SHARE TANKS AND CLOSES AROUND THE LOWS – DOWN 13%

One more listing and one more issue where investors have lost their shirt. Time and again, issue after issue the same thing is being repeated again and again. Issues are being aggressively priced or overpriced, then they are aggressively marketed and hype about the same is created and when the issue lists it tanks, falls or crashes. End result – Loss for investors.  Post listing the blame game begins where the sector, current market conditions are blamed for the price fall. No one is ever prepared to accept that the price charged was expensive and therefore the post listing price has taken a beating.

Coming to Hathway, the issue price band was Rs 240-265. The issue comprised of a fresh issue of 2 cr shares and an offer for sale of 77.5 lakh shares. The issue was priced at the lower price of Rs 240 and at this price the issue size would be Rs 666 crs. The fresh issue would raise Rs 480 crs for the company. The response to the issue was not over whelming and the issue was subscribed a mere 1.36 times with the retail portion being just about 25%.

The share listed on the BSE at Rs 246 which was higher than the issue price of Rs 240 and the opening price itself was the high. On the NSE similarly the stock opened at Rs 250 which was the high of the day. Thereafter it was down almost throughout the day. The low on the BSe was 206.20 while on the NSE it was Rs 204.50.

The trading volumes were not very high. The total volume was just about 137 lakh shares or roughly half the IPO size. The delivery volume was 11.6 lakhs or 8.47% of the traded volume. This delivery percentage or the total delivery seems insignificant to the price fall. A mere 11.6 lakh shares or a mere 4.18% of the IPO issue size of 277.5 lakh shares is insignificant for the kind of fall of 13% witnessed today. I believe if the price does not recover quickly we could see sharp erosion in price from current levels.

Very clearly amongst all the recent issues, a fall of this magnitude on such a poor delivery percentage is unheard of. It very clearly indicates that there is more pain ahead and investors should not look at investing in this company simply because it has fallen 13% or 20% from the issue price.

The issue was very aggressively priced and had pricing issues because of the fact that it is a loss making company and it would be quite some time before the company starts making money. At the lower end of the price band the issue would raise Rs 666 crs of which the gross proceeds to the company would be Rs 480 crs. The objects of the issue need Rs 579.7 crs and there is a term loan component of Rs 50 crs which would mean that the company would have raised at the gross level Rs 530 crs. There are issue expenses to be deducted from the proceeds and very clearly there would be a substantial gap in the amount raised and the amount required for fulfilling the objects of the issue.

The other issue which was on simultaneously has done exceedingly well and created new records, underlying the fact that if the issue is well priced, it attracts investors.

Hathway Cable and Datacom Limited has completed the allocation to anchor investors of a total of 49,95,000 shares at a price of Rs 240 per share. The price band is in the range of Rs 240-265. The allocation has been done to a total of 13 entities which are from 5 different funds.

Details are as follows:-

Hathway Cable and Datacom Limited is tapping the capital markets with an issue which opens on the 9th of February 2010 and closes on Thursday the 11th of February 2010 in a price band of Rs 240-Rs 265. The company also proposes to offer 30% of the QIB portion to Anchor Investors.

Business
Hathway is the leading cable television services provider in India as well as the leading cable broadband services provider. Hathway offers analog and digital cable television services across 125 cities and towns and high speed cable broad-band services across 18 cities. As of 30th November 2009, Hathway had 13.47 lakh subscribers for analog cable television, 10.02 lakh subscribers for digital cable. The company also has 3.22 lac broadband subscribers. Hathway also has a pan-India ISP license and has 9.64 lakh two way broadband enabled homes.

Hathway currently offers up to 176 channels through its digital platform against 85 channels on our analog platform. The digital platform can offer DVD quality picture and stereophonic sound and also gaming. The company plans to introduce pay-per-view, including Hindi movies and educational programs. The under reporting of subscribers by the local cable operator or “LCO’s” is a rampant practice and this is substantially controlled by the use of digital set-top boxes which gives accurate data about number of subscribers using the service.  Hathway employs 642 full time employees as well as 22 consultants. The company has outsourced 2182 jobs for numerous functions such as customer service, support, sales, collection and other back office administration functions.

TRAI has mandated in compulsory CAS areas that 58 free to air channels are offered at a flat Rs 77 per month to subscribers. Hathway also offers a bouquet of channels which come at a price ranging from Rs 59 to Rs 129 per month and also a selection of specific channels that a customer may require. Based on the requirement of the customer he/she chooses his selection of channels and the relevant subscription for the same.

Objects of the Issue

Acquisitions of Customers	Rs 243.60 crs
Investment in the development of our digital cable and set top boxes	Rs 156.40 crs
Investment in the development of our broadband infrastructure	Rs 83.0 crs
Repayment of Loans	Rs 96.7 crs
General corporate Purposes	X
Issue Expenses	X

The company would be raising Rs 530 crs at the top end of the price band and with the additional term loan of Rs 50 crs would make a total of Rs 580 crs available to the company to meet the objects of the issue. The issue related expenses are to be borne out of this sum of Rs 580 crs (530 crs top end plus 50 crs term loans) and the objects excluding issue expenses itself amount to Rs 579.7 crs. Very clearly the company would not be able to meet the objects of the issue at the top end of the price band also and would have to ‘manage’ the same. Secondly there would be major deviations in the use of proceeds as the net amount raised would fall short of the money required. This would lead to the company having to borrow further or reduce the investment plans – in short affecting the growth plans and performance of the company. 

Financials
Hathway has been recording significant growth in revenues since the year 2006-2007. Revenues from operation have increased from Rs 301.38 crs in the year ended March 2007 to Rs 414.56 crs in March 2008, to Rs 663.39 crs in March 2009 and finally in the six months ended September 2009 to Rs 362.31 crs. The growth in percentage terms has been 37% in 2008 over 2007, 60% in 2009 over 2008 and 9% in 2010 over 2009 assuming the half year numbers are annualised.

The company has a very healthy EBITDA with the same rising from Rs 22.18 crs in 2007 to Rs 21.30 crs in 2008, to Rs 103.73 crs in 2009 and Rs 71.86 crs in the six months ended September 2009. The company has a large amount of debt and incurs huge depreciation as it is in the investment mode. The company has provided interest of Rs 14.59 crs, Rs 22.10 crs, Rs 43.05 crs and Rs 27.93 crs respectively. It has also provided for depreciation, amortisation and impairment of Rs 39.26 crs, Rs 58.88 crs, Rs 96.10 crs and Rs 61.73 crs respectively leaving a net loss of Rs 62.45 crs, Rs 66.81 crs, Rs 62.74 crs and Rs 42.42 crs in the half year ended September 2009 respectively.

The company expects to add large number of subscribers and also increase the ARPU’s (average revenue per user) significantly as its growth strategy. It also intends to increase the service offerings and do cross-selling of services so that it breaks even and starts generating profits.

To this effect the average revenue per unit for a MSO has increased from Rs 42.66 per month in 2007 to Rs 55.83 per month in March 2009 and Rs 57.05 per month in the half year ended September 2009. In the broadband internet business the ARPU’s have actually decreased from Rs 462.61 per month in 2007 to Rs 307.39 per month in March 2009 and improved slightly to Rs 322.79 in the half year ended September 2009.  

Valuations and Comparisons
There are very few comparable players with whom the company can be compared. For comparison sake some of the names offered include Sun TV, Zee Entertainment, NDTV, IBN18, Dish TV, Wire and Wireless and the recently listed Den Networks. Den Networks was a highly hyped issue and even three months after its listing the share is unable to trade above its issue price. Sun TV Network is the most successful of the peers and enjoys excellent ratings in the area of choice that it operates in. It is basically a Southern India player and has more than 40% net profit in its operations. In terms of revenue it achieved sales of just over Rs 1000 crs in the year ended March 2009 and has done Rs 1028 crs in the nine months ended December 2009. Its net profits for the year ended March 2009 were Rs 437 crs while they are Rs 402 crs for the nine months ended December 2009. Sun TV is trading at a PE multiple of 28.3 based on the 9 months annualised numbers of the period ended December 2009. The others are entertainment channels with the exception of Dish TV and Wire and Wireless.

Hathway has yet to make profits and it may be some time before the same happens. The company is in an investment mode and needs to continue to subsidise the set-top box to increase its number of subscribers and start generating the monthly rent from them. This subsidy is a drag on the company and the breakeven is almost three years. Secondly the increase in numbers becomes mandatory for the business to survive.

Valuing a company on the basis of price earnings for a loss making company becomes infructuous or meaningless. The other way one could compare it is on the basis of EV/Ebitda and this is a high 29.16 times based on the current half year ended September 2009 of Rs 72 crs on an annualised basis and considering market cap at the top end of the price band of Rs 265 of Rs 3800 crs. There is a current debt on the books of the company of about 400 crs. This 29.16 is extremely high. If one were to assume growth and expect the company to earn an EBITDA of Rs 200 crs next year the EV/EBITDA would still be an extremely high 21 times.

Conclusion
The issue is expensive and there is no immediate driver which could make the issue attractive on improved valuations in the near term. With huge amount of paper coming to the primary market, it makes sense to be choosy and preserve cash for the time being. I believe one should just avoid this issue as there is nothing available for investors and allow the institutional players to pick up the share.

SEBI disclaimer: – I do not intend to subscribe to the issue.

Hathway Cable & Datacom Limited has fixed the price band for its IPO between Rs 240 and Rs 265. The issue opens on Tuesday the 9th of February and closes on Thursday the 11th of February 2010. The issue consists of a fresh issue of 2 cr shares and an offer for sale of 77.50 lakh shares. The total issue would be for 2.775 cr shares. The issue would raise Rs 666 crs at the lower price band and Rs 735.38 crs at the upper price band.

The market capitalisation post issue at the lower price band would be Rs 3428.57 crs while at the upper price band it would be Rs 3785.71 crs.