Cable and Satellite Sector - Strong profit visibility

The Rs 21,000-crore cable and satellite sector is likely to improve profitability on the back of higher subscriber base, lower costs and improving average revenue per user.

The consolidation activity and the Telecom Regulatory Authority of India’s (Trai’s) recently-proposed norms on foreign direct investment in the cable and satellite sector could hasten corporatisation and make operations of service providers more profitable.

 

EYEING PROFITS
FY12 estimates in Rs cr	Net  sales	Ebitda	Net  profit	EV/Ebitda (x)
Den Networks	1,431	277	90.0	10.3
Dish TV	1,993	577	136.0	7.8
Hathway Cable	1,195	87	87.0	7.6
WWIL	453	139	-8.4	7.2
Source: Analyst reports

The organised sector, comprising multi-system operators (MSOs) and direct-to-home (DTH) players, is sitting on huge losses due to this leakage and high customer acquisition costs.

However, analysts say the recent acquisition by Reliance Communications (RCom) of India’s third-largest national MSO, Digicable, fund-raising by MSOs Hathway and DEN Networks, as well as the proposed norms will bring the much-need capital.

This will not only help national MSOs consolidate but also compete against DTH players, which are spending heavily to acquire new customers. In a short period, DTH players have notched up 20 million subscribers in a market of 110 million cable and satellite connections.

Faster growth for the organised segment
What is attracting players such as RCom and will be of interest to other foreign cable operators is growth of the organised sector. IDFC Securities estimates that while the overall sector will grow 14.5 per cent annually between 2009 and 2015 to Rs 48,000 crore, the share of organised players will grow from Rs 4,100 crore now to Rs 24,000 crore by 2015. If VAS (value-added services) revenues are included, the share will jump by 6.5 times to Rs 34,000 crore, it says. This means the share of organised players, which is currently less than 20 per cent, will grow to about 70 per cent. A large part of this is likely to come from the rise in the number of declared subscribers as well as DTH subscribers.

From 11 per cent now, the number of DTH homes is likely to move up by a factor of three, contributing over a third of total subscribers over the next six years. Going ahead, the six players in the DTH space and large national MSOs are likely to focus on profitability once their subscriber acquisitions stabilise and consolidation reduces competition.

Not yet there
Most players are making losses due to revenue leakage and high subscriber acquisition costs. DTH operators are among the heaviest advertisers as they compete against cable operators as well as other DTH players to attract subscribers by giving heavy subisidies. The six DTH players are estimated to be sitting on losses of Rs 7,000 crore and have so far spent Rs 15,000 crore on setting up operations.

However, as the subscriber base increases and higher average revenue per user (ARPU) from VAS services kicks in, they could see profits at the operating level in the next two years. Dish TV, the only listed player, for example, is already making profits at the operating level with a subscriber base of nearly six million. Similarly, among MSOs, DEN networks, with 10 million subscribers, is making profits at the net level. In addition to the higher base, VAS revenues from broadband, advertising, gaming, movie-on-demand and recording services are likely to improve ARPUs from under $3.8 to $6.3 over the next five years, adding to profits.

Den Networks
The country’s second-largest MSO has used the inorganic route to expand its network to 77 cities in just two years. It would use the Rs 360 crore it raised from an initial public offer some time ago to add 3.1 million digital connections to its existing base of 10 million, with a significant portion going towards digitisation. Given its execution capabilities, aggressive expansion and improved declaration of subscriber numbers by cable operators, its revenues are expected to grow 43 per cent annually to Rs 1,320 crore by FY13, believes IDFC Securities. Its syndication business under a joint venture with Star TV should add about Rs 600 crore to the kitty. The stock is expected to give over 40 per cent returns over the next one year.

Dish TV
While the company has raised about Rs 1,500 crore that it will use to scale up its six-million subscriber base to about eight million by 2013, it is likely to make profits at the net level only in the last quarter of FY2012. Though expenditure is coming down due to fixed content costs and higher subscriber base, subsidies, at Rs 2,500 per customer, are delaying profits in the most competitive DTH environment in the world. The well-funded balance sheet, expanded subscriber base and lower content as well interest costs are likely to help the company record a profit of Rs 136 crore for FY12. Expect over 35 per cent returns over the next one-and-a-half years from these levels.

Hathway Cable
The company is India’s largest MSO with a 30 per cent market share of the digital subscriber base. The Rs 480-crore initial public offer equity infusion should help the company aggressively expand its customer base and reach revenues of Rs 1,700 crore by FY13. Coupled with strong growth from the high-margin broadband business, Hathway’s operating profit is likely to grow five times to Rs 630 crore, with net profit reaching Rs 210 crore by FY13. Given its reach, the company is likely to be the biggest beneficiary of the move towards digitisation. At the current price, the stock is expected to give 40 per cent returns over a one-year period.

Wire and Wireless
This Zee group company wound up its head-end in the sky (HITS) operations and suffered revenue loss as its experiment with new technology failed to take off due to high content costs. Elara Securities expects the company to report higher profitability as its analog cable operations are positive at the operating profit level. The stock has corrected considerably due to the failed experiment with HITS and offers an opportunity as the company now focuses on expanding its digital cable business. Elara Securities has a set target of Rs 24, while the stock currently trades at Rs 14.