GTPL Hathway has entered the primary market on Wednesday 21^st June 2017 to raise Rs. 240 crore, via fresh issue of equity shares of Rs. 10 each and an offer for sale (OFS) of up to 1.44 crore equity shares by promoters, both in the price band of Rs. 167 to Rs. 170 per share. Representing 25.36% of the post issue paid-up share capital, issue will raise Rs. 485 crore at the upper end, of which, OFS portion is worth Rs. 245 crore. Closing on Friday, 23^rd June, shares are expected to be listed on 4^th July. This company’s IPO timeline looks very tight. In its RHP, company has presented audited financials only till 31Dec16. To avoid re-audit, it has launched IPO just a few days before the 6 month deadline of 30 Jun 2017 expires.

GTPL Hathway Limited, joint venture between listed competitor Hathway Cable and Gujarat based cable TV operator Gujarat Digi (part of Gujarat Television Pvt. Ltd. group), is a Multi System Operator (MSO) offering cable television to 5.69 million customers and broadband services to 0.23 million subscribers, enjoying leadership position in the cable TV business in Gujarat (67% market share) and second position in Kolkata and Howrah (24% market share). It is a regional player, as these 2 states together account for 88% of digital cable income.

Company’s FY16 total income stood at Rs. 746 crore, on which 22.1% EBITDA was earned, leading to EBITDA of Rs. 163 crore. Due to highly capital intensive nature of business, annual depreciation burden in FY16 was huge, at Rs. 104 crore. Besides this, interest outgo of Rs. 45 crore was also steep, on account of high debt, denting bottomline. FY16 PAT was at just Rs. 4.6 crore, translating into net margin of mere 0.6%. Historically, company’s operating margins have been volatile, swinging in the range of 20-24% and thus impacting bottomline even more sharply. Outstanding trade receivables too, above 4 months of sale, are very high. Thus, fundamentally speaking, company’s financials are not strong.

During first nine months of FY17, while margins did strengthen a bit, on absolute basis, they are still slim. On total income of Rs. 664 crore, EBITDA of Rs. 173 crore was earned, leading to an EBITDA margin of 26.5%. Excluding depreciation of Rs. 101 crore and interest charges of Rs. 44 crore for Apr-Dec 2016 period, PAT stood at Rs. 16.3 crore, resulting in net margin of 2.5%. On an equity of Rs. 98.35 crore, up after 40:1 bonus on 31-3-16, EPS for 9M FY17 stood at Rs.2.16. Company generated very low return ratio – RoE of 5.72% for 9M FY17 and 1.8% for FY16.

As of 31-12-16, company’s consolidated net worth stood at Rs. 372 crore (BVPS Rs. 38). 50% stake is owned by Hathway Cable, while 48.95% stake is held by co-promoter Gujarat Digi and group. Post participation in OFS and fresh issue of shares, Hathway will own 37.3% stake, while Gujarat Digi and group will own 36.5%, taking combined promoter holding to 73.9%, post IPO. Company’s consolidated total debt of Rs. 503 crore, as of 31-12-16, will trim by Rs. 229 crore, as fresh issue proceeds will repay loans. Current debt equity ratio of 1.35:1 will drop to a more comfortable level of 0.44:1, post IPO. Company has cash and equivalents of Rs. 97 crore, as of date.

At Rs.170, its market cap will be Rs. 1,912 crore and EV at Rs. 2,089 crore, which discounts 9M FY17 annualised earnings by PE multiple of 67 times and EV/EBITDA multiple of 9x. Based on FY18E earnings, PE and EV/EBITDA multiples are 43x and 8x respectively, which is very steep. All listed peers viz. Hathway, Siti and Den, except Ortel (marginal profit), have bottomlines in the red, due to heavy depreciation and interest expenditure. Hence, PE multiple based comparison is meaningless. Also, co-promoter Hathway and Essel Group’s Siti are much larger in size with pan India presence, subscriber base of over 13 million and topline of over Rs.1,200 crore. Another peer, Den Networks, being debt free and having a subscriber base of 10.7 million, is quoting at FY17 EV/EBITDA multiple of 7x, while Ortel Communications, being an East India regional play, with 75% revenue concentration in Odisha alone, is ruling at historic EV/EBITDA multiple of 6x. Thus, IPO pricing is expensive on relative basis too.

Besides, IPO of Ortel, in Feb 2015, had a very poor show, with OFS size having trimmed and stock falling 12% on debut. After over 2 years of listing, share is currently quoting at 63% discount to the IPO price, which highlights the poor outlook on the sector, despite broader markets having a healthy run-up. 

Business is highly capital intensive with a very competitive industry landscape as biggies fight for each additional subscriber. Also, with advent of superior technology and premium products like DTH (offered by deep-pocketed players like Tata Sky and Airtel) and mobile internet (new entrant Jio challenging incumbents), cable TV as a segment is becoming less appealing to the younger generation. Thus the sector as a whole is not an exciting space to be in.

To top this, regulatory uncertainties loom large over the sector as TRAI’s new tariff regime, which will come into effect from Sept 2017, will (i) restrict subscription charges for free-to-air channels, (ii) fix charges for pay channels, as also (iii) cap distributor fees, among others, which will adversely affect cable TV industry and hence the company. Going forward, its subscription income and ARPUs may come under stress. Also, carriage fees, the second highest income stream after subscription charges, have been capped wef 3^rd Mar 2017. Thus, it is important to factor in these headwinds before taking a call on the company and its valuation.

To summarise, weak fundamentals (huge depreciation, slim net margins, single digit RoE, high debtors), sector headwinds and inexpensive pricing make this IPO unattractive and hence an avoid.

Disclosure: No Interest.