Thursday, December 29, 2011

>CABLE & SATELLITE INDUSTRY: Dish TV, Hathway Cable & Datacom & Den Networks

India's C&;S market on the cusp of high growth phase
The Indian Cable & Satellite(C&S) industry, the third largest in the world, with 136mn C&S homes is all set for a revolution as the long-expected 'digitisation' becomes a reality. Currently there are 41mn DTH homes and 6mn Digital cable homes (35% penetration in C&S homes). Going forward digital subscriber base is expected to rise from 47mn to 83mn by 2015, increasing at 21%CAGR (2012E-2015E). An industry of Rs270bn will no longer operate under obsolete analog distribution business post digitisation. The long standing local cable operator (LCO) 'underreporting' issue will get resolved with the gradual roll out of digitisation as per the sunset clause. Aggressive marketing and promotional offers by DTH players adds to the growth factor of the industry.

Imminent Digitisation set to double digital subscriber base
C&S industry is set to expand to 166mn with 64mn DTH and 20mn digital cable gross subscribers by 2015E. Aggressive subscriber acquisitions by the well funded six DTH players have kept the digitisation momentum alive. Now with compulsory digitisation MSOs and LCOs are left with 'no choice' in the face of increasing threat from DTH. We believe with Government-mandated digitisation, the well funded national MSOs and DTH players are all set to capture the opportunity.

Industry on the threshold of profitability
Currently the C&S industry is largely run under the outdated analog mode of distribution which has resulted in a highly fragmented value chain and allowed last mile operator to corner ~80% of the subscription revenue. With compulsory digitisation, economic retention will be the crucial driver in value creation. Curbing of revenue leakages will be the main growth factor for C&S industry to register 10% CAGR over 2012E-15E. Out of which we expect 47% CAGR in digital cable revenue over 2012E-15E.Digital cable players will benefit with increased portion of retained gains of compulsory declaration, which would drive a 3x rise in revenues. DTH subscription revenue is estimated to show 22% CAGR during 2012E-15E. Digitisation is bound to reduce the incidence of under-reporting - the bane of the Indian C&S industry. High operating leverage business model will be the key driver for organised cable players and DTH operators in magnifying their operating margins. We see major players in DTH segment and organized MSOs to breakeven by 2013.

Hathway Cable & Datacom- all set to ride the digitisation wave
Hathway, the MSO with largest paying subscriber base of 1.8mn, is all set to be the major beneficiary from compulsory digitisation. We expect a turnaround in the business with strong traction in its profitability post Phase I and Phase II of the sunset clause of mandatory digitisation. We believe changing business strategy, strong execution capabilities and market leadership in the metros would enable the company to monetise the digitisation opportunity.

We believe Hathway is the best placed MSOs to benefit from the digitisation opportunity. At CMP, the stock is trading at 7.5x EV/EBIDTA FY13E and 5.8x FY14E. With digitisation a reality, sustained leadership in its key markets, improved business dynamics of cable and broadband businesses and clarity in profitability makes Hathway a very attractive play in digitisation space. We initiate coverage on the Company with a ‘BUY’ recommendation on the stock with a target price of Rs151(7.5x EV/EBITDA FY14E). We have valued the stock on average of DCF, EV/Subscribers and EV/EBITDA(taking Comcast and Time Warner as peers).

Dish TV’s dominance to continue...
Dish TV, the pioneer in the DTH industry, continues to maintain its leadership with ~30% market share reaching more than 12mn subscribers led by competitive pricing, strong marketing push and wide distribution network making it the most commendable player in the DTH Industry.

We believe Dish TV is best placed amongst all DTH players to tap the low penetrated DTH opportunity. At CMP, the stock is trading at 9x FY13E EV/EBIDTA FY13E and 6.8x FY14E EV/EBIDTA. With digitisation a reality, sustained leadership in its key markets and clarity in profitability makes Dish TV a very attractive play in the digitisation space. We initiate coverage on the stock with a ‘BUY’ recommendation and a target price of Rs77 (8.4x FY14 EV/EBITDA).We have value the stock on average of DCF, EV/Subscribers and EV/EBITDA (taking Direct TV and Dish Network as peers).

Den Networks- leading cable operator
Den Networks, the only profitable MSO in India, has the largest reach with 11mn subscribers including ~1.4mn paying subscribers, acquired mainly through aggressive secondary point acquisitions. Its strategic acquisitions helped it in garnering better carriage revenue through improved subscriber base. Star-Den, a syndication venture with Star, added to the scale and stability of the business. Den's strong execution capabilities, market leadership in key markets and profitable business model makes it a strong contender to benefit from the digitisation wave.

At CMP, the stock is trading at 5.3x EV/EBIDTA FY13E and 3.7x EV/EBITDA FY14E. We\ initiate coverage on the stock with a ‘BUY’ recommendation and a target price of Rs64 (4.6x EV/EBITDA FY13E).We have valued the stock on average of DCF, EV/Subscribers and EV/EBITDA (taking Comcast and Time Warner as peers).

Cable Distribution Industry

Changing Dimensions

The Rs270bn Indian cable sector is the third largest in the world after China and US. The number of TV homes in India grew from 120mn in 2007 to ~148mn TV homes currently. C&S homes have witnessed a strong 12% growth in 2011 adding more than 12mn subscribers to reach 136mn (92% penetration of TV homes). Cable reaches 94mn homes with 88mn analog and 6mn digital cable households. DTH has 41mn subscribers reaching 30% of C&S homes. The TV viewing experience has changed a great deal over the last few years with the upcoming broadcasters producing differentiated and niche content like reality shows, food channels and more. The number of channels available has more than doubled to 600 plus channels, offering viewers more choice than they could ask for. Digital technology is fast catching up and gaining wider acceptance amongst viewers who are quality conscious and wish to have a better TV viewing experience.

Profound growth opportunity..
Currently 65% of C&S homes are Analog cable, forming a major chunk of the C&S base, 30% are DTH subscribers and 4% subscribe to Digital cable. Though up to now the growth in Digital cable penetration has been slow, the off take of the mandatory digitisation bill will provide an
opportunity for cable operators to convert the 88mn analog base into digital cable and DTH.
DTH penetrated into urban and rural markets registering a robust 83% CAGR over 2007-2011 to reach 41mn gross subscribers in November, 2011, from a mere 2mn subscribers in 2007.
Latest offerings such as High Definition(HD), Set Top Boxes(STBs) with recording facility,
Movies on demand, interactive learning, gaming and mobile TV are other innovations which
provides digital viewing an edge over analog and has led to an evolution in the TV and broadcasting industry. The 12mn non cable TV homes and 90mn non TV homes highlight the potential for further cable penetration and ample growth opportunity.

Outlook for the Industry
With a strong distribution networks spread across the country, cable and satellite has penetrated to 92% of TV homes to reach 136mn homes in 2011 at 16%CAGR (2007-2011). Total C&S homes are expected to reach 166mn by 2015. Analog cable penetration of C&S homes is expected to decrease from 65% currently to 50% by 2015E. Much of the growth will come from Digital cable which is expected to increase its penetration from 4% in 2011 to 12% by 2015E reaching ~20mn subscribers. Mandatory digitisation will provide a thrust to digital cable to increase its reach. The deep penetrated analog reach will help digital cable operators capture this opportunity much faster. Digital cable subscriber base should witness 31%CAGR over 2012-2015. DTH has been growing fast as the 6 players (excluding DD Direct) are strongly competing to gain market share. Aggressive advertising and attractive promotional offers have led to the DTH industry penetrate 30% into C&S homes. The DTH subscriber base is expected to grow from 41mn in 2011 to 64mn by 2015 at 15% CAGR(2012-15). With digital cable we will also see a ramp up in broadband subscription reaching 3mnsubscribers by 2015E. Broadband subscriber base will grow considerably led by bundledoffering of digital cable with broadband.