DEN Networks Ltd is a low risk high returns investment idea for the Indian markets and one of the biggest beneficiaries of the Digitization policy. With the Government of India (GoI) determinedly implementing the digitization policy, we believe that the turning point for the struggling cable industry has been reached. The cable industry which was characterized by drastic “under reporting” of subscribers by the LCO (last mile operators) had led to substantial revenue losses not only to the broadcasters & MSO’s (multi system operators) but also the GoI (in the form of lost taxation). With Digitization gradually replacing the analog distribution system, the entire universe of subscribers will now be uniquely recognized leading to a multifold jump in the paying subscribers for MSOs. India’s largest MSO – DEN Networks Ltd is expected to benefit the most.
We rate the stock DEN Networks Ltd as a BUY with a DCF based target of Rs 210 offering scope for a potential gain of ~71% from the current CMP of Rs 123. Currently the stock is trading at 21x and 17.5x its estimated earnings for FY13 & FY14 respectively. DEN is one of the few profitable MSO with a leading market share of 12% and a subscriber base of 11mn. We expect revenues to grow multifold as the LCOs will no longer be able to under report the subscriber base. We expect revenues and earnings to reach Rs 1,280.9 crore and Rs 93.4 crore in FY14 from the current Rs 714.3 and Rs 14.6 crore in FY12 respectively.
Further once digitization is completed by 2016 (latest in our view), the full benefits would start accruing to the bottom line. We expect the earnings to be amplified significantly with increase in the ARPUs (current Rs 170/month which is expected to be around Rs 225/month as per the FICCI-KPMG study, uptick in subscriber growth (due to near doubling of the TV house holds by 2016).
Cable TV market in India well penetrated but under reported
Despite 76% penetration as of 2011, the 146 mn TV market is “ under reporting” pay TV subscriptions to the extent of 85% of the Rs 18,000 crore market. The under reporting has been primarily due to the unorganised nature of the cable distribution network which has over 1000 MSOs and nearly , hold your breath, 60,000 LCO’s.
As per the existing structure of broadcasting, the content is passed on to the LCO’s by the MSO’s via cable who further distributes the channels to the consumers. This results in the LCO having singular access to the consumer and the analog system ensures that there is no way for the MSO to have a clear understanding on the number of subscribers who are enjoying its services.
MSOs to wean control off LCOs post digitizatio
With the implementation of the new Digitization Bill, a radical change will take place. Use of smart technology (Set Top Box equipped with a Conditional Access Card at the customers end & SMS – Subscriber Management System) will ensure that all revenue leakages are plugged and gradually control shifts from LCO to MSO. The full impact of which is expected to be felt from 2016 onwards, post complete seeding of the ecosystem with set top boxes (STBs)
Once the roll out is complete we would notice a sea change in the way revenue share between the MSO , broadcaster and LCO are calculated. Also post digitization the MSO would be well entrenched as the controller and the role of the LCO would be relegated to more of a collection and servicing agent.
ARPU’s set to expand post complete rollout of digitization
APRU’s have remained suppressed largely due to high competition among the MSO’s and the unorganized nature of the industry. Even during the phased implementation of digitization, we do not expect a major surge in ARPU’s as MSO’s and DTH operators are on an expansion spree for capturing the same target audience resulting in competitive pricing. Post 2016 ARPU’s are expected to improve aided by value added services and introduction of niche content and increased HD offerings.
Post digitization, DEN’s entire ~11 mn subscriber base (as against the reported number of ~1.4 mn) is expected to start contributing to the revenues. In the interim we expect DEN’s subscription revenues to grow multifold to `853.8 crore by FY14 from `262.34 crore in FY12.
However placement fee is expected to crash
In the analog regime, channel carrying capacity was constrained to 90-100 channels. This led to a scramble amongst broadcasters to have their channels featured by the MSOs and for securing veiwership they had to pay a carriage fee. Further to have a higher sequential ranking, the broadcasters had to pay a placement fee to the MSOs. Although the subscription revenues were not large the MSO made handsome monies from this placement and carriage fees. Carriage and placement fees presently contribute ~50% of the total revenues for the MSO’s.
Post digitization this is expected to come down. However there is no consensus on the same amongst the various industry stake holders. While DEN Networks Ltd. expects this to remain stable, Hathway Cables expects this to crash quite a bit. We have conservatively built in 50% reduction in this amount for DEN Networks.
Carriage fees which have so far contributed 47% to the consolidated revenues are expected to decline to 23% going ahead. We have factored a drop in carriage fees to `294 crore in FY14 from ` 327.9 crore in FY12. Given the expected multifold increase in subscription revenues, the drop in carriage revenues will have a minimal impact on total revenues Despite this sharp fall revenues are expected to not be impacted severely as subscription revenues are expected to be extremely strong.
Threat from DTH players misplaced; Game is highly tilted in favour of MSOs
Despite having a presence in ~42 mn Households since inception (2003), we do not expect DTH to completely replace the existing analog distribution system. MSO’s being deeply penetrated in the Phase I and Phase II regions will restrict the churn to DTH operators and with accelerated rollout of digitization, we expect the MSO’s to further consolidate their position. MSO’s clearly outperform DTH on various other parameters as enumerated below.
DEN Networks Ltd truly a multi bagger in the making
Although the full impact of the revenue benefit would be felt FY2015 onward, nevertheless in the interim, the impact on revenue and profitability is expected to be substantial. Post digitization DEN’s entire ~11 mn subscriber base (as against the reported number of ~1.4 mn) is expected to start generating revenues. We expect DEN’s subscription revenue’s to grow multi fold to `853.8 crore by FY14 from `262.34 crore in FY12.
The strong growth in subscription revenues is incumbent upon the fact that the digitization would roll out in a timely manner as per the time table laid out by the Telecom Regulatory Authority of India (TRAI). Knowing fully well how deadlines are scarcely adhered to in India, we have been conservative in the roll out and built in delays in assuming an extended period for the rollout. Incas the roll out were to be done as per plan then the earnings would be brought forward significantly increasing the appreciation potential. However we have not built this into our model and remains an upside risk to our estimates.
Longer term consolidation of the industry to benefit DEN Networks Ltd significantly
As has been the global trend for pay tv, the same is expected to play out in India over the current decade. This will lead to the emergence of a few organized and well capitalized players over the next few years. Consolidation will also enable MSO’s to have a better bargaining power with broadcasters resulting in improved margins and thus better returns to the investors.
DEN being one of the major players which has grown the inorganic way is best placed to benefit from consolidation.
Post consolidation if international trends were to prevail in India also then we could expect similar improvement in the subscription margins which would improve the profitability and earnings of Indian companies dramamtically.
Financials to improve sharply over the next two years. After which the growth is to be even steeper
We expect the paying subscriber base to reach 3.9 mn by FY14 from the current 1.4 mn. On the back of the increased paying subscribers revenues are expected to almost double to Rs 1,280.9 crore by FY14 from Rs 714.3 core in FY12, while earnings are expected to leapfrog to Rs 93.4 crore from Rs 14.6 crore in FY12 despite higher depreciation from newly seeded STB’s and interest cost. However the full benefit of digitization will be felt only FY15 onwards.
DEN networks is indeed a low risk high yielding investment opportunity
Valuing DEN Networks Limited on a single stage DCF basis we recommend a BUY with a price objective of Rs 210 representing an upside potential of ~71% from the CMP of Rs 123 over the next 18 months. DEN Networks is truly a low risk high yielding investment opportunity for the Indian markets.
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|Vinit Bolinjkar Head of Research, Ventura Securities Ltd
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