement and reported to the Authority.

• It is mandatory for MSOs to enter into a written agreement with LCOs before providing the signals. Such interconnection agreement must comply with the standard provisions as per the Model Interconnection Agreement (MIA)/Standard Interconnection Agreement(SIA) as prescribed by the Authority.

The TRAI tariff order can have implications on total viewership, free television, channel MRP rates and advertising revenues. While its implementation could take up to six months, we can expect a lot of changes.

Consolidation has been seen across cable and DTH:

Acquirer Acquired Company Rationale
Reliance Jio DEN Netw stake), Cable stake) vorks (66% Hathway (51.34% The acquisition has provided Reliance Jio with direct access to MSOs broadband infrastructure and the large pool of pay Cable Television subscribers, which the company will utilize to accelerate Jios entry into the fibre to the home market. Postacquisition, Jio has direct access to ~6.5 Mn broadband households, which account for ~36% of Indias total fixed broadband subscriber base of 18 Mn. On the other hand, the deal also allows Jio to access 12.5 Mn Cable Television subscribers or ~7% of total TV households who may not have broadband connectivity yet.
Dish TV India Videocon (Merger) D2H The combination of these two companies created the largest DTH operator in the country and they are expected to enjoy the benefits of scale across content and other operating costs.

Company Overview

Hathway Cable and Datacom Limited (HCDL), is one of Indias leading broadband players having 5.5 million home passes and 0.81 million subscribers base. It is India first MSO to launch GPON FTTH service in India.

Hathway Digital Private limited, a wholly owned subsidiary of HCDL, is an MSO, with 6+ main head ends and a network of approximately 35,000 kms of optical fibre and coaxial cable, providing cable services to 6 million viewers (including through its fellow subsidiaries and associates) pan India and reach to 109+ cities and adjoining areas.

Segment-wise Operational Review Broadband

1) Your Company has rolled out 5.5 million Home Pass by March 2019 and its Broadband subscribers reached 0.81 million. During the year, the Company added 0.16 million subscribers at an ARPU of र 662. The Company has shown growth of 10% in subscription revenue on year on year basis.

2) GPON FTTH Parallel network being deployed in High Potential High Penetrated DOCSIS home passes. Opportunity to increase market share by offering 200mbps - 500mbps speed to premium consumers, minimum data limits across country increased to 200 GB/consumer/ month. 59% of our consumers have monthly data limits of 1TB.

3) Your Company continues to bring in new technology for superior consumer experience, one of the initiatives taken is Hathway Play Box based on android platform which will provide world class large screen OTT viewing experience to our privilege customers, Hathway Play box also allows consumers to experience Android gaming on big screen including multiple users having gaming Fun on same screen. It also provides consumers a smarter way to watch all Google Play content on a big screen. These initiatives help to increase customer sticky-ness and to retain customers for longer duration.

4) The Company has appointed TCS as System Integrator to automate various process and Improve the Quality of Services. IT & Other Initiatives have helped us in cost optimization and provide system driven services.

5) The average bandwidth consumption (Mbps) per subscribers is 0.77 bandwidth increase is healthy for the long term wireline industry. The average data usage per costumer per month has now reached 113 GB which shows customers preference of watching online media and reflects the binge watching culture of users.

6) A new self-care app - Hathway Broadband has been launched during the financial year which will provide customers access to their data usage pattern, billing cycle etc. by integrating it to the Oracle Billing and Revenue Management System (OBRM).

Cable Television

1) Hathways Cable Television business has seen significant growth in subscription revenue by 14%, led by increase in monetisation of Phase III and IV.

2) Your Company has successfully implemented DPO Packs for all region. Packaging is based on the extensive consumer research and focussed group interviews with the customers. Approx.

3) I n View of the NTO the relationship between the stakeholders are improved, which help us to drive the New Tariff order implementation across PAN India.

4) Your Company launch Indias first Cable Hybrid box "Hathway Ultra Smart HUB" on the android TV platform to create unique TV viewing experience for Indian consumers based on This Ultra Smart TV Hub simplifies the user experience for our customers that increasingly combine their linear TV-viewing with on- demand and streaming services. The user can select and download more than 2,000 apps from Google Play, including play services, games, and music.

Financial Review
in Crore FY19 FY18 Growth %
Standalone
Revenue from Operations 527.63 544.54 -3%
EBITDA* 202.68 227.10 -11%
EBITDA Margin 38.4% 41.7% -8%
Total Comprehensive Income / (Loss) (after Tax) 211.45 78.92 168%
Consolidated
Revenue from Operations 1,558.29 1,534.62 2%
EBITDA* 331.34 336.06 -1%
EBITDA Margin 21.3% 21.9% -3%
Total Comprehensive Income / (Loss) (after Tax) (186.53) (105.21) 77%

* Excluding impact of Forex Loss

Details of significant changes (i.e. change of 25% or more as compared to the immediately previous financial year) in key financial ratios, along with detailed explanation are as given below:

Ratio (Consolidated Basis) Mar-19 Mar-18 % Changes Explanation
Debtor Turnover Ratio 12.90 3.93 228% Shift in O2C cycle post implementation of the new Regulatory Framework for Broadcasting & cable Services sector notified by TRAI
Inventory Turnover NA NA 0% --
Interest Coverage Ratio 1.50 2.20 -32% Reduction in forex loans (Buyers Credit) in Debt portfolio
Current Ratio 2.84 0.38 653% Financial Investment post Equity infusion in Current Financial year
Debt Equity Ratio 0.54 2.12 -74% Equity infusion in Current Financial year
Operating Profit Margin 19.8% 21.9% -9%
Net profit Margin -12% -7% 66% Higher Opex
Return on Net Worth -5% -14% -62% Equity infusion in Current Financial year

Other Key Developments

Preferential allotment to Entities belongs to Reliance Group of Companies

During the year, Jio Content Distribution Holdings Private Limited, Jio Internet Distribution Holdings Private Limited and Jio Cable and Broadband Holdings Private Limited, (Acquirers) and Mr. Akshay Raheja, Mr. Viren Raheja, Hathway Investments Private Limited and Spur Cable and Datacom Private Limited and the Company had entered into a Share Subscription Agreement dated October 17, 2018 ("SSA") Company to subscribe to 51.34% of the post allotment share capital of the Company. Pursuant to which, the Company made an allotment of 908,810,000 equity shares of the Company on 30th January, 2019 to the Acquirers, at a price of र 32.35/- (including premium of र 30.35/-) per Equity Share aggregating to र 29,400,003,500/- on a preferential basis:

Sr. No. Particulars of Allotees Shares
1 Jio Content Distribution Holdings Private Limited 534,698,609
2 Jio Internet Distribution Holdings Private Limited 214,296,755
3 Jio Cable and Broadband Holdings Private Limited 159,814,636
Total 908,810,000

Pursuant to such allotment, the acquirers acquired sole control of the Company and the acquirers along with Reliance Industries Limited, Digital Media Distribution Trust, Reliance Content Distribution Limited and Reliance Industrial Investments and Holdings Limited ("PACs") became part of the Promoter and Promoter Group of the Company.

Pursuant to the above preferential issue made by the Company, there was an obligation on the acquirers, to make an open offer under the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011. Accordingly, the Allotees and the PACs made an open offer for acquisition of up to 26% of the expanded voting share capital of the Company from the public shareholders of the Company at a price of र 32.35 per equity share The acquirers, acquired 364,891,215 equity shares representing 20.61% of the total equity / voting capital of the Company in the open offer.

As on date, their aggregate holding in the Company stands at 1,273,701,215 equity shares of the Company i.e. 71.96% of the total paid-up share capital of the Company.

SWOT ANALYSIS

Strengths Challenges
Broadband: Broadband:
• First MSO to Launch GPON with 300 Mbps speed • To retain Lower GB usage customers
• Average data consumption 113 Gb per subscriber per month • Continuously focusing to expand the footprint and upgrading network and infrastructure
• Partnering with various content providers, education portals and other lifestyle improvement players • Expansion to power towns with a low cost model
• Launch of "Hathway Play Box" based on android platform which will provide world class large screen OTT viewing experience to our customers Cable: • Compliance of QoS TRAI
Cable: • Strong IT Support to Large volume
• 6 Million digital subscribers base; Offers its cable television services across 109+ cities and towns, operating in pan India regions • High content cost due to southern market
• Implementation of Hathway connect, increase in transparency among the LCOs • Lower paying capacity and poor infrastructure in Phase 3 and 4 markets
• Centralized CAS provides feed from 8 main head-ends across the country • Large number of subsidiaries to manage
• Customers friendly DPO packs which allows to meet their daily viewing requirement.
• Negotiation Power with the Broadcaster
• The Launch of New android based Set Top Box "Hathway Ultra Smart HUB" this allows the one single device for use of Liner and OTT content.

 

Opportunities Threats
Broadband: Broadband:
• Rapid growth of the top power cities, demand for high speed connectivity fixed broadband • Government initiatives for Smart City • Low end users may move to wireless service providers due to competitive pricing
• Increase in Media content through OTT platform main driver for online content consumption. • Technology Changes will lead to upgradation
Cable: Cable:
• Implementation of New Tariff will have an impact on the content cost rational, Higher monetisation • DTH companies, Free Dish to offer stiff competition in Phase 3 and 4 Markets
• Prepaid model implementation
• Collaboration with new technology will change the revenue model
• HD would continue to be opportunity by way of new channel launches and better regional content
• Monetization

RISKS AND CONCERNS

Product / Technology Risk Competition
Consequence: The traditional cable customer preferences are changing and they are moving towards getting content in a nonlinear manner. Inability to meet the customers demand might lead to loss in business. Also Rapid advancements in technology leading to obsolescence of existing assets Consequence: Broadband and Cable business verticals where Hathway is present, has low entry barriers and multiple players across geographies.
Risk Mitigation Strategy: Your company is well placed to serve the arising needs of the customers by offering OTT & broadband services to existing cable customers Risk Mitigation Strategy: To take early lead over competition, Hathway has offered cutting edge products & solutions at value for money pricing to enhance customers delight Hathway is well poised to grow in this new segment of the market.
The shift to MPEG-4 STBs in cable and provision of providing broadband through DOCSIS 3.1 /GPON network is testament to the fact that we are sensitive to the rapidly changing technology trends and are cognisant to take counter measures.
Awareness Risk
Consequence: LCOs function as primary facilitators of our business expansion. Therefore, delay in updating/on boarding them on latest initiatives undertaken by the company would negate the first mover advantage.
Risk Mitigation Strategy: Your company has launched Hathway Connect portal for LCOs by imparting real-time training to help them manage their customers. Besides, there is regular collaboration with LCOs for our branding initiatives. A separate outreach initiative has been undertaken for our broadband services to ensure brand recall and educate the customers about the kind of services being offered.