Sector Report | November 2014

Media: Pay TV Operators

Don't flip! Best is yet to come

Shobhit Khare

(Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428

Don't flip! Best is yet to come

Index: Don't flip! Best is yet to come

Page No.

Summary

....................................................................................................

3

Executive summary.................................................................................... 4

Story in charts

............................................................................................

6

Digitization: Well begun and half done.................................................... 10

Broadband: Significant untapped potential

.............................................

12

Expect 23% digital subscriber CAGR over CY13-17

.................................

14

Cable ruled phase I/II; closer fight in phase III/IV

..................................

15

Expect industry consolidation in medium term

......................................

19

Phase I/II net ARPUs soar 5-10x

.............................................................

22

Recurring EBITDA/subscriber to increase many-fold

..............................

23

Regulations, Star RIO implementation to be catalyst for price hikes

.....

24

Companies

.........................................................................................

25-75

Den Networks

........................................................27

Hathway Cable & Datacom

.................................... 43

SITI Cable Network

................................................ 56

Dish TV India

..........................................................68

Investors are advised to refer through disclosures made at the end of the Research Report.

November 2014

2

Media | Pay TV Operators: Don’t flip! Best is yet to come

Media

Don’t flip! Best is yet to come

90m digital adds by CY17; net ARPU to jump 3-5x; huge BB opportunity

Indian cable Multi-system operators (MSOs) are amid two major technology revolutions

sweeping the country today – cable digitization and data traffic explosion:

Pay TV: Potential USD9-11b incremental annual revenue opportunity





Companies Covered









Pg

27

43

56

68



Den Network

Hathway

Siti Cable

Dish TV



Digitization, a game changing event for the Indian Television sector, represents

potentially a USD9-11b incremental annual revenue opportunity for the TV

distribution sector, implying scope for tripling of TV subscription revenue from

~USD5b in CY13 to USD14-16b by CY19. Moreover, bulk of the revenue in the

unorganized sector pre-digitization would move to the organized sector.

Indian TV distribution is one of the most fragmented industries, consisting of

50,000+ Local Cable Operators (LCOs) and 1,900+ Multi System Operators

(MSOs). Almost 65% of the ~140m Cable & Satellite (C&S) households in the

country are serviced by cable and its fragmented industry structure and lack of

transparency has been the key impediment for sector growth. ARPU has been

stagnant and lack of monetization opportunity deters broadcasters from making

big ticket content investments. Indian pay TV ARPU of USD3 has significant room

to grow as the low levels are primarily due to supply side fragmentation rather

than lack of customer value proposition/paying ability.

Assuming industry reaches ~200m subscriber base by CY19 (~140m as of CY13)

and the ARPU increases from currently depressed levels of INR175 (USD3) to

INR350-400 (USD5.8-6.7) led by consolidation of industry structure, the industry

TV subscription revenue can jump from USD5b currently to USD14-16b by CY19.

Not unexpectedly, the sector is currently going through teething execution and

regulatory challenges as the two decade long structure is being disrupted and

industry participants are jostling for space in the new paradigm. However, once

the dust settles, we believe the stage will be set for the sector to take-off. MSOs

as well as DTH operators will be the key beneficiaries of these reforms.

Broadband: INR15-23b value creation opportunity for each of Top-3 MSOs









Top-3 Indian MSOs together have a 35m+ universe and can conservatively reach

a 4-5m potential broadband subscriber base as compared to ~0.5m currently.

Cable reaches 90m+ households in India as compared to ~28m households

reached by wire line telephones, making it a much more potent medium for

delivering broadband. Out of the 252m internet connections in India, only 19m

are on wire-line out of which cable has mere ~5% share (only ~0.9m cable

broadband subs).

The entire globe is witnessing data explosion led by increasing smart phone

penetration and India is no exception to this trend. Global mobile data traffic is

growing at 60%+ YoY. Indian mobile incumbents are witnessing much higher

data traffic growth rates at ~100% or more on a YoY basis.

However, mobile data represented only 5% of the total data traffic in 2013.

Much of the mobile data usage happens inside buildings and it is estimated that

by 2017, 45% of the mobile data would be offloaded to fixed networks through

Wi-Fi. Wi-Fi offloading (using fixed network to service a mobile connection)

would be even more relevant in the Indian context given spectrum constraints.

3

November 2014

Media | Pay TV Operators: Don’t flip! Best is yet to come

Executive summary

Digitization: Well-begun and half-done; deadline extension broadly in line

India’s CY13 digital C&S subscriber base is estimated at ~70m, implying that almost

half of the ~140m connections were already receiving signals digitally. While phase

III/IV deadline has been relaxed to December 2015/16, this was broadly in line with

expectations as the new government intends to provide sufficient time for efforts

pertaining to local manufacturing of set-top boxes. Mandatory pan-India digitization

will become a reality from the start of CY17, entailing significant growth opportunity

as well as investment requirement.

Broadband: Huge untapped value creation opportunity for MSOs

Of the 252m internet connections in India, only 19m are on wire-line out of which

cable has ~5% share (~0.9m subs). Increased focus on broadband can tap significant

latent demand in the home broadband segment for the MSOs. Broadband segment

enjoys superior steady-state margin of 35-40% as compared to 20-25% in cable TV.

Assuming ARPU of INR600/month and assigning an 8x EV/EBITDA to broadband

business, per subscriber value creation opportunity is ~INR15,000. 10-15% potential

conversion for the MSO universe would imply incremental broadband value creation

opportunity of 35-90% (INR15-23b) for each MSO as a percentage of the current

market capitalization.

Best yet to come; expect 23% digital subscriber CAGR over CY13-17

Over CY13-17E, ~90m new digital subscribers are likely to be added. Of these, ~35m

would be due to organic market growth (C&S HHs to increase from 140m in CY13 to

175m in CY17) and ~55m would be due to expected phase-out of the analog

subscriber base, which is expected to decline from ~68m in CY13 to ~13m in CY17

due to mandatory digitization.

Digital cable ruled phase I/II; expect more balanced outcome in phase III/IV

During CY11-13, digital cable dominated the overall digital net additions with ~90%

of the incremental share on a pan-India basis. This was led by presence of better-

prepared national MSOs in the phase I/II (markets that were digitized during this

timeframe). However, given the connectivity challenges likely to be faced by cable in

rural markets and relatively lower presence of national MSOs in phase III/IV, we

expect a more balanced share of incremental digital subscribers for cable and DTH.

We model 40m DTH net additions and 50m cable net additions over CY13-17. This

implies huge growth opportunity for both platforms: digital cable subscriber base

would grow at a CAGR of ~32% from ~25m in CY13 to ~75m in CY17, and DTH

subscriber base would grow at ~20% CAGR from ~37m in CY13 to ~77m in CY17.

Expect industry consolidation; Star RIO implementation strong catalyst for

ARPU increases

We expect the industry to consolidate in the medium term, given significant scale

requirement post-digitization towards higher investments, sophisticated

systems/processes, and bargaining power for content. The cable industry is already

witnessing this trend, with top-5 MSOs accounting for ~55% of overall cable

subscribers but ~75% of digital subscribers. Consolidation and requirement of

increased content pay-out to broadcasters given increased transparency post

digitization could drive the second leg of upside from improved

segmentation/pricing at the end-subscriber level. Recent move from Star to migrate

November 2014

4

Media | Pay TV Operators: Don’t flip! Best is yet to come

to reference interconnect offer (RIO) based pricing can become a significant catalyst

in driving up the consumer level pricing and attaining addressability.

Phase I/II net ARPU soars 5-10x; universe net ARPU to jump 3-5x

The analog regime made monetization difficult for cable MSOs, given no control on

LCOs. Tax arbitrage available to cable also adversely impacted DTH ARPU. However,

post digitization, continued increase in net realizations for national MSOs in phase

I/II cities reflects substantial progress. Net ARPU for cable MSOs in these cities has

increased from INR10-15 earlier to INR50-100 currently, with further upside, as

gross billing gets implemented in more cities. By FY18, we expect universe net ARPU

of ~INR120 for national MSOs – a 3-4x jump from INR24-40 in FY14, led by increase

in the proportion of digital subscribers and better monetization.

Recurring EBITDA/subscriber to improve from INR2-10 in FY14 to INR40-50

by FY18, despite increase in net content cost

With significant increase in net ARPU and operating leverage, cable EBITDA (ex-

activation) for MSOs is expected to increase from INR2-10/subscriber in FY14 to

INR40-50/subscriber by FY18. Our estimates factor in higher net content costs at

INR30-40/subscriber per month by FY18 v/s -6 to +7 in FY14. TRAI regulation

requiring disaggregation of content from different broadcasting groups is positive

for MSO/DTH operators, given increased bargaining power. Also, continued

audience fragmentation and new channel launches are a reality in the digitized

scenario. These factors should prevent any run-away inflation in content costs.

EBITDA CAGR of 50-110% for MSOs, 28% for DITV; prefer DITV, HATH, SCNL

We expect 50-110% recurring EBITDA CAGR for MSOs (DEN, HATH, SCNL) and 28%

CAGR for DITV led by strong growth in digital subscriber base/net ARPU and

operating leverage. We initiate coverage on DEN (Neutral with a TP of INR165; 10%

upside), HATH (Buy with a TP of INR430; 22% upside), and SCNL (Buy with a TP of

INR40; 39% upside). We maintain

Buy

on DITV, with a TP of INR75 – 20% upside.

Summary valuation

Rating

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

CMP

(INR)

150

63

354

28

FY15E

12.7

27.7

17.9

10.8

FY15E

3.3

2.8

5.4

3.2

Subscriber universe (m)

Target Upside

Mcap

(INR)

(%) (USD m) FY15E FY16E FY17E FY18E

445

165

10

12.5

14.4

15.0

15.4

1079

75

20

12.9

14.3

15.5

16.6

983

430

22

12.2

14.0

14.7

15.0

283

40

39

10.2

10.5

10.8

11.0

Revenue (INR b)

EBITDA ex activation/one-offs (INRb)

FY16E FY17E FY18E FY15E FY16E FY17E FY18E

22.8

33.5

44.6

1.2

1.6

3.1

7.2

31.9

36.9

41.5

6.4

9.3

12.8

14.9

23.8

28.6

37.0

1.5

2.5

6.0

11.7

15.9

24.6

30.6

1.0

1.5

3.2

5.8

EV/Sales (x)*

EV/ recurring EBITDA (x)*

FY16E FY17E FY18E FY15E FY16E FY17E FY18E

2.2

1.3

0.9

31.2

24.3

13.4

5.2

2.3

1.9

1.5

12.0

8.1

5.4

4.1

4.5

3.3

2.3

60.7

37.2

14.9

6.9

2.5

1.5

1.1

30.4

21.8

10.7

5.4

Digital subscribers (m)

FY15E FY16E FY17E FY18E

7.0

12.4

14.8

15.4

12.9

14.3

15.5

16.6

9.2

13.0

14.5

15.0

5.4

9.0

10.6

11.0

Adjusted PAT (INRb)

FY15E FY16E FY17E FY18E

0.1

1.5

1.0

2.2

-0.1

2.2

5.6

8.0

-1.6

0.4

1.6

5.9

-0.6

1.1

1.0

2.6

P/E (x)

FY15E FY16E FY17E FY18E

368

17

28

12

NM

30

12

8

-35

141

36

10

-32

19

19

8

Source: Company, MOSL

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

November 2014

5

Media | Pay TV Operators: Don’t flip! Best is yet to come

Story in charts

Exhibit 1: India Pay TV: Potential USD9-11b incremental

annual revenue opportunity

CY13

End of period subscribers

(m)

Monthly ARPU (INR)

Revenue (INR b)

Revenue (USD b)

140

174

281

4.7

CY19L*

200

350

819

13.7

CY19H*

200

400

936

15.6

88

101

29

122

140

158

169

194

213

Exhibit 2: India PAY TV Revenue: Growth rate can accelerate

YoY (%)

Subscription revenue

281

245

* L/H= ARPU at lower/higher end of the range

21

15

13

7

15

10

15

15

CY04 CY05 CY06 CY07 CY08 CY09 CY10 CY11 CY12 CY13

Exhibit 3: India: TV and C&S households (m)

Total HHs (m)

238

148

241

153

130

243

161

140

C&S HHs (m)

245

169

148

247

177

157

TV HHs (m)

249

185

165

Exhibit 4: C&S connections mix: Analog v/s Digital (%)

Analog

7

251

193

175

62

53

49

44

19

12

CY16E

26

5

6

26

15

Digital cable

7

26

18

6

30

20

38

41

43

7

CY17E

DTH

6

38

Other digital

5

42

6

44

119

CY11

CY12

CY13

CY14E

CY15E

CY16E

CY17E

CY11

CY12

CY13

CY14E

CY15E

Exhibit 5: Significant shift expected in subscriber base

to digital (m)

Analog

140

72

Digital

175

Exhibit 6: 23% digital subscriber CAGR from 72m to 162m

55

35

162

162

72

68

13

CY13E

CY17E

90m net susbcriber adds

Market growth Analog phase-

off

CY17E Digital

CY13E digital

November 2014

6

Media | Pay TV Operators: Don’t flip! Best is yet to come

Story in charts

Exhibit 7: Phase III/IV: Current break-down of private

DTH and cable

Private DTH

Cable and other digital

Exhibit 8: Phase III/IV: Expected incremental share

of DTH/cable

DTH

Digital Cable

28.5

25%

84.5

75%

50.0

56%

40.0

44%

Exhibit 9: Share of top-5 MSOs

Industry

Digital subs (m)

30

22

Top-5 aggregate

Exhibit 10: 5-10x increase in phase I/II MSO ARPUs

80-100

50-60

95

52

10-15

Universe (m)

0

20

40

60

80

100

Pre-DAS

Current Phase II

Current Phase I

Exhibit 11:

Expect 3-5x jump in net ARPU

140

110

80

50

20

FY14E FY15 FY16 FY17 FY18

Den

Hathway

SITI

EBITDA per subscriber to grow manifold

Den

60

45

30

15

0

FY14E FY15

FY16

FY17

FY18

Hathway

SITI

EBITDA payback analysis

(per subscriber; INR)

MSO

Target Yearly EBITDA

Net Capex

Working Capital

Total Investment

EBITDA

Pay-back (years)

500-

600

800

250

1,050

1.8-

2.1

DTH

700-

800

1800

-300

1,500

1.9-

2.1

November 2014

7

Media | Pay TV Operators: Don’t flip! Best is yet to come

Story in charts

Exhibit 12: India: Internet connections (m)

Exhibit 13: Broadband: Per subscriber metrics and

value creation opportunity

Yearly ARPU (@INR600/month)

EBITDA margin (%)

Yearly EBITDA

EV/EBITDA multiple (x)

Value per subscriber

Acquisition cost per subscriber

Potential value creation per subscriber

7,200

35

2,520

8

20,160

5,000

15,160

46

187

252

19

Wireline

2G Wireless 3G/4G Wireless

Total

Exhibit 14:

Broadband:

Incremental value creation opportunity of 35-90%

Universe (m)

Hathway

Den

SITI Cable

12

15

10

Current BB

Conversion

base (m) potential (m)

0.4

-

-

15%

10%

10%

Potential BB

base (m)

1.8

1.5

1.0

BB subs

upside (m)

1.4

1.5

1.0

Value

creation

potential

(INR b)

21

23

15

Current M

Cap (INR b)

59

27

17

BB

potential/M

cap (%)

35

84

89

Exhibit 15: Stocks trading at 8-12x FY18 P/E and 4-7x EV/EBITDA

Den

Dish TV

Hathway

12

7

4

8

5

10

8

SITI Cable

5

FY18 EV/recurring EBITDA

FY18 P/E

Source: Company, MOSL

November 2014

8

Media | Pay TV Operators: Don’t flip! Best is yet to come

Exhibit 16: Detailed Company valuation

Rating

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Subscriber universe (m)

Digital subscribers (m)

Target Upside

Mcap

(INR)

(%) (USD m) FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

445

165

10

12.5

14.4

15.0

15.4

7.0

12.4

14.8

15.4

1079

75

20

12.9

14.3

15.5

16.6

12.9

14.3

15.5

16.6

983

430

22

12.2

14.0

14.7

15.0

9.2

13.0

14.5

15.0

283

40

39

10.2

10.5

10.8

11.0

5.4

9.0

10.6

11.0

Revenue (INR b)

EBITDA ex activation/one-offs (INRb)

Adjusted PAT (INRb)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

12.7

22.8

33.5

44.6

1.2

1.6

3.1

7.2

0.1

1.5

1.0

2.2

27.7

31.9

36.9

41.5

6.4

9.3

12.8

14.9

-0.1

2.2

5.6

8.0

17.9

23.8

28.6

37.0

1.5

2.5

6.0

11.7

-1.6

0.4

1.6

5.9

10.8

15.9

24.6

30.6

1.0

1.5

3.2

5.8

-0.6

1.1

1.0

2.6

Revenue growth (%)

EBITDA growth (%)

PAT growth (%)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

13

80

47

33

-17

33

87

134

-85

2023

-37

124

14

15

16

12

28

34

36

16

-92

-2563

154

45

13

33

20

29

58

66

143

95

NM

NM

293

262

56

47

55

25

226

44

111

83

NM

NM

-3

154

Gross ARPU (INR/month)

Net ARPU (INR/month)

EBITDA/sub (INR/month)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

167

176

189

207

31

42

68

113

12

14

16

37

175

184

196

204

175

184

196

204

44

57

72

77

175

186

202

222

49

59

82

121

5

9

26

55

171

182

197

216

36

47

75

108

8

10

22

41

Content cost/sub (INR/month)

C&P revenue/sub(INR/month)

Net content cost/sub (INR/month)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

29

32

45

59

30

29

27

26

-1

3

18

33

55

56

58

60

NA

NA

NA

NA

55

56

58

60

53

57

62

72

41

39

37

35

11

18

24

36

27

33

47

58

18

17

16

15

9

16

31

43

Recurring EBITDA margin (%)

Adjusted PAT margin (%)

Capex/Sales (%)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

9.8

7.2

9.2

16.1

0.6

6.7

2.9

4.8

20

38

14

5

23.0

29.2

34.8

35.9

-0.3

6.9

15.1

19.4

28

24

20

18

8.3

10.4

21.0

31.7

-9.0

1.8

5.7

16.0

18

29

14

7

9.6

9.4

12.8

18.9

-5.1

5.8

3.7

7.5

21

33

12

5

Gross adds (m)

Net adds (m)

Capex/sub (INR)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

1.2

5.8

2.9

1.2

1.0

5.4

2.4

0.6

1,411

1,341

1,341

1,341

2.6

2.6

2.6

2.6

1.5

1.4

1.2

1.1

2,709

2,655

2,515

2,380

1.6

4.2

2.0

1.2

1.2

3.8

1.5

0.6

1,550

1,450

1,400

1,350

1.5

3.9

2.0

0.9

1.4

3.6

1.6

0.4

1,200

1,200

1,200

1,200

EV/Sales (x)*

EV/ recurring EBITDA (x)*

P/E (x)

FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E FY15E FY16E FY17E FY18E

3.3

2.2

1.3

0.9

31.2

24.3

13.4

5.2

368

17

28

12

2.8

2.3

1.9

1.5

12.0

8.1

5.4

4.1

NM

30

12

8

5.4

4.5

3.3

2.3

60.7

37.2

14.9

6.9

-35

141

36

10

3.2

2.5

1.5

1.1

30.4

21.8

10.7

5.4

-32

19

19

8

CMP

(INR)

150

63

354

28

* Excluding activation revenue and post attributable minority interest

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

Den Networks

Dish TV India

Hathway Cable.

SITI Cable

Neutral

Buy

Buy

Buy

November 2014

9

Media | Pay TV Operators: Don’t flip! Best is yet to come

Digitization: Well begun and half done

~70m of the ~140m C&S connections already receiving signals digitally



India’s CY13 digital C&S subscriber base is estimated at ~70m, implying that almost

half of the ~140m connections were already receiving signals digitally.

While phase III/IV deadline has been extended as the government intends to provide

sufficient time for efforts pertaining to local manufacturing of cable set-top boxes,

mandatory pan-India digitization should become a reality in CY17.





This entails significant growth opportunity as well as investments.

India had an estimated

140m cable and satellite

(C&S) connections, implying

a C&S penetration of ~58%

out of the ~240m

households.

C&S penetration at 58%; leaving room for upside

As of CY13, India had an estimated 140m cable and satellite (C&S) connections,

implying a C&S penetration of ~58% out of the ~240m households. Of these 140m

C&S connections, ~49% were in the analog mode, ~26% were on DTH, ~18% were on

digital cable, and the balance ~7% were on other digital platforms including DD

Direct (free DTH service) and IPTV. Given scope for increase in C&S penetration as

well as high mix of analog connections, there is significant room for growth of digital

platforms, both cable and DTH till CY17.

Exhibit 17: India: TV and C&S households (m)

Total HHs (m)

238

148

241

153

130

243

161

140

C&S HHs (m)

245

169

148

247

177

157

TV HHs (m)

249

185

165

251

193

175

119

CY11

CY12

CY13

CY14E

CY15E

CY16E

CY17E

Source: FICCI Frames, MOSL

Exhibit 18: C&S connections mix: Analog v/s Digital (%)

Analog

7

26

5

62

6

26

15

53

7

26

18

49

Digital cable

6

30

20

38

44

19

CY11

CY12

CY13

CY14E

CY15E

41

12

CY16E

43

7

CY17E

DTH

6

38

Other digital

5

42

6

44

Source: FICCI Frames, MOSL

November 2014

10

Media | Pay TV Operators: Don’t flip! Best is yet to come

Post phase I/II digitization, phase III/IV next growth drivers

Post mandatory digitization in phase I (4 metros; digitization deadline: 31 October

2012) and phase II (38 cities, with 1m+ population; digitization deadline: 31 March

2013), ~27m subscribers across these phase I/II cities are now fully digitized. The

only exception is Tamil Nadu (Chennai, Coimbatore), where the digitization mandate

could not be implemented due to the ongoing legal proceedings. As per the revised

deadline, an estimated 113m C&S connections across phase III/IV would come under

mandatory digitization by December 2016. While ~29m of these could be already on

DTH, a significant portion of the balance ~85m is currently on analog and required to

be digitized as per the mandate.

As per the revised deadline,

an estimated 113m C&S

connections across phase

III/IV would come under

mandatory digitization by

December 2016.

Exhibit 19: Phase-wise subscribers (CY13E)

Private DTH

Cable and other digital

140

113

104

85

9

3

6

18

14

5

Phase II

29

Phase III/ IV

36

Aggregate

Phase I (ex-Chennai)

Source: Companies, TRAI, MOSL

Delay of 12/24 months in phase III/IV digitization

With the new government giving a strong thrust towards local manufacturing of set-

top boxes (STBs), the deadlines for mandatory digitization have been extended from

December 2014 to December 2015 for phase III and December 2016 for phase IV.

Recent muted pace of new digital subscriber additions from leading MSOs as

compared to the huge STB requirement was already indicating the fact that the

industry was in a wait-and-watch mode. However, with fresh deadlines in place, we

expect the phase III/IV digitization process to get completed by March 2017.

Exhibit 20: Digitization deadline

Phase

I

II

III

IV

Areas proposed

Delhi, Mumbai, Kolkata & Chennai

Urban areas with population > 1m

(38 cities)

All other Urban areas

Rest of India

Digitization Deadline

31-Oct-12

31-Mar-13

Rescheduled to 31-Dec-15

Rescheduled to 31-Dec-16

Source: Govt of India, MOSL

November 2014

11

Media | Pay TV Operators: Don’t flip! Best is yet to come

Broadband: significant untapped potential

INR15-23b value creation opportunity for each MSO



Of the 252m internet connections in India, only 19m are on wire-line out of which

cable has ~5% share (~0.9m subs).

Increased focus on broadband can tap significant latent demand in the home

broadband segment for the MSOs.

Broadband segment enjoys superior steady-state margin of 35-40% as compared to

20-25% in cable TV.

Assuming ARPU of INR600/month and assigning an 8x EV/EBITDA to the broadband

business, per subscriber value creation opportunity is ~INR15,000.

10-15% potential conversion for the MSO universe would imply incremental

broadband value creation opportunity of 35-90% (INR15-23b) for each MSO as

compared to the current Market Capitalization.









Wire-line broadband significantly underpenetrated in India

Of the 252m internet

connections in India, 187m

are on 2G wireless, 46m are

on 3G/4G wireless and only

19m are on wire-line (<8%

house-hold penetration).

Of the 252m internet connections in India, 187m are on 2G wireless, 46m are on

3G/4G wireless and only 19m are on wire-line (<8% house-hold penetration).

In the wire-line internet segment, cable currently has ~0.9m broadband subscribers

(5% of wire line). While wireless is likely to remain the preferred mode given

infrastructure bottlenecks, strong execution from MSOs can drive significant

growth given untapped potential.

Exhibit 22: Growth driven by wireless internet subs (m)

220

233

188

Exhibit 21: India: Internet connections (m)

46

177

187

252

19

Wireline

2G Wireless 3G/4G Wireless

Total

1QFY14

2QFY14

3QFY14

4QFY14

Source: TRAI, MOSL

Source: TRAI, MOSL

Exhibit 23: Technology wise wire line subscribers (m)

1.2

6%

0.9

5%

0.2

1%

DSL

3.1

17%

13.2

71%

Wireless/WiFi

Ethernet

Cable Modem

Others

Exhibit 24: Operator wise wire line subscribers (m)

0.4 1.6

0.4

0.4

2% 9%

2%

1.1 2%

6%

1.5

8%

13.2

71%

BSNL

Bharti

MTNL

You

Beam

hathway

Others

Source: TRAI, MOSL

Source: TRAI, MOSL

November 2014

12

Media | Pay TV Operators: Don’t flip! Best is yet to come

Opportunity to scale-up high margin business

Broadband business being incremental in nature, requires much lower revenue

sharing with local cable operators as compared to cable TV. Gross margins are also

higher as no pay-outs are required to broadcasters etc. Structurally, this leads to

higher broadband EBITDA margins of 35-40% as compared to 20-25% steady state

margins expected in cable TV.

Exhibit 25: Broadband: Per subscriber metrics and value creation opportunity

Yearly ARPU (@INR600/month)

EBITDA margin (%)

Yearly EBITDA

EV/EBITDA multiple (x)

Value per subscriber

Acquisition cost per subscriber

Potential value creation per subscriber

7,200

35

2,520

8

20,160

5,000

15,160

Source: MOSL

Assuming 10-15% potential

conversion for the MSO

universe, this implies

incremental broadband

value creation opportunity

of 35-90% (INR15-23b) as

compared to the current

market capitalization.

INR15-23b value creation opportunity for each MSO

Docsis-3 technology being deployed by leading MSOs provides 50-100 Mbps

speeds and ARPU is conservatively expected to be ~INR600 with steady-state

EBITDA margin of ~35% and subscriber acquisition cost of ~INR5000. Assigning an

8x EV/EBITDA to broadband business, per subscriber value creation opportunity is

~INR15,000. Assuming 10-15% potential conversion for the MSO universe, this

implies incremental broadband value creation opportunity of 35-90% (INR15-23b)

as compared to the current market capitalization.

Exhibit 26: Broadband: Incremental value creation opportunity of 35-90%

Universe

(m)

Current BB

base (m)

Conversion

potential

(m)

15%

10%

10%

Potential

BB base

(m)

1.8

1.5

1.0

BB subs

upside (m)

Value

creation

potential

(INR b)

21

23

15

Curent M

Cap (INR

b)

59

27

17

BB

potential/

Mcap (%)

35

84

89

Source: MOSL

Hathway

Den

Siticable

12

15

10

0.4

-

-

1.4

1.5

1.0

November 2014

13

Media | Pay TV Operators: Don’t flip! Best is yet to come

Expect 23% digital subscriber CAGR over CY13-17

~90m digital adds – market growth to contribute ~35m; analog phase-out ~55m





Over CY13-17, ~90m new digital subscribers are likely to be added.

Of these, ~35m would be due to organic market growth (C&S HHs to increase from

140m in CY13 to 175m in CY17) and ~55m due to expected phase-out of the analog

subscriber base.



The analog subscriber base is likely to decline from ~68m in CY13 to ~13m in CY17 due

to mandatory digitization.

C&S penetration to improve from 58% to 70%

The Indian C&S subscriber base is likely to increase from 140m in CY13 to 175m by

CY17, implying addition of ~35m new subscribers over the period and marking an

increase in C&S penetration from 58% in CY13 to 70% in CY17. Given the expected

analog phase-out, the incremental additions would be on digital platforms.

Analog phase-out implies ~55m opportunity for digital

CY13 analog subscriber base is estimated at ~68m. Given the mandatory digitization,

we expect this to decline to ~13m by CY17, even after factoring in likely challenges

in full digitization that could come up in specific regions or far-flung areas. This

implies an ‘analog-to-digital’ conversion opportunity of ~55m for the digital cable

and DTH platforms.

With C&S universe

expansion expected to

contribute ~35m subscriber

additions and analog phase-

off likely to contribute

~55m, the digital subscriber

addition opportunity over

CY13-17 is estimated at

~90m.

Combined digital opportunity of 90m incremental subscribers

With C&S universe expansion expected to contribute ~35m subscriber additions and

analog phase-off likely to contribute ~55m, the digital subscriber addition

opportunity over CY13-17 is estimated at ~90m. This implies a potential 23% CAGR

in digital subscriber base from ~72m in CY13 to ~162m in CY17. Given the

traditionally different focus areas for cable and DTH, we believe both platforms will

have an important role to play in the process of pan-India digitization.

Exhibit 27: Significant shift expected in subscriber

base to digital (m)

Analog

140

72

Digital

175

Exhibit 28: 23% digital subscriber CAGR from 72m to 162m

55

35

162

162

72

68

13

CY13E

CY17E

Source: FICCI Frames, Companies, MOSL

CY13E digital

90m net

susbcriber

adds

Market growth

Analog phase-

off

CY17E Digital

Source: FICCI Frames, Companies, MOSL

November 2014

14

Media | Pay TV Operators: Don’t flip! Best is yet to come

Cable-ruled phase I/II; closer fight in phase III/IV

Digital cable to add ~50m (32% CAGR), DTH 40m (20% CAGR) over CY13-17



Over CY11-13, digital cable dominated overall digital net additions, with ~90% of the

incremental share on pan-India basis. This was led by presence of better-prepared

national MSOs in the phase I/II (markets digitized during this timeframe).



However, given the connectivity challenges likely to be faced by cable in rural markets

and lower presence of national MSOs in phase III/IV, we expect a more balanced share

of incremental digital subscribers for cable and DTH. This implies huge growth

opportunity for both platforms. While the digital cable subscriber base would grow at

32% CAGR from ~25m in CY13 to ~75m in CY17, the DTH subscriber base would grow

at 20% CAGR from ~37m to ~77m.

Significant growth opportunity for both platforms

Of the 90m digital

subscriber addition

opportunity, we expect DTH

to add ~40m and cable

~50m.

Phase III/IV provides a significant growth opportunity for both digital cable and

DTH. Of the 90m digital subscriber addition opportunity, we expect DTH to add

~40m and cable ~50m. We note that both platforms have traditionally been

focused on different regions and strength areas. While top national MSOs have

largely urban footprint with presence in 80-200 cities, majority of the subscribers

for the leading DTH operators come from non-top-50 cities, that is, phase III/IV

markets. We expect a more balanced incremental share in phase III/IV as

compared to phase I/II, which was dominated by digital cable. Our estimates imply

significant growth opportunity for both platforms, with digital cable subscriber

base expected to grow at 32% CAGR and DTH at 20% CAGR.

CY11

238

148

62

119

80

74

6

1

31

3

8

3

62

38

5

26

7

CY12

241

153

63

130

85

69

19

13

34

3

9

1

53

47

15

26

6

CY13

243

161

66

140

87

68

25

6

37

3

9

0

49

51

18

26

7

CY14E

245

169

69

148

88

65

30

5

44

7

9

0

44

56

20

30

6

CY15E

247

177

72

157

89

30

59

29

59

15

9

0

19

81

38

38

6

CY16E

249

185

74

165

89

20

67

8

69

10

9

0

CY17E

251

193

77

175

91

13

75

8

77

8

9

0

Exhibit 29: India: Television subscriber forecasts

Total HHs (m)

TV HHs (m)

TV Penetration (%)

C&S HHs (m)

C&S (% of TV)

Analog Cable (m)

Digital Cable (m)

Digital Cable net adds (m)

DTH (m)

DTH Net adds (m)

Other Digital (m)

Other Digital adds (m)

Subscriber mix (%)

Analog

Digital

-Digital Cable

-DTH

-Other digital

12

7

88

93

41

43

42

44

5

6

Source: FICCI Frames, MOSL

November 2014

15

Media | Pay TV Operators: Don’t flip! Best is yet to come

Phase I: 9m digital subscribers; cable share at 70%+

In the three fully digitized

phase I cities excluding

Chennai, digital cable

accounts for more than 70%

of the subscriber base while

the balance is primarily on

DTH.

Phase I markets (Delhi, Mumbai, Kolkata) have an estimated C&S subscriber base of

~9m. Delhi is the largest phase I market, with an estimated C&S subscriber base of

3.7m followed by Kolkata (~2.8m) and Mumbai (~2.5m). Chennai, which has an

estimated C&S base of ~1.1m, is yet to come under mandatory digitization due to

ongoing legal proceedings. However, 60%+ of the Chennai market is already

digitized through DTH. In the three fully digitized phase I cities excluding Chennai,

digital cable accounts for more than 70% of the subscriber base while the balance is

primarily on DTH. Based on government data, we estimate that ~90% of the

incremental digital subscriber additions post digitization were on digital cable.

Exhibit 31: Phase I: Incremental share of analog to

digital transition (m)

0.7

10%

DTH

Exhibit 30: Phase I subscriber base pre and post

digitization (m)

DTH

9.0

Cable

9.0

7.1

6.5

Digital Cable

1.9

Pre-digitization

2.5

Post-digitization

6.5

90%

Source: Industry, MOSL

Source: Industry, MOSL

Exhibit 32: Phase I: City-wise MSO presence

Estimated C&S Set

top boxes (m)

3.7

2.5

2.8

9

Hathway







3 cities

Den

Siticable

Delhi

Mumbai

Kolkata

Aggregate phase I













3 cities

3 cities

Source: Census of India, Industry, MOSL

Phase II: 18m digital subscribers; cable share at 70%+

Phase II markets (38 cities having a population base more than 1m) have an

estimated C&S subscriber base of ~18m. Bangalore is the largest phase I market,

with an estimated C&S subscriber base of 2.6m, followed by Ahmedabad (~1.3m),

Hyderabad (~1m), Pune (~0.9m), and Surat (~0.9m). Hyderabad is currently the most

challenging market for the cable MSOs from monetization standpoint due to earlier

delays in box seeding due to legal proceedings and adverse political environment.

Exhibit 33: Phase II subscriber base pre and post

digitization (m)

DTH

Cable

Exhibit 34: Phase II: Incremental share of analog to

digital transition (m)

0.9

6%

DTH

18.0

18.0

13.9

13.0

Digital Cable

4.1

Pre-digitization

5.0

Post-digitization

13.0

94%

Source: Industry, MOSL

Source: Industry, MOSL

November 2014

16

Media | Pay TV Operators: Don’t flip! Best is yet to come

Exhibit 35: Phase II: City-wise MSO presence

Estimated C&S

Set top boxes

(m)

2.6

1.3

1.0

0.9

0.9

0.7

0.6

0.6

0.6

0.5

0.5

0.5

0.4

0.4

0.4

0.4

0.4

0.4

0.4

0.3

0.3

0.3

0.3

0.3

0.3

0.3

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

0.2

18

Hathway













































































26 cities

24 cities

Den













































































17 cities

SITI













































































Bangalore

Ahmadabad

Hyderabad

Pune

Surat

Jaipur

Visakhapatnam

Nagpur

Lucknow

Kanpur

Thane

Vadodara

Indore

Pimpri Chinchwad

Ludhiana

Bhopal

Gaziabad

Nashik

Kalyan Dombivli

Coimbatore

Rajkot

Faridabad

Patna

Navi Mumbai

Amritsar

Agra

Howrah

Mysore

Chandigarh

Meerut

Aurangabad

Jabalpur

Ranchi

Srinagar

Varanasi

Jodhpur

Allahabad

Sholapur

Aggregate phase II

Source: Census, Industry, MOSL

November 2014

17

Media | Pay TV Operators: Don’t flip! Best is yet to come

Phase III/IV: 113m subscribers; growth opportunity for digital

While cable is likely to

continue its lead, we expect

its incremental share at

~55% compared to 90-95%

in phase I/II.

Phase III/IV markets have an estimated C&S subscriber base of ~113m, of which

~29m are estimated to be on the six private DTH platforms, while the balance are on

cable, DD Direct, et cetera. Bulk of the incremental ~90m digital subscriber growth

would come from these markets, as they are yet to come under mandatory

digitization. While cable is likely to continue its lead, we expect its incremental share

at ~55% compared to 90-95% in phase I/II. This would be led by relatively lower

presence of national MSOs and cable footprint in these markets than in phase I/II.

Exhibit 37: Phase III/IV: Expected incremental share of

DTH/cable

DTH

Digital Cable

Exhibit 36: Phase III/IV: Current break-down of private

DTH and cable

Private DTH

Cable and other digital

44%

28.5

25%

56%

84.5

75%

Source: Industry, MOSL

Source: Industry, MOSL

November 2014

18

Media | Pay TV Operators: Don’t flip! Best is yet to come

Expect industry consolidation in medium term

Second leg of growth likely from better segmentation/pricing



We expect the industry to consolidate in the medium term, given significant scale

requirement

post-digitization

towards

higher

investments,

sophisticated

systems/processes, and bargaining power for content.



The cable industry is already witnessing this trend, with top-5 national MSOs

accounting for 55% of overall cable subscribers but 75% of digital subscribers. Industry

consolidation

could

drive

the

second

leg

of

upside

from

improved

segmentation/pricing at end-subscriber level.

14% TV subscription revenue CAGR over CY04-13

Pricing power of the

industry has been relatively

weak due to high

fragmentation. We expect

digitization to drive industry

consolidation.

TV subscription revenue at the end-consumer level is estimated to have grown at a

CAGR of 14% over CY04-13 to INR281b. However, a significant proportion of these

revenues was under-declared in the analog regime due to lack of addressability.

Pricing power of the industry has been relatively weak due to high fragmentation.

We expect digitization to drive industry consolidation.

Exhibit 38: TV subscription revenue and YoY growth (INR b)

YoY (%)

Subscription revenue

245

158

169

194

213

281

88

101

122

140

29

CY04

CY05

21

CY06

15

CY07

13

CY08

7

CY09

15

CY10

10

CY11

15

CY12

15

CY13

Source: FICCI Frames, MOSL

Top-5 MSOs have garnered much higher share of digital subscribers

We estimate that the top-5

account for ~75% of digital

cable subscribers v/s just

~55% of the overall cable

subscribers.

While the top-5 national MSOs (Den, Hathway, Siticable, Incable, Digicable) account

for ~50m of the estimated cable universe of ~95m, their share of pan-India digital

cable subscribers is higher. We estimate that the top-5 account for ~75% of digital

cable subscribers v/s just ~55% of the overall cable subscribers. As digitization

progresses in phase III/IV cities, industry consolidation is likely to accelerate.

Exhibit 39: Share of top-5 MSOs

Industry

Digital subs (m)

30

22

Top-5 aggregate

Universe (m)

95

52

0

20

40

60

80

100

Source: Industry, MOSL

November 2014

19

Media | Pay TV Operators: Don’t flip! Best is yet to come

Exhibit 40: Estimates subscriber universe and digital base of national MSOs (m)

Den

Hathway

Siticable

Incable

Digicable

Aggregate

Universe (m)

13.0

11.7

10.0

8.5

8.5

52

Digital subs (m)

6.6

8.4

4.6

2.5

2.4

22

Source: Industry, MOSL

Fewer head-ends further signifies scale benefit and consolidation

Post implementation of digitization mandate in phase I cities of Mumbai/Delhi, it is

estimated that the number of head-ends has reduced by ~85%. This signifies

industry consolidation as well as scale benefits available for large MSOs in the post-

digitization scenario.

Exhibit 41: Fewer head-ends post DAS

Post-Das

Delhi

15

110

Pre-DAS

Mumbai

7

50

0

20

40

60

80

100

120

Source: Company, MOSL

DTH: Consolidation process has begun

While the top-4 DTH

operators account for ~80%

of gross subscribers added

by the industry till date,

their share of net

subscribers and incremental

share in subscriber

additions is higher.

While the top-4 DTH operators account for ~80% of gross subscribers added by the

industry till date, their share of net subscribers and incremental share in subscriber

additions is higher. While the industry is currently going through virtual

consolidation, active consolidation possibilities exist.

Exhibit 42: DTH gross subscriber share (%)

DTH Operator

Dish TV

Tata Sky

Airtel Digital TV

Videocon D2H

Big TV

Sun Direct

Gross Subscriber Sh (%)

27

20

19

14

7

13

Launch Date

Oct-03

Aug-06

Oct-08

Apr-09

Aug-08

Jan-08

Source: Company, MOSL

Industry consolidation to drive segmentation/pricing benefits; Star RIO

implementation a significant catalyst

At ~INR174, India has one of the lowest pay TV ARPUs globally, largely due to its

fragmented industry structure and lack of segmentation/up selling opportunities in

the analog regime. As these bottlenecks get addressed and the ‘land grab’ phase

gets over in the next 2-3 years, we expect focus to shift towards pricing

November 2014

20

Media | Pay TV Operators: Don’t flip! Best is yet to come

improvement at the end-subscriber level. As evident in the exhibits below, DTH

operators are already offering a wider choice of packages.

Recent move from Star to

migrate to reference

interconnect offer (RIO)

based pricing for MSOs in

phase I/II areas can become

a significant catalyst in

driving up the consumer

level pricing as well as

attaining addressability.

We expect similar initiatives from cable MSOs, once package-wise billing is

implemented. Consolidation and requirement of increased content pay-out to

broadcasters given increased transparency post digitization would accelerate the

process. Recent move from Star to migrate to reference interconnect offer (RIO)

based pricing for MSOs in phase I/II areas can become a significant catalyst in driving

up the consumer level pricing as well as attaining addressability.

Exhibit 43: Estimated pay TV ARPU (INR/month)

174

164

158

CY11

CY12

CY13

Source: FICCI Frames, MOSL

Exhibit 44: DTH: Monthly pack prices (INR)

Simple Definition

Simple Definition

Simple Definition

Simple Definition

Simple Definition

High Definition

A

B

C

D

E

Tata Sky

230

260

320

360

450

125 add on

Dish TV

230

245

320

440

499

175-200 add on

Videocon D2H

231

260

310

370

425

550

Airtel

230

325

390

450

199 add on

Source: Company, MOSL

Exhibit 45: MSO: Monthly pack prices (INR)

BST (free channels)

Pack A

Pack B

Pack C

Hathway

100

180

225

270

Den Networks

100

180

225

270

SITI Cable

100

180

222

267

Source: Company, MOSL

November 2014

21

Media | Pay TV Operators: Don’t flip! Best is yet to come

Phase I/II net ARPUs soar 5-10x

Universe net ARPU to jump 3-5x



The analog regime made monetization difficult for cable MSOs, given no control on

LCOs. Tax arbitrage available to cable also adversely impacted DTH ARPU. However,

post digitization, continued increase in net realizations for national MSOs in phase I/II

cities indicates substantial progress.



Net ARPU for cable MSOs in these cities has increased from INR10-15 earlier to INR50-

100, with further near-term upside, as gross billing gets implemented in more cities.

By FY18, we expect universe net ARPU of ~INR120 for national MSOs – a 3-4x jump

from INR24-40 in FY14, led by increase in proportion of digital subscribers and better

monetization.



MSO net ARPUs increasing steadily

Currently, MSOs are

collecting INR80-100 per

subscriber from LCOs in

phase I markets and INR50-

60 in phase II markets.

Pre-digitization, net ARPU for MSOs was INR10-15, led by under-declaration of the

subscriber base by LCOs. While full monetization continues to be a challenge for

MSOs, we highlight the substantial progress achieved by MSOs. Currently, MSOs are

collecting INR80-100 per subscriber from LCOs in phase I markets and INR50-60 in

phase II markets. With package-wise billing (gross billing) getting implemented

progressively in several phase II cities, we expect continued increase in net ARPU.

Currently, the boxes seeded in phase III/IV markets by the MSOs are also generating

same ARPU as analog. This will change once mandatory digitization comes into

effect. Growth in digital base as well as increased monetization per box would drive

3-4x increase in the net ARPU per universe subscriber for national MSOs.

Exhibit 46: 5-10x increase in phase I/II MSO ARPUs

80-100

50-60

10-15

Pre-DAS

Current Phase II

Current Phase I

Source: Company, MOSL

Exhibit 47: Expect 3-5x jump in net ARPU

140

110

80

50

20

FY14E

FY15

FY16

FY17

FY18

Den

Hathway

SITI

Exhibit 48: Digital subscribers as % of total

Den

Hathway

SITI

125%

100%

75%

50%

25%

FY14E

FY15

FY16

FY17

FY18

Source: Company, MOSL

Source: Company, MOSL

November 2014

22

Media | Pay TV Operators: Don’t flip! Best is yet to come

Recurring EBITDA/subscriber to improve

Expect increase from INR2-10 in FY14 to INR40-50 by FY18



With significant increase in net ARPU and operating leverage, cable EBITDA (ex-

activation) for MSOs is likely to increase from INR2-10/subscriber in FY14 to INR40-

50/subscriber by FY18. Our estimates factor in higher net content costs at INR30-

40/subscriber per month by FY18 v/s -6 to +7 in FY14.



TRAI regulation requiring disaggregation of content from different broadcasting

groups is positive for MSO/DTH operators, given increased bargaining power. Also,

continued audience fragmentation and new channel launches are a reality in digitized

scenario. These factors will likely prevent any run-away inflation in content costs.

Recurring EBITDA/subscriber at INR40-50; payback attractive

We estimate cable EBITDA

(ex-activation) of INR40-

50/subscriber per month

for national MSOs on a net

ARPU of INR100-120 post

LCO commissions and taxes.

We estimate cable EBITDA (ex-activation) of INR40-50/subscriber per month for

national MSOs on a net ARPU of INR100-120 post LCO commissions and taxes. This

takes into account the expected increase in monthly content cost to INR30-

40/subscriber. Assuming an investment of INR800 in set-top box subsidy and

INR250/subscriber in working capital, the EBITDA payback period is attractive at 1.8-

2.1 years for digital cable. Payback period for DTH appears equally attractive, given

higher EBITDA per subscriber (no LCO share) and benefit of negative working capital.

Exhibit 50: ...despite significant increase in net content

costs/sub

60

40

20

0

-20

Den

Hathway

SITI

Exhibit 49: EBITDA per subscriber to grow manifold…

Den

60

45

30

15

0

FY14E

FY15

FY16

FY17

FY18

Hathway

SITI

FY14E

FY15

FY16

FY17

FY18

Source: Company, MOSL

Source: Company, MOSL

Exhibit 51: EBITDA payback analysis (per subscriber; INR)

Target Yearly EBITDA

Net Capex

Working Capital

Total Investment

EBITDA Pay-back (years)

MSO

500-600

800

250

1,050

1.8-2.1

DTH

700-800

1800

-300

1,500

1.9-2.1

Source: Company, MOSL

November 2014

23

Media | Pay TV Operators: Don’t flip! Best is yet to come

TRAI regulations, Star RIO implementation to act as catalyst for

price hikes















In February 2014, TRAI issued amendments mandating that only broadcasters

can enter interconnection agreements with MSO/DTH operators and

aggregators are not allowed to change the bouquets as offered in the reference

interconnect offer of the broadcaster.

There were 239 pay channels offered by 55 pay broadcasters, distributed by 30

broadcasters/aggregators. Top-3 aggregators controlled 59% of the total pay TV

channels, which included almost all the popular pay TV channels.

A timeframe of six months was prescribed for the broadcasters to amend their

RIOs, enter into new interconnection agreements and file the amended RIOs

and the interconnection agreements with TRAI.

Post these regulations, Media-Pro, the erstwhile JV between Zee and Star

Group, was discontinued. Zee and Star now distribute their channels

independently.

Recently, Star group announced that it will cease to enter independent

negotiations with MSOs for phase I/II markets and would distribute its channels

only on the basis of a transparent Reference Interconnect Offer (RIO).

Star RIO offers three distinct incentives (discount on card rate) to MSOs on

every channel on offer: 1) Penetration incentive (what proportion of subscriber

base is the channel reaching), 2) Logical channel number incentive (placement

of the channel in its genre and language) and 3) channel count incentive

(number of channels attaining a specified penetration slab)

Given Star’s leading viewership share across genres, Star RIO would increase

need for addressability of subscribers. It will also be a catalyst for taking price

hikes for the MSOs given expected increase in net pay-out to Star.

Exhibit 52: Card rate of popular Star India channels

Channel

Star Plus

Star Gold

Channel V

Life OK

Movies OK

Star Movies

NGC

Total

Genre

Hindi GEC

Hindi Movies

Hindi GEC (Youth)

Hindi GEC

Hindi Movies

English Movies

Infotainment

Rate (INR/month)

9.1

8.5

0.5

10.6

8.2

8.5

3.0

48.4

Source: Company, MOSL

Exhibit 53: Sample incentive calculation for Star Plus

Criteria

A. Penetration incentive > 90% Slab

B. LCN Incentive @ Slab 1

C. Channel Count incentive (i+ii+iii)

i. No. of Channels with penetration>10%

ii. No. of Sports Channels with penetration>10%

iii. No. of Channels with penetration>90%

Total incentive (A+B+C)

Star Plus card rate

Effective rate per subscriber (INR/month)

Incentive

9%

7%

8%

2%

4%

2%

24%

9.1

6.9

Source: Company, MOSL

November 2014

24

Media | Pay TV Operators: Don’t flip! Best is yet to come

Companies

BSE Sensex: 28,163

Companies Covered









S&P CNX: 8,426

Pg

27

43

56

68

November 2014

Den Networks

Hathway Cable

SITI Cable Network

Dish TV India

November 2014

25

Media | Pay TV Operators: Don’t flip! Best is yet to come

THIS SPACE IS INTENTIONALLY LEFT BLANK

November 2014

26

Initiating Coverage

Den Networks

| Sector: Media

Den Networks

BSE Sensex

28,163

S&P CNX

8,426

CMP: INR150

TP: INR165

Neutral

Well placed given scale and balance sheet strength

High new business losses a concern; ~50% underlying EBITDA CAGR

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

DEN IN

178.2

246/110

-15/-33/-58

26.7

0.4







Financial Snapshot (INR b)

Y/E Mar

2015E 2016E 2017E

Net Sales

12.7 22.8 33.5

EBITDA

2.0

5.9

5.5

EBITDA#

Adj. Net Profit

Adj. EPS (INR)

Adj. EPS Gr.

BV/Sh (INR)

RoE (%)

RoCE (%)

Valuations

P/E (x)

EV/EBITDA (x)*

EV/ rec EBITDA

367.9

19.1

31.2

17.3

6.8

24.3

27.5

7.5

13.4

1.2

0.1

0.4

1.6

1.5

8.7

3.1

1.0

5.4

-37.1

4.2

6.2



Den Networks (DEN) is the largest cable MSO in India, with a subscriber universe

of 13m (including 6.6m digital) in over 200 cities.

We expect its digital subscriber base to increase from 6m in FY14 to 15m in FY18,

driving 47% CAGR in net ARPU from INR24 to INR113 and 38% CAGR in recurring

EBITDA/subscriber from INR10 to INR37.

Focused group presence in cable distribution has driven DEN’s leadership in the

industry, despite it being a late entrant (founded in 2007). However, possibility

of sustained losses in its new business initiatives (Broadband and Soccer) is a

concern (EBITDA loss of INR120-150m per quarter currently).

We initiate coverage with a Neutral rating. Our price target of INR165 implies

10% upside.

-87.2 2022.8

0.4

2.8

7.3

9.3

112.7 124.8 132.3

~50% recurring EBITDA CAGR:

Increase in net subscription income in the post-

digitization scenario should drive 48% recurring EBITDA CAGR for DEN, with

EBITDA (ex-activation) increasing from ~INR1.5b in FY14 to ~INR7.2b in FY18.

Growth would be primarily driven by 47% CAGR in net subscription ARPU (from

~INR24 in FY14 to ~INR113 in FY18). Implied EBITDA per cable subscriber (ex-

activation) should improve from ~INR10 in FY14 to ~INR37 in FY18.

Largest national MSO despite being late entrant:

Mr Sameer Manchanda, who

has over two decades of experience in the Indian media and television industry,

founded DEN in 2007. Despite being a relatively late entrant, DEN has attained

industry leadership, with strong presence in HSM markets and leading market

share across its 200-city-13-state footprint.

Almost half of the universe base already digitized:

DEN’s current digital

subscriber base stands at 6.6m of the ~13m universe consisting of ~2m phase I,

~3m phase II, and 1.6m phase III/IV digital subscribers (balance ~6.4m are still in

the analog mode). With almost half of the universe digitized, DEN has a blend of

investments on the ground and further growth opportunities within its universe.

It has operations in 200 cities across 13 states, with strong leadership in the

digital subscriber base across HSM markets like Delhi and UP. We expect DEN to

add further ~9m net digital subscribers over FY14-18, driving a digital subscriber

CAGR of ~26% as compared to expected universe subscriber CAGR of ~4%.

Net ARPU to increase by ~3.5x by FY18:

The current net ARPU in phase I stands

at INR85-100/month while phase II monetization is INR50-55. With increase in

digital subscribers, we expect net subscription ARPU to jump from ~INR24 in

FY14 to ~INR113 in FY18 (47% CAGR), led by reduction in LCO/distributor share

(assuming modest underlying gross universe ARPU CAGR of 6%).

EV/Sub (INR)* 3,093 2,780 2,748

*Based on attributable EBITDA and

subs post minority stake

Shareholding pattern (%)

Sep-14 Jun-14 Mar-13

Promoter

40.1

40.1

40.1

DII

2.2

3.2

3.6

FII*

20.3

18.5

16.8

Others

37.4

38.3

39.5

*FII includes depository receipts

Stock Performance (1-year)

Den Networks

Sensex - Rebased

260

220

180

140

100

November 2014

27

Den Networks

Healthy carriage and placement yield, driven by HSM presence:

DEN has a

healthy carriage and placement (C&P) yield per universe subscriber at

~INR32/month as compared to ~INR43 for HATH and ~INR19 for SCNL. While

DEN’s presence across contiguous HSM markets drives C&P income, we note

that the HSM presence advantage would be relatively less critical in the digitized

scenario as compared to the analog regime.

Net content cost per subscriber to increase on higher proportion of digital

subscribers:

FY14 content cost was ~INR26/subscriber/month as compared to

C&P revenue of ~INR32, implying negative net content cost of ~INR6/month for

DEN on its universe base of 13m. With increase in the proportion of digital

subscribers, we expect net content cost per sub to increase to ~INR33 by FY18.

Ready for broadband launch starting from Delhi:

DEN plans to undertake

significant investments in the broadband business and has already incurred an

EBITDA loss of INR186m in this business during 1HFY15. It has hired a top

strategy consultant for overall project direction/management and has tied up

with key technology vendors – Cisco for network equipment, Wipro for OSS/BSS,

and Tata Communications for fiber, backbone, CDN, etc. Delhi is the first city of

launch, followed by UP. We model a broadband subscriber base of 0.2m and

broadband revenue of INR1.2b for DEN by FY18.

Indian Super League team ownership aimed at creating better brand visibility:

DEN has been awarded rights for a football club for Delhi city (named ‘Delhi

Dynamos’) in the Indian Super League (ISL) founded by IMG Reliance and Star

India. The company expects to create enhanced brand visibility through this

initiative. Given the pure opex nature of the business model, first-year loss from

the ISL team is expected to be ~INR150m.

Likely cumulative capex requirement of ~INR18b over FY14-18:

We estimate

cumulative capex requirement of ~INR18b over FY14-18 towards achieving 11m

cumulative gross digital cable subscriber additions, ~0.2m broadband subscriber

additions, and capex on head-ends and other network infrastructure. Capex is

expected to peak in FY16, led by investments towards digitization, thereafter

settling down at maintenance level of INR2.2b-2.4b from FY18.

Equity infusion of INR9.6b post March 2013; net cash balance sheet a

significant advantage:

DEN raised ~INR9.6b post March 2013 at ~INR218/sh

through preferential allotment and QIP. Post the capital raising, DEN became

the only national MSO with a net cash (~INR2.4b) balance sheet in FY14,

positioning it well to undertake investments towards future growth

opportunities in digitization, cable universe expansion, and broadband.

DCF-based target price INR165 implies 10% upside; Neutral:

We initiate

coverage on DEN with a Neutral rating. Our DCF-based one-year forward target

price is INR165, which implies an exit EV/recurring EBITDA multiple of 7x

(FY18E). We expect 22% EBITDA CAGR over FY14-20, primarily driven by 32%

CAGR in net ARPU. We have used a WACC of 13.3% and 5% terminal FCF growth.

November 2014

28

Den Networks

Den Networks: Geographical Footprint

Uttaranchal

Haryana

Rajasthan

Delhi

Uttar Pradesh

Bihar

Gujarat

Madhya

Pradesh

Jharkhand

West Bengal

Maharashtra

Goa

Karnataka

Kerela

Exhibit 54: Den Networks: Phase wise presence

Phase

I

II

III & IV

Nos of

cities

3

24

173

Details

Delhi, Mumbai, Kolkata

Banglore, Pune, Surat, Jaipur, Lucknow, Kanpur, Thane, Vadodara, Pimpri

Chinchwad, Gaziabad, Nashik, Kalyan Dombivli, Rajkot, Faridabad, Patna,

Navi Mumbai, Agra, Howrah, Mysore, Meerut, Ranchi, Varanasi,

Jodhpur, Allahabad

-

Exhibit 55: Subscriber packages (Delhi)

Monthly Package

Basic Service Tier

Intro

Family

Platinum

Price

100

180

225

270

Source: Company, MOSL

November 2014

29

Den Networks

Exhibit 56: Subscriber base (m)

Phase I

13.0

12.5

Phase II

14.4

12.4

6.0

1.0

3.0

2.0

FY14

7.0

1.8

3.1

2.1

FY15E

7.0

3.2

2.1

FY16E

Phase III/IV

15.0

14.8

9.2

Total Universe

15.4

15.4

9.6

3.4

2.2

FY17E

3.5

2.3

FY18E

Source: Company, MOSL

Exhibit 57: Gross and Net ARPU (INR/month)

Net ARPU

166

167

LCO and distributor share

176

189

Gross ARPU

207

94

142

137

135

121

113

24

FY14

31

FY15E

42

FY16E

68

FY17E

FY18E

Source: Company, MOSL

Exhibit 58: Net content cost (INR/sub/month)

Net content cost/sub/month

C& P revenue/sub/month

Content cost/subscriber/month

45

26

32

-6

FY14

29

30

-1

32

29

3

27

18

33

59

26

FY15E

FY16E

FY17E

FY18E

Source: Company, MOSL

Exhibit 59: EBITDA (ex-activation) per subscriber (INR/month)

EBITDA

Other cost

Net content cost

68

24

20

10

-6

FY14

31

20

12

-1

FY15E

42

3

25

14

18

34

16

37

113

Net ARPU

33

42

FY16E

FY17E

FY18E

Source: Company, MOSL

November 2014

30

Den Networks

Exhibit 60: FY14 revenue break-up

Others

8%

Susbcription

36%

Carriage

42%

Activation

14%

Exhibit 61: FY18 revenue break-up

Others

3%

Carriage

10%

Activation

3%

Susbcrip

tion

83%

Source: Company, MOSL

Source: Company, MOSL

Exhibit 62: Net subscription revenue (INR b)

20.6

Exhibit 63: EBITDA ex-activation/one-offs (INR b)

7.2

12.0

4.7

6.7

1.5

1.2

1.6

3.1

3.5

FY14

FY15E

FY16E

FY17E

FY18E

FY14

FY15E

FY16E

FY17E

FY18E

Source: Company, MOSL

Source: Company, MOSL

Exhibit 64: Capex and Capex/sales (INR b, %)

10.0

8.0

6.0

4.0

2.0

0.0

4.7

FY14

2.5

FY15E

8.6

FY16E

20

Capex

42

38

Capex/Sales (%)

50

40

30

14

4.8

FY17E

5

2.3

FY18E

20

10

0

Exhibit 65: FCFF (INR b)

4.1

4.3

4.9

-1.6

FY15E

-1.2

-2.4

FY16E

FY17E

FY18E

FY19E

FY20E

Source: Company, MOSL

Source: Company, MOSL

November 2014

31

Den Networks

Exhibit 66: DEN: Key operating metrics

FY14

Phase wise subscriber base (m)

Phase I

Phase II

Phase III/IV

Digital

Analog

Total Universe

Phase wise gross ARPU (INR)

Phase I

Phase II

Phase III/IV

Analog

Total Universe

YoY (%)

Phase wise net ARPU (INR)

Phase I

Phase II

Phase III/IV

Analog

Total Universe

YoY (%)

Per subscriber carriage and content cost (INR)

Content cost/subscriber/month

C& P revenue/sub/month

Net content cost/sub/month

Net content cost/net ARPU

Per subscriber monthly metrics

Gross revenue

LCO share

Net revenue

Net content cost

Other cost

Total operating cost

EBITDA

166

142

24

-6

20

14

10

167

137

31

-1

20

19

12

176

135

42

3

25

28

189

121

68

18

34

52

207

94

113

33

42

76

26

32

-6

-27

29

30

-1

-4

32

29

3

7

45

27

18

26

59

26

33

30

64

41

16

8

24

78

54

16

8

31

29

93

69

26

8

42

34

114

92

55

8

68

64

147

121

103

8

113

66

205

165

155

150

166

205

165

155

161

167

1

226

182

155

172

176

5

248

200

171

184

189

7

273

220

188

197

207

9

2.0

3.0

1.0

6.0

7.0

13.0

2.1

3.1

1.8

7.0

5.5

12.5

2.1

3.2

7.0

12.4

2.0

14.4

2.2

3.4

9.2

14.8

0.2

15.0

2.3

3.5

9.6

15.4

0.0

15.4

FY15E

FY16E

FY17E

FY18E

14

16

37

Source: Company, MOSL

November 2014

32

Den Networks

Exhibit 67: DEN: Key financial metrics

Key Financials (INR b)

Revenue

YoY (%)

EBITDA

YoY (%)

EBITDA margin (%)

EBITDA ex activation/one-offs

YoY (%)

EBITDA margin ex activation (%)

Capex analysis (INR b)

Capex

Capex/Sales (%)

Gross STB adds (m)

Net STB adds (m)

STB Capex/gross add (INR)

Revenue break-up (INR b)

Gross subscription revenue (incl LCO share)

Net subscription revenue (excl LCO share)

Reported subscription revenue (post gross billing)

Activation revenue

Carriage and placement revenue

Other revenue (incl broadband)

Total revenue

23.9

3.5

4.1

1.5

4.7

0.9

11.2

25.6

4.7

6.9

0.8

4.6

0.4

12.7

28.4

6.7

13.2

4.2

4.6

0.7

33.2

12.0

25.1

2.4

4.8

1.1

37.6

20.6

37.4

1.1

4.7

1.5

4.7

42

2.9

2.9

1,411

2.5

20

1.2

1.0

1,411

8.6

38

5.8

5.4

1,341

4.8

14

2.9

2.4

1,341

2.3

5

1.2

0.6

1,341

13.3

FY14

11.2

22

3.0

39

27.1

1.5

FY15E

12.7

13

2.0

-33

15.9

1.2

-17

9.8

FY16E

22.8

80

5.9

191

25.7

1.6

33

7.2

FY17E

33.5

47

5.5

-6

16.5

3.1

87

9.2

FY18E

44.6

33

8.3

50

18.6

7.2

134

16.1

22.8

33.5

44.6

Source: Company, MOSL

November 2014

33

Den Networks

Exhibit 68: DEN - Key subsidiary financials (FY14)

Shareholding

Den Entertainment Network Pvt. Ltd.

Den Digital Entertainment Gujarat Pvt. Ltd.

Aster Entertainment Pvt. Ltd.

Shine Cable Network Pvt. Ltd.

DEN Krishna Cable TV Network Pvt. Ltd.

Den Mahendra Satellite Pvt. Ltd.

DEN Pawan Cable Network Pvt. Ltd.

DEN Harsh Mann Cable Network Pvt. Ltd.

Den Classic Cable TV Services Pvt. Ltd.

Den Montooshah Network Pvt. Ltd.

Den Bindra Network Pvt. Ltd.

Den Ashu Cable Pvt. Ltd.

Den Nanak Communication Pvt. Ltd.

Den Futuristic Cable Networks Pvt. Ltd.

Den Digital Cable Network Pvt. Ltd.

Den Saya Channel Network Pvt. Ltd.

Den Faction Communication System Pvt.Ltd.

Radiant Satellite (India) Pvt. Ltd.

Den Mewar Rajdev Cable Network Pvt. Ltd.

Den Radiant Satelite Cable Network Pvt. Ltd.

Den RIS Cable Network Pvt. Ltd.

Den Sky Media Network Pvt. Ltd.

Meerut Cable Network Pvt. Ltd.

DEN Crystal Vision Network Pvt. Ltd.

Den Mod Max Cable Network Pvt. Ltd.

DEN BCN Suncity Network Pvt. Ltd.

Den Pradeep Cable Network Pvt. Ltd.

Den Prince Network Pvt. Ltd.

Den Jai Ambey Vision Cable Pvt. Ltd.

DEN Varun Cable Network Pvt. Ltd.

DEN Aman Entertainment Pvt. Ltd.

Den Satellite Cable TV Network Pvt. Ltd.

Den FK Cable Tv Network Pvt. Ltd.

Den Budaun Cable Network Pvt. Ltd.

DEN Ambey Cable Networks Pvt. Ltd.

Den Ambey Citi Cable Network Pvt. Ltd.

Den Ambey Jhansi Cable Network Pvt. Ltd.

Den Ambey Farukabad Cable Network Pvt. Ltd.

Den Kashi Cable Network Pvt. Ltd.

Den Enjoy Cable Networks Pvt. Ltd.

DEN Prayag Cable Networks Pvt. Ltd.

Den Deva Cable Network Pvt. Ltd.

Den Maa Sharda Vision Cable Networks Pvt.Ltd.

Den Fateh Mareketing Pvt. Ltd.

Den Enjoy Navaratan Network Pvt. Ltd.

November 2014

100%

100%

100%

100%

74%

60%

63%

51%

51%

100%

51%

51%

51%

100%

51%

51%

51%

51%

95%

65%

100%

99%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

26%

51%

51%

51%

51%

38%

26%

51%

51%

26%

Revenue

11

17

13

20

72

4

47

4

6

4

4

41

0

0

105

80

16

78

41

5

0

48

18

2

7

8

12

7

11

34

15

21

52

10

546

7

32

31

21

485

58

4

39

89

59

PBT

9

0

0

-1

12

1

8

1

0

-1

0

8

0

-17

-1

9

-6

11

-14

1

0

-6

2

-1

1

3

-1

-2

0

0

3

1

24

-1

204

0

-1

3

-10

229

8

1

2

-2

5

PAT

6

0

-1

-1

8

0

6

1

0

-1

0

6

0

-17

-1

6

-3

8

-10

1

0

11

2

-1

1

2

-1

-2

0

0

2

0

16

0

139

0

-1

2

-8

152

5

0

2

-2

4

34

Den Networks

Shareholding

Den Shiva Cable Network Pvt. Ltd.

Den Narmada Network Pvt. Ltd.

Dewshree Network Pvt. Ltd.

Shree Siddhivinayak Cable Network Pvt. Ltd.

Mahadev Den Network Pvt. Ltd.

Den Patel Entertainment Network Pvt. Ltd.

Mahadev Den Cable Network Pvt. Ltd.

Den MCN Cable Network Pvt. Ltd.

Drashti Cable Network Pvt. Ltd.

Den-Manoranjan Satellite Pvt. Ltd.

Den Nashik City Cable Network Pvt. Ltd.

Den Supreme Satellite Vision Pvt. Ltd.

Den Bellary City Cable Pvt. Ltd.

Den Malayalam Telenet Pvt. Ltd.

Den Malabar Cable Vision Pvt. Ltd.

Den Elgee Cable Vision Pvt. Ltd.

Den Rajkot City Communication Pvt. Ltd.

Den Infoking Channel Entertainers Pvt. Ltd.

Den Ucn Network India Pvt. Ltd.

Fortune (Baroda)Network Pvt. Ltd.

Galaxy Den Media & Entertainment Pvt. Ltd.

Bali Den Cable Network Pvt. Ltd.

Mahavir Den Entertainment Pvt. Ltd.

Den Citi Channel Pvt. Ltd.

Amogh BroadBand Services Pvt. Ltd.

Star Channel Den Network Pvt. Ltd.

Kishna DEN CableNetwork Pvt. Ltd.

Fab Den Network Pvt. Ltd.

Den Satellite Network Pvt. Ltd.

United Cable Network (Digital) Pvt. Ltd.

Shree Ram Den Network Pvt. Ltd.

Den Krishna Vision Pvt. Ltd.

Cab-i-Net Communications Pvt. Ltd.

Divya Drishti Den Network Pvt. Ltd.

Den Sahyog Cable Network Pvt. Ltd.

Den Sariga Communications Pvt. Ltd.

DEN New Broad Communication Pvt. Ltd.

IME Networks Pvt. Ltd.

Astron Media Networks Pvt. Ltd.

Den Kattakada Telecasting and Cable Services Pvt. Ltd.

Kerala Entertainment Pvt. Ltd.

Den A.F. Communication Pvt. Ltd.

Big Den Entertainment Pvt. Ltd.

Sree Gokulam Starnet Communication Pvt. Ltd.

Rajasthan Entertainment Pvt. Ltd.

Fun Cable Network Pvt. Ltd.

November 2014

87%

97%

51%

51%

95%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

51%

97%

51%

51%

51%

51%

51%

51%

100%

26%

26%

51%

50%

51%

51%

51%

51%

26%

51%

51%

26%

100%

100%

51%

100%

51%

51%

51%

100%

51%

Revenue

4

6

0

11

10

12

1

2

2

253

35

26

46

33

8

16

152

19

42

24

22

12

112

18

239

6

6

38

865

2

0

3

41

4

14

4

171

0

1

30

16

7

20

9

3

12

PBT

-1

1

0

-7

0

-3

0

-2

-6

53

0

-4

-1

1

-5

1

33

2

-1

0

-11

0

21

0

-22

0

-1

0

210

-1

0

0

-1

0

0

-1

6

0

0

-3

-1

0

2

-3

0

-3

PAT

-1

1

0

-5

0

-2

0

-1

-4

36

0

1

-1

0

-5

0

24

2

0

0

-10

0

14

0

-18

0

-1

0

144

-1

0

0

-2

0

0

-1

3

0

0

-3

-1

0

2

-3

0

-3

35