Cable & Satellite Industry Future is digital Media & Entertainment 19 November 2009 Mohan Lal firstname.lastname@example.org +91 22 3220 9600 This page intentionally left blank Elara Securities (India) Pvt. Ltd. India | Media & Entertainment 19 November 2009 Initiating Coverage Cable & Satellite Industry Future is digital Indian C&S industry; the largest, fragmented and growing C&S Industry Revenue Growth 18 15 12 (%) 9 6 3 0 FY06 FY07 FY08 FY09 YoY growth (LHS) Industry Revenues (RHS) Source: Industry, Elara Securities Research 2.7 3.1 3.6 4.1 0 2 1 5 4 3 ($bn) Global Markets Research The Indian Cable & Satellite space generates ~$4 billion in subscription revenues, is the largest piece of the media industry and is growing at 15%-18% per annum. The industry at present is pre-dominantly run under the outdated analog mode of distribution which has resulted in a highly fragmented value chain and allowed last mile operator to corner 85%-90% of the value so far. Standing at a digital inflexion point However, the space is witnessing furious growth of digital platforms in the last few years mainly because of rising customer demand for quality, and highly subsidized offerings from DTH and digital cable players. We expect DTH and digital cable platforms to digitize half of the C&S households by 2015, which would make India one of the largest digital pay markets in the world. Digital cable to remove clutter, trigger consolidation We believe that the high capex intensity of digital cable would favor a few large MSOs having access to required funding, thus removing clutter of 6,000 multi system operators (MSOs) that exists in the analog mode. This would greatly enhance competitive positioning of bigger MSOs in the digital video value chain, and in turn would help them command a higher share of the subscription pie. A Rs35 billion topline multiplying opportunity by 2012 We estimate digital cable to throw a Rs35 billion subscription revenue opportunity for MSOs who have the ability to digitize cable networks. We note that this opportunity is 10x-20x the subscription revenues that the leading players currently earn from the analog cable. We see players with the ability to raise the required funds, skills to manage B2C networks and the technology to provide triple play services to emerge as winners in the space. Digital and DTH Subscribers (mn) 50 40 30 20 10 0 FY06 1 5 3 0.4 0.9 FY07 FY08 12 3 FY09 5 19 25 9 12 15 31 36 48 42 19 23 FY10E FY11E FY12E FY13E FY14E 5,000 0 DTH Subscribers Digital Cable Subscribers Source: Industry, Elara Securities Research Mkt opportunity for MSOs by 2012 Total C&S HHDs by 2012 (mn) Digital Cable share (%) Digital Cable HHDs (mn) ARPU (Rs) Size of digital market (Rs bn) Source: Elara Securities Research 116.5 10.0 11.7 250.0 35.0 Valuation The C&S industry so far has been largely ignored by investors because of lack of clarity over investment viability under the analog mode. However, the space has started to heat up, with two of the leading MSOs i.e. Hathway and DEN filing for IPO and more expected to come. We like players with proven execution skills, and available at comfortable valuations. We recommend BUY on Wire & Wireless, and Dish TV, both leading players in their respective spaces, on improving operational performance and cheap valuations. 60 40 20 0 Jan-09 Jun-09 Aug-09 Feb-09 Mar-09 Dec-08 Apr-09 May-09 Nov-08 Sep-09 Jul-09 Oct-09 20,000 15,000 10,000 Dish TV India (LHS) Sensex(RHS) WWIL (LHS) Source: Bloomberg Key Financials Company Rating Mcap Rs bn USD mn Dish TV Buy 37.7 813 CMP (Rs) 40 21 Target (Rs) 52 30 Upside (%) 30.0 44.0 EV/EBITDA FY10E NA NA FY11E 25.5 NA FY12E 13.5 17 FY10E 4.3 4.9 EV/Sales FY11E 3.6 3.7 FY12E 2.6 2.4 FY10E NA NA ROE (%) FY11E NA NA FY12E NA NA WWIL Buy 9.4 203 Source: Bloomberg, Elara Securities Estimate Mohan Lal • email@example.com • +91 22 3220 9600 Elara Securities (India) Pvt. Ltd. FY15E Cable & Satellite Industry Table of Content Executive Summary……………………………………………………………………………………………………………… Indian C&S industry – the largest and growing……………………………………………………………… Video has generated huge value in India too…..albeit for the local cable operator….. Digital cable creates a radical shift in power in favor of MSOs…………………………………….. Brief profile of Top MSOs…………………………………………………………………………………………………… Sector valuation & Recommendation………………………………………………………………………………. 3 5 6 9 11 12 Company Section Wire & Wireless…………………………………………………………………………………………………………………… Best placed to capture the digital opportunity ……………………………………………………………… HITS to spearhead digital leadership……………………………………………………………………………….. Key HITS model assumptions…………………………………………………………………………………………….. Topline to expand four times in 4 years………………………………………………………………………….. EBITDA to turn positive in FY12E……………………………………………………………………………………… Valuation & Recommendation…………………………………………………………………………………………. Company Description………………………………………………………………………………………………………… Dish TV………………………………………………………………………………………………………………………………. Critical mass achieved – crucial in a fragmented video value chain…………………………… Content cost to come down to 30% of subscription revenues……………………………………. Incremental subscribers not to dent margins substantially………………………………………….. Valuation & Recommendation…………………………………………………………………………………………. Company Description………………………………………………………………………………………………………… 13 16 16 17 18 19 21 23 25 28 29 31 33 35 2 Elara Securities (India) Pvt. Ltd. Cable & Satellite Industry Executive Summary Future is Digital The Indian cable & satellite industry (video market), generating ~$4 billion in subscription revenues, is the largest piece of the total media industry and is growing at a strong growth of 15%-18%. So far, most of this value has been generated in the analog mode of distribution, and has been captured by the local cable operators (LCOs) because of its very nature (explained later); analog value chain offers strong competitive advantage to the LCOs. The result has been little to no revenues at all to the other players in the industry value chain viz. the broadcasters and the multi system operators (MSOs), and thus the space never attracted significant investor interest. India all set to become the largest digital pay TV market in Asia However, the space is all set for a phase of sustained digitization and consolidation led by consumer demand for quality and technology making it affordable. India has 6 well capitalized direct to home (DTH) players and 6 leading multi system operators (MSOs) with the ability to digitize cable networks across India. Given the expansion plans of these players and strong consumer acceptance for digital platforms (DTH and digital cable), we expect half of India's C&S homes to migrate to digital platforms by 2015, creating one of the world's largest digital subscribers markets. Exhibit 1: Indian Digital Cable HHDs (mn) 25 20 15 10 5 0 FY10E FY11E FY12E FY13E FY14E FY15E FY07 FY08 FY09 0.4 0.9 3 9 5 12 19 15 23 Exhibit 3: Subscriber Break-Up FY09 Analog cable 80% Digital Cable 3% Source: Industry, Elara Securities Research DTH 13% Others 4% Exhibit 4: Subscriber Break-Up FY15E Others 4% DTH 31% Analog cable 50% Digital Cable 15% Source: Industry, Elara Securities Research Digital Cable to multiply topline of leading MSOs by 2012 DTH shrinking cable networks of the LCOs The aggressively rising DTH penetration in India has resulted in shrinking analog subscriber base of the local cable operators, who own the last mile. We estimate that LCOs are losing at least 1% of their cable subscriber base every month to the DTH platform. The only way to counter DTH threat is to provide affordable digital cable to the consumers, which is a very high capex intensive proposition. LCO needs digital cable to counter DTH threat In the face of the DTH heat, the LCO has two choices, one is to do nothing and loose the subscribers forever. The second (and more likely) is to align with those multi system operators that can provide digital cable to the LCO’s subscribers at an affordable rate. But since digital cable creates switching costs, it would also induce LCO dependency on these MSOs, thus enhancing their bargaining power. Digital cable to remove clutter, trigger consolidation Digital Cable Subscribers Source: Industry, Elara Securities Research Exhibit 2: Indian DTH HHDs (mn) 50 40 30 20 10 0 FY10E FY11E FY12E FY13E FY14E FY15E FY06 FY07 FY08 FY09 1 3 5 12 19 25 31 36 42 48 DTH Subscribers Source: Industry, Elara Securities Research As digital cable requires far higher capex than the analog cable, only a handful of MSOs with the ability to fund capex would be able to offer digital cable, thus lay claim over digital cable subscription revenues. We 3 Elara Securities (India) Pvt. Ltd. Media & Entertainment Cable & Satellite Industry believe that the high capex intensity of digital video is going to remove clutter at the MSOs’ end (currently 6,000 plus), thus greatly enhancing competitive positioning of a few large MSOs. This would enable these MSOs to capture a higher share of the total subscription revenues of the industry (at present only 5%-10% share) from the LCO. A Rs 35 billion opportunity in three years We expect the current changes in the sector to present a Rs35bn subscription opportunity to the leading MSOs by 2012. We note that the opportunity has the potential to multiply the 10x-20x times the current subscription revenues of the leading players. Exhibit 5: Market opportunity for MSOs by 2012 Total C&S HHDs by 2012 (mn) Digital Cable share (%) Digital Cable HHDs (mn) ARPU (Rs) Size of the market (Rs bn) Source: Elara Securities Research both the companies and consumers. Hence, valuations have to reflect enough scope for execution delays, price wars etc. We would like to play the companies where execution risk is less and digital upside is not fully captured in the stock price. Recommend ‘BUY’ on WWIL & Dish TV WWIL WWIL is one of the oldest and largest MSOs in India having presence in 107 cities with 73 analog and 5 digital headends. Chaired by Mr. Subhash Chandra, It is part of the Essel group of companies, one of the biggest media houses in India, with a strong execution track record in multiple businesses. The company is the sole owner of the Head End in The Sky (HITS) license in India at present, which is the quickest and cheapest way to digitize cable networks. We expect WWIL to garner 5 million subscribers by FY15E through its HITS launch, which would see its topline growing 4 times in 6 years and throw a positive EBITDA by FY12E. While WWIL is at an inflexion point in its operational performance, its share price doesn’t reflect any upside from the digital opportunity, and is trading below its analog business value, which we expect to correct with its successful HITS launch. We also see a favorable HITS policy from government, and successful listing of DEN Networks and Hathway as immediate valuation triggers as both of these companies are expecting a market cap which is more than triple the current market cap of WWIL. We initiate coverage with a ‘BUY’ recommendation and a target price of Rs30, indicating an upside of 44% from current levels. Dish TV Dish TV is India’s largest DTH player with ~5 million subscribers under its belt. We see the growing subscriber base of Dish TV a very important source of increasing bargaining power with respect to broadcasters while negotiating content fees, resulting in lower growth in content costs vis. a vis. revenue growth. We build in a content cost CAGR of 20% and topline growth of 31% for the period FY09-FY15E, resulting in content cost coming down to 31% and EBITDA margin reaching to 27% by FY15E. Dish TV’s operational performance has come under pressure in the past because of higher proportion of subsidized subscribers in the total subscriber base, resulting in lower ARPU growth and higher losses due to low gross margins. We see reducing proportion of new subscribers to total subscriber base easing pressure on operational parameter from here onwards. We believe that the company is all set for sustained operational improvement and arrive at a weighted average price of Rs 52, based on DCF method, stable state EV/EBITDA and ARPU adjusted EV/Sub method, implying an upside of 30% from current levels. Elara Securities (India) Pvt. Ltd. 116.5 10.0 11.7 250.0 35.0 Exhibit 6: Digital Cable subscription market size MSO WWIL DEN Hathway Incable Current Subscription Subscription Opportunity by revenues FY12E (Rs bn) (Rs mn) 1,300 35 1,750 3,214 1,315 35 35 35 Revenue jump x 27 20 11 27 Source: Elara Securities Research Note: Subscription revenues are assumed to be 50% of the total revenues reported from analog cable by these MSOs How to spot winners in the digital world Access to funding – Digital video requires investment in the digital head ends, hybrid fiber co-axial network, upgrading last mile network for two way connectivity, and of course set top boxes. Hence, only those players who can successfully raise funding through capital markets, or private equity players or through foreign partners would be able to ride this wave. Ability to provide triple play services – In the analog mode so far, the local cable operator has been interacting with the consumers providing low quality video. As the space becomes digital, triple play services viz. providing voice, video and data over one pipe would become possible through the latest technology. Players who can provide these services would be able to retain their subscriber base and maximize consumer revenue potential through cross selling different products. Available at comfortable valuations The digital opportunity is not going to be an easy ride and would be an intensively fought battle between the DTH players and MSOs. The technology itself is new to 4 Cable & Satellite Industry Indian Cable & Satellite Industry - Future is digital Indian C&S TV distribution market is highly lucrative and growing So far, LCOs have cornered most of the $4bn subscription revenues generated in the space Rising penetration of DTH is forcing LCOs to depend on MSOs for digital cable services High capex intensity of digital cable would favor large MSOs with access to funding Digital cable would provide a Rs35bn revenue opportunity for bigger MSOs by FY12E Indian C&S industry – the largest and growing The Indian C&S industry (video market) consists of delivering TV signals to consumers through cable, satellite and broadband. At present, mode of delivery is primarily analog, which is increasing becoming obsolete. It reaches ~90 million households, carries ~70-200 channels, with a monthly ARPU of ~Rs180-200 and generates revenues of over Rs$4 billion. The sector sizes up to 27% of the total entertainment and media industry, and is growing at ~15-20% per annum. Exhibit 7: Media & Entertainment Ind. Size break-up Television rest 16% Filmed Ent 19% Print Media 29% Exhibit 9: Indian C&S HHds technology wise break-up 3 1 2 50 57 64 71 78 83 87 2003 2004 2005 2006 Analog Cable HHDs mn Source: Industry 2007 2008 2009 Digital Cable HHDs mn Exhibit 10: C&S Industry revenue growth 18 15 12 (%) 9 6 Radio 1% Music 1% 3 0 2.7 FY06 3.1 FY07 3.6 FY08 4.1 FY09 YoY growth (LHS) 5 4 3 2 1 0 ($bn) Television Distribution 27%* Online Advtg 1% OOH 3% Animation 3% Industry Revenues (RHS) Source: Industry, Elara Securities Research Source: PWC *(TV dist. revenues exclude revenues from DTH) Exhibit 8: Video Value Chain – India Content Creators Content Aggregators Co ntent Disseminators Broadcasters •40+ broadcasters •400+ channels •125+ pay channels MultiSystem Operators Local Cable Operators 60,000 DTH players Source: Elara Securities Research Elara Securities (India) Pvt. Ltd. Media & Entertainment 5 Cable & Satellite Industry Indian Video value chain - analog based and highly fragmented The video delivery value chain comprises of content producers, broadcasters, Direct to Home (DTH) players /Multi System Operators (MSOs) and Local Cable Operators (LCOs). Currently, the industry is being operated under the analog mode of transmission, which is a basic and inefficient technology to carry video signals, is easier to set up and run, and does not require significant capex. This has resulted in a highly fragmented video value chain which has ~6,000 MSOs, who buy TV signals from broadcasters, and ~ 60,000 LCOs, who buy these signals from MSOs and carry to the consumer through their cable network. The consumer pays the monthly subscription to the LCO, who keeps a certain portion out of it for himself and pays fee to the MSO in a pre determined ratio. The MSO in turn pays the broadcaster for providing him the right to carry his channels. This is in direct contrast to the US video sector, which started in the same fragmented way in the 90’s, but has over the years resulted in a highly consolidated market through a long phase of mergers and acquisitions. Today, the top 5 MSOs in US control 80% of the cable market as compared to an estimated market share of 30% of the leading MSOs in India. Exhibit 11: Video market in US is highly consolidated Top 5 MSOs - U.S. 1 Comcast Corporation Time Warner Cable, Inc. Cox Communications, Inc. Charter Communications, Inc. Cablevision Systems Corporation No. of Subscribers 24,104,000 13,105,000 5,320,300 5,013,700 3,102,000 50,645,000 63,100,000 Mkt Share (%) 38.2% 20.8% 8.4% 7.9% 4.9% 80.3% distribution players in the cable and DTH space. Video space has the tendency to become consolidated and become a 4-5 players’ market over time, as the largest player in the value chain corners the maximum value. The two main reasons of continuous rise of video players are given below; Video services are unlimited: Video services keep on evolving over time and thus create continuous ARPU growth. Players who are able to provide these services viz. digital video, HD video, pay per view, video on demand, broadband internet, voice etc. are able to retain their customers and maximize revenues per unit. Video winning the convergence battle so far: Video has taken the centre stage in the battle to provide the triple play services viz. video, voice and data to the consumer through one pipe. The main reason for this has been the suitability of the cable pipe to carry video, voice, and data in the most cost effective way. The internet service providers and voice players have not been able to cost effectively carry all the three services on their networks unlike the cable players, especially in US. This has resulted in cable players dominating the broadband subscriber addition in the US market. Video has generated huge value in India too…..albeit for the local cable operator The video market in India is highly lucrative and thriving. The Indian video value chain is a little different than in other countries in that here the last mile is owned by the local cable operators, as compared to multi system operators in US and UK. Due to the vast geography, it was impossible for a few MSOs to lay cable over the Indian terrain as it would have involved huge capital outlays, which simply were out of reach of the MSOs. Hence, it was the decentralized nature of the cable industry that resulted in 90 million out of a total of 120 million TV owning HHDs in India receiving cable signals at present. LCOs control last mile –most of the value too However, this has also resulted in a very profitable local cable operator and loss making MSOs as most of the value is being cornered by the former so far. This is not 2 3 4 5 Total Top 5 Total U.S. Source: NCTA Video – proven wealth creator globally Video market has been a proven wealth creator for the leading players all over the world, creating giant video Exhibit 12: Video wealth creation – Global evidence Global Video Players No. of subscribers (mn) Market Capitalization ($ bn) Revenue ($ mn) EBITDA ($ mn) EBITDA Margin (%) Comcast 24.2 47.8 34,256 13,170 38.4 DirecTV 17.6 27.0 19,693 5,015 25.5 Dish Network 13.7 8.6 11,617 2,888 24.9 TWC 13 15.2 17,200 (8,694) (50.5) Vivendi* 10.6 25.2 25,392 4,953 19.5 Cablevision 10 7.2 7,230 2,198 30.4 B Sky B** 9 10.1 5,359 1,095 20.4 Astro PLC^ 2.8 23.5 10,282 2,320 22.6 Source: Bloomberg, Elara Securities Research; *(Euro million), ** (£ mn), ^(RM mn) 6 Elara Securities (India) Pvt. Ltd. Cable & Satellite Industry surprising given the way the analog value chain is tilted hugely in favor of the local cable operator. Clutter of MSOs in the analog mode In the analog mode of transmission, the level of knowhow and capital required to set up plant is very low. This has resulted in multiple MSOs mushrooming all over the country. Today there are 6,000 plus (TRAI estimates) multi system operators all selling the same video channels to the local cable operators. Exhibit 13: Clutter of MSOs selling their signal to a monopoly LCO has to reach the ultimate consumer through the LCOs’ network only, this results in many MSOs trying to sell their signals to the same LCO, leading to undercutting. This gives the LCO a very strong competitive advantage while deciding the MSO’s share out of the subscription revenues received from the consumer. The analog networks enable the local cable operator to switch from one MSO to another quite easily as he only has to change the MSO feed at his end while no change is required at the consumer end. This results in a huge churn at the LCO’s end every time a new MSO tries to enter the market. It’s not underpayment/leakage subscriber base but negotiated 6, 000 MS Os 1 LCO Source: Elara Securities Research Fixed content cost in the analog mode for MSOs – economy of scale becomes important In the analog mode, it is very difficult for the broadcasters to know how many households are receiving his signal as the transmission is not encrypted. So, broadcasters license their content to the MSOs on a fixed fee basis regardless of the subscriber base of the MSO. This fixed nature of the content cost makes operating at a large scale very important for MSOs, as the addition of more LCOs do not add to their cost and create healthy margins. On the other hand, since cable is a natural monopoly, usually there exists only one LCO per locality. As the MSO Exhibit 14: Analog value chain favors LCO Hence, multiple MSOs try and woo the same cable operator through undercutting each other by agreeing to charge for fewer households than what the LCO actually services. This results in LCO commanding 85%90% of the $4 billion of the subscription income that is being generated in India. While there is a general perception that local cable operators under report subscribers, we see it as simply their strong competitive positioning in the value chain that allows them to dictate terms to the MSOs and hence corner most of the value. Uninspiring operational performance of MSOs It is thus very easy to guess the plight of the MSOs under the analog mode. Most of the leading MSOs have been making losses precisely because of the way analog value chain favors the competitive positioning of LCOs. As they receive only 5%-10% of the subscription revenues, usually it’s not adequate to cover for the content cost payments to the broadcasters, resulting in losses at the operational level. Broadcasters Mul tiple Mul ti-System O perators 6 , 000 Loc al Cable O perators 60 ,000 Households 90 million Due to lack of addressability, forced to sell content to MSOs at prenegotiated lumpsum rather than at a fair rate per end subscriber. However, advertisement revenue has been their relief. Clutter of MSOs Too many suppliers of the same content targeting max 1-2 LCOs per area. Forced to resort to undercutting in order to widen subscriber base. Monopoly in their areas of operation. Easy substitution of content from one MSO with content from another. Hence high bargaining power with MSOs. Years of bad service at the hands of negligent and monopolistic LCOs. Dissatisfaction with Analogue cable. Eager for an alternative. Source: Elara Securities Research Elara Securities (India) Pvt. Ltd. Media & Entertainment 7 Low switching costs in the analogue mode Cable & Satellite Industry Only recently, carriage fee has emerged as a significant revenue stream for MSOs, which is a type of right of way fee paid by the broadcasters to have their channels placed in the preferred band frequencies. In the last few years, carriage fee has been substantial for the MSO mainly because of the rising number of new channel launches. Exhibit 15: Uninspiring operational performance of leading MSOs 2009 (Rs mn) Hathway DEN WWIL Sales 6,729 7,193 3,105 EBIT (14.6) 108.2 46.5 2008 Sales 4,347 869 2,855 EBIT (380.8) (191.8) (38.5) further augmented the digital penetration in different parts of the world. Exhibit 16: Digital Penetration as % of C&S HHDs 100 80 60 40 20 0 UK US Germany Taiwan 40 2008 19 13 9 3 4 6 France China Europe India 65 37 2007 NZ Italy 82 80 68 66 55 55 41 34 16 15 Source: Companies, Elara Securities Research Customers eager for an alternative Since LCO enjoys local monopoly, most of the time he takes customers for granted. The condition of cable networks is not very good in most areas because of low investments in the upgradation giving rise to very poor signal reception and frequent blackouts at the consumer’s end. On the other hand, cable bill has been rising year on year, leaving the consumer very dissatisfied. Source: Country website, CASBAA, NCTA, OECD Exhibit 17: China Digital Cable HHDs (mn) 70 60 50 40 30 20 10 0 2005 Source: Screen Digest 45 30 13 4 2006 2007 2008 2009 The digital revolution to weaken LCO grip However, the space is all set for a phase of sustained digitization and consolidation led by consumer demand for quality and technology making it affordable. The customer’s dissatisfaction with the low quality analog mode of distribution and the availability of an aggressively priced substitute product (DTH) is resulting in the LCOs losing their customer base at a very fast pace. Two main drivers of the digital growth in India are; Analogue cable networks are giving way to the digital mode the world over Analog technology, an outdated mode to carry video signals provides low quality and low capacity video delivery. It is not suitable for carrying a large number of channels and looses signal quality over a wide network. The digital platforms, on the other hand, are able to carry far more channels due to their advanced compression technology, and with better quality than the analog mode. Moreover, digital technology makes possible the delivery of high end services like video on demand, HD channels, pay per view and voice over internet protocol (VoIP), making it more relevant for the consumers. Consumers all over the world are preferring digital signals and the penetration of digital video has been rising over time. The falling prices of set top boxes have Exhibit 18: U.S. Digital Cable HHds (mn) 50 40 30 20 10 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 1 5 9 15 19 23 25 29 33 Source: NCTA Exhibit 19: Europe Digital Cable HHDs (mn) 20 15 10 5 0 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: Screen Digest 2 2 8 Elara Securities (India) Pvt. Ltd. Cable & Satellite Industry DTH triggered a mass exodus of dissatisfied analog customers India has seen a sharply rising DTH penetration throughout the country mainly because of six very strong players in this space with deep pockets and nationwide sales networks. The advertisement campaign run by these players is resulting in rising awareness about digital video and thus expanding the market in the process. Exhibit 20: Cable v/s DTH HHDs growth (%) 250 200 150 100 50 0 (50) (2.9) (2.9) (2.6) 2007 2008 2009 2010E 2011E Analog Cable HHDs growth YoY DTH HHDs growth YoY Source: Industry, Elara Securities Research Digital cable creates a radical shift in power in favor of MSOs LCOs need digital cable to counter DTH threat In order to counter the DTH threat, LCOs need to provide affordable digital cable to the customers. As they cannot provide it on his own due to their small scale of operations, they would have to collaborate with the MSOs for providing digital infrastructure and seeding his network with set top boxes. Digital cable highly capex intensive –to remove clutter 217 133 62 3.0 2.8 58 31 Moreover, all of these players are deeply subsidizing their product offerings, making it more affordable for the end consumers. These two factors have led to a mass exodus of dissatisfied analog cable households towards the DTH platform. The DTH segment is expected to add ~10 million subscribers to its fold in the current fiscal alone, which translates into a ~100% jump from the present DTH subscriber base. We are expecting ~34 million DTH subscribers by FY12E. LCOs losing grip over the last mile So far under the analog mode of distribution, the LCO has cornered most of the ~$4bn subscription revenues generated in India per annum as he has monopoly over the last mile. However, the advent of DTH technology has bypassed his network to reach consumer directly thus denting his bargaining power. This has resulted in local cable operator losing an estimated 1% of his network per month to the DTH players. This trend is only expected to continue, while DTH players are expected to corner 31% market share by 2012. Exhibit 21: DTH and Analogue Penetration 100% 80% 60% 40% 20% 0% FY06 FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E However, as the digital cable is highly capital intensive in nature, unlike analog. It requires a high investment in a digital head-end per city (at the cost of ~$600,000 per head end) that will encrypt the digital signals and of course spending on set top boxes per household (Rs1,800-2,00 per set top box). Due to this high capex requirement, only those MSOs who have access to organized funding either through banks, PE players, or capital markets would be relevant to the LCOs. Exhibit 22: Cable Capex in the U.S. ($bn) 160 140 120 100 80 60 40 20 0 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 7 6 11 15 16 15 11 10 11 12 14 15 Source: NCTA We believe that this would remove the existing clutter of 6,000 MSOs, and force most of the local cable operators to affiliate with the leading MSOs on the terms that would be profitable to both. This would also trigger a wave of consolidation in the industry and create a few very large MSOs. Digital Networks increase switching costs The main source of high bargaining power of the LCO has been the ease with which he can switch from one MSO to another under the analog mode. Under the digital networks, this is greatly reduced because one needs to change the entire digital set up which includes changing the digital head end, fiber back bone and set 9 DTH Penetration Source: Industry, Elara Securities Research Analogue Cable Penetration Elara Securities (India) Pvt. Ltd. Media & Entertainment Cable & Satellite Industry top boxes for the entire subscriber base. This would be out of reach of most of the MSOs as it requires high capex to replace a digital infrastructure. This also involves changes at the consumer end also unlike in the analog mode, which further reduces the frequency of churn. These two reasons would bind the LCO to the MSO, resulting in higher bargaining power in favor of the MSO. MSOs with deep pockets to ride the digital wave This would create the dependency of the LCOs on a very few large MSOs who have the ability to provide digital services to the consumers. MSOs in turn are going to demand a higher share of subscription revenues from the LCO’s network. As the LCO at present corners 85%90% of the subscription revenues and MSOs get only 5%10%, even a 5% digital penetration has the potential of doubling MSOs’ current revenues. Exhibit 23: Digital video value chain Exhibit 24: India Digital Cable HHDs (mn) 25 20 15 10 5 0 FY07 FY08 FY09 FY10E FY11E FY12E FY13E FY14E FY15E 116.5 10.0 11.7 250.0 35.0 27 20 11 27 0.4 0.9 3 9 5 12 19 15 23 Source: Industry, Elara Securities Research Exhibit 25: Market opportunity for MSOs by 2012 Total C&S HHDs by 2012 (mn) Digital Cable share (%) Digital Cable HHDs (mn) ARPU (Rs) Size of the market (Rs bn) Source: Elara Securities Research Exhibit 26: Digital Cable subscription market Vis. a vis. Current subscription revenues of leading MSOs 1 MSO 1 LCO MSO WWIL DEN Hathway Source: Elara Securities Research Current Subscription Subscription Opportunity by revenues FY12E 1,300 1,750 3,214 1,315 35 35 35 35 Revenue jump Incable Digital video – a Rs ~35bn opportunity by 2012 for the leading MSOs We estimate the leading MSOs to add 3-4 million digital subscribers per year going forward, which would result in total digital cable subscriber base reaching 23 million by FY15E. We reckon that the ongoing digital shift is going to present a ~Rs35 billion opportunity by FY12E, to the leading MSOs with the ability to invest in the digital infrastructure. While this is small in comparison to ~Rs70bn subscription revenues that would be generated under DTH platform by then, it still has the potential to multiply the topline of current players like DEN, DigiCable, Hathway, Indusind Media, Sumangali, WWIL and You Telecom. Source: Elara Securities Research Note: Subscription revenues are assumed to be 50% of the total revenues reported from analog cable by these MSOs Players sensing capex driven opportunity – line up for capital raising As the cable space undergoes a paradigm shift, most of the bigger MSOs are sensing the changes happening on the ground and are lining up for capital raising from either the PE players of through public offerings to capitalize on the digital opportunity. We have already seen DEN Cable and Hathway filing for an IPO, and we sense that more will be coming in future. Below is a brief profile of the leading MSOs at present. 10 Elara Securities (India) Pvt. Ltd. Cable & Satellite Industry Brief profile of Top MSOs Exhibit 27: Digicable Promoter Group Mr. Jagjit Singh Kohli and Mr. Yogesh Shah Ashmore Investment Management 46 Analog Cable, Digital Cable, Broadband Service 12 million Exhibit 30: DEN Networks Promoter Group Sameer Manchanda (IBN18) Raghav Bahl (N18) - founding member IL&FS, EMSAF Mauritius PE Funding No. of Cities Services PE Funding No. of Cities Services Claimed subscriber base Source: Company Analog Cable, Digital Cable, Broadband Over 10 million Claimed subscriber base Source: Company Exhibit 31: You Telecom Promoter Group Rajan Raheja Group Star, Chrys Capital 125 Analog Cable, Digital Cable, Broadband Service 1.57 direct subscribers, 0.3 broadband subscribers No. of Cities Services PE Funding CVCI Citigroup Venture Capital International 85%, Bennett Coleman & Company holds a 5% stake - 5% 12 Analog Cable, Broadband, Wifi broadband, Digital Cable, VoIP 1.5 mn Exhibit 28: Hathway Promoter Group PE Funding No. of Cities Services Claimed subscriber base Source: Company Claimed subscriber base Source: Company Exhibit 29: IndusInd media Promoter Group Strategic Interest No. of Cities Services Claimed subscriber base Source: Company The Hinduja Group Intel 24 Analog Cable, Digital Cable, Broadband Service 6.5 million Elara Securities (India) Pvt. Ltd. Media & Entertainment 11 76 Cable & Satellite Industry Sector valuation & Recommendation Globally, video market players have seen three distinct phases High capex/ high subsidy phase In the first phase of growth, video players try to build subscriber base for their new services, viz. analog cable, digital video, pay per view, HD services etc. As these services are highly capex oriented and have to be priced at subsidized rates to lure consumer, players run heavy losses in the initial years. Stable subscriber base operational break-even Once the company manages to retain the consumers through better offerings and customer care, rising ARPUs help the company recover the front loaded investment made in the product and service infrastructure. Mature state/high churn phase During this state, most of the consumer homes are converted to latest offering and market has matured. There is usually high competition among players and growth depends on churn in competitors’ subscriber base. It is interesting to note that this is a never ending cycle of new and innovative services coming to market and the companies striving to penetrate consumer homes with them again and again. Valuation parameters We believe that during the growth phase, company valuations are probably best captured using DCF method as it fully captures the investment pay back cycle (usually 3-5 years). Valuations are largely driven by expected subscriber base growth and ARPU trend. Once the companies achieve a stable state, valuations could be based on EV/Sub or EV/EBIDA multiples as most of the growth is priced in and valuations depend on existing subscriber base. Indian video market – present scene The Indian video industry is seeing the last phase of analog market growth and first phase of growth of Exhibit 32: Valuation summary Company Rating Mcap Rs bn USD mn Dish TV WWIL Buy Buy 37.7 9.4 813 203 CMP (Rs) 40 21 Target (Rs) 52 30 EV/EBITDA EV/Sales ROE (%) Upside (%) FY10E FY11E FY12E FY10E FY11E FY12E FY10E FY11E FY12E 30.0 44.0 NA NA 25.5 NA 13.5 17 4.3 4.9 3.6 3.7 2.6 2.4 NA NA NA NA NA NA digital platforms. Companies have a huge market of over 90 million households to convert into digital and most of them are focusing on building subscriber base through subsidized offerings. At present, there are 6 satellite players in India, with a subscriber base of 1-5 million, altogether accounting for over 15% of market share. All of these players offer almost similar offerings, and compete mostly on price. On the cable side, there are 10 large players and ~6,000 smaller players in the industry, servicing ~75 million customers through ~60,000 last mile operators. Exhibit 33: Indian DTH players subscriber base (mn) 5 4 3 2 1 0 Dish TV Tata Sky Sun Direct Reliance Big TV Airtel Digital TV 1.8 1.0 4.7 4.0 3.5 Source: Industry The C&S space so far has been largely ignored by investors because of lack of clarity over investment viability under the analog mode. However, the space has started to heat up, with two of the leading MSOs i.e. Hathway and DEN filing for IPO and more expected to come. We like players with proven execution skills, and available at comfortable valuations. We recommend BUY on Wire & Wireless, and Dish TV on improving operational performance and cheap valuations. We have valued WWIL on DCF method and Dish TV on a weighted average of DCF, EV/Sub, and EV/EBITDA method based on global peers multiples. Source: Bloomberg, Elara Securities Estimate 12 Elara Securities (India) Pvt. Ltd. India | Media & Entertainment 19 November 2009 Initiating Coverage Wire & Wireless It’s a ‘HITS’ Key contender to the digital opportunity WWIL is one of the oldest and the largest MSOs in India with presence in 107 cities, having 73 analog and 5 digital headends. Chaired by Mr. Subhash Chandra, It is part of the Essel group of companies, one of the biggest media houses in India, with a strong execution track record in multiple businesses. We count WWIL as one of the key contenders for the digital opportunity and expect it to emerge as a dominant player in the digital video market. Expected to garner 5 million subscribers with its HITS platform WWIL is the sole owner of Headend-In-The-sky (HITS) license at present, which we believe is the quickest and cheapest way to digitize cable networks. It has already set up the backbone infrastructure for its HITS launch, and the offering is now available in 125 cities across India. The company plans to target Category B and C towns, and expect to garner 1.25-1.5 million subscribers by FY11E. Assuming a run rate of 1 million HITS subscribers per annum, we expect WWIL to reach a digital subscriber base of 5mn by FY15E, from 0.3mn at present. Operating performance set to improve significantly In our estimates, increasing share of digital subscription and rising subscriber base would help WWIL post a 27% revenue CAGR during FY09-FY15E, which would result in a fourfold expansion of its topline. Improving gross margin from the digital subscriber base is would help the company become EBITDA positive by FY12E, and further improve margin to 30% by FY15E. WWIL is expected to throw positive cash flows by FY14E. Right issue to support balance sheet We expect WWIL to incur a net capex of ~Rs9.2bn to build its digital video business. The company has come up with a 1:1.09 right issue to the tune of Rs4.5bn which would strengthen the expansion drive for the next two years and also support balance sheet for further fund raising in FY12E. Rating : Buy Target Price : Rs 30 Upside : 44% CMP : Rs 21(as on 16 November 2009) Key Data Bloomberg /Reuters Code Current /Dil. Shares O/S (mn) Mkt Cap (Rsbn/US$mn) Daily Vol. (3M NSE Avg.) Face Value (Rs) 1 US$= Rs46.3 Source: Bloomberg ; * As on 16 November 2009 Global Markets Research WNW IN/WIWI.BO 217/454 9.4/203 4,992,125 1 Price & Volume 30 25 20 15 10 5 0 Feb-09 Mar-09 Apr-09 May-09 Nov-08 Dec-08 Jun-09 Jul-09 Sep-09 Oct-09 48.6 12.2 12.5 26.7 6M 39.9 39.3 17.9 88.4 54.4 Aug-09 Nov-09 48.6 4.4 16.3 30.7 12M 81.5 72.9 147.2 144.7 93.5 WWIL 10+ HITS 6 0.3 3.1 9.4 507 NA NA 17 Oct-08 Jan-09 200 150 100 50 0 Vol. in mn (RHS) Source: Bloomberg WNW (LHS) Share Holding (%) Q3FY09 Q4FY09 Q1FY10 Q2FY10 Promoter Institutional Investors Other Investors General Public Source: Bloomberg 48.6 17.4 10.5 23.5 48.6 14.8 10.6 26.0 3M 10.5 4.8 (14.0) 41.9 11.2 Price Performance (%) Sensex WWIL Dish TV Zee Entertainment Sun TV Source: Bloomberg Valuation Valuations do not capture digital upside – WWIL’s core business is available at a market cap of ~Rs4bn, which is below its analog business value, implying zero value to the digital upside. Further, two of its peer group companies i.e. Hathway and Den Networks have filed for IPOs. Hathway is expecting a valuation of ~Rs50bn whereas Den is expecting ~Rs25bn upon listing. WWIL’s market cap of ~Rs9.4bn is at a huge discount to these otherwise comparable companies. We believe that the listing of these two players may provide an immediate upside trigger for WWIL. We have used DCF method to capture and value the digital opportunity for WWIL and arrive at a one year price target of Rs30, indicating an upside of 44% from the current levels. Key Financials Y/E Mar (Rs mn) FY09 FY10E FY11E Rev 3,082 2,586 3,412 YoY(%) 13.7 (16.1) 31.9 EBITDA 25 (356) (27) 724 EBITDA(%) 0.8 (13.8) (0.8) 14.0 Adj PAT (941) (1,225) (1,346) (1,185) YoY(%) (37.0) (29.7) (9.8) 11.5 DEN Years of experience Digital strategy Analog Subscriber (mn) Digital Subscribers (mn) Cable Revenues (Rs bn) Market Cap (Rs bn) Valuation gap over DEN, Hathway Source: Company 2 Hathway 14 Digital Digital head-ends head-ends 10 0.3 3.6 25 166% 1.3 1.0 6.6 50 432% Fully DEPS NA NA NA NA RoE(%) NA NA NA NA RoCE(%) NA NA NA NA P/E(x) NA NA NA NA EV/EBITDA(x) FY12E 5,177 51.7 Source: Company, Elara Securities Estimate Mohan Lal • firstname.lastname@example.org • +91 22 3220 9600 Elara Securities (India) Pvt. Ltd. Wire & Wireless Valuation Trigger HITS policy approved by goverment Successful listing of peers at higher valuations Investment Summary Key contender for the Rs35bn digital cable opportunity by FY12E Sole owner of HITS license with ready infrastructure set up and offering available in 125 cities Expected to garner 5 mn digital subscribers with HITS platform, by FY15E at the run rate of 1 mn subscribers p.a. Current market cap not capturing digital upside Valuation Trigger 1. Successful listing of peers (DEN Networks and Hathway) at higher valuations 2. Growing acceptability of HITS offering by LCOs leading to subscriber base growth 3. EBITDA break even by FY12E Key Risks Funding constraint to the tune of Rs2.8bn by FY12E Slower than expected subscriber growth under HITS High competitive intensity leading to irrational competition Slower than expected ARPU growth Higher than expected content costs Major technological changes leading to obsolescence of current set top boxes Our Assumptions Addition of 1 million digital subscribers under HITS starting FY11E, leading to a digital subscriber base of 5 million by FY15E Gross ARPU growth of 5% p.a., LCO's share 50% to start with and declining to 30% by FY15E Revenue CAGR of 27% Content cost as % of net subscription revenues at 50% to start with; reducing to 36% by FY15E; CAGR of 20% Reducing proportion of analog business and carriage fee in the overall revenue stream Set top box subsidy of Rs1300 per subscriber 35 30 25 20 15 10 5 0 Right issue announcement 3 1 2 Subscriber base of 1mn by FY11E Losses due to HITS launch Jul-09 Jul-10 Nov-08 Nov-09 May-09 May-10 Source: Bloomberg Value Overview Methodology Replacement Cost DCF Target Price (Rs) 30 30 Narrative WWIL at present trades at below its analog business value, implying no value to digital opportunity Taking a WACC of 12.5% and long term growth rate of 5% Two of its peers have filed for IPOs and are expecting 3-5 times the valuation of WWIL, a successful listing of Den and Hathway may provide an immediate trigger Relative valuation 30 Source: Elara Securities Research Valuation Driver – Immediate trigger post peer listing DEN Years of experience in Cable Digital strategy 2 Hathway 14 WWIL 10+ Comments Zee group is one of the pioneers in this industry HITS capex far less than digital head ends on the ground; WWIL sole owner of HITS license Claimed numbers Digital Digital HITS head-ends head-ends Analogue Subscribers (mn) Digital Subscribers (mn) Total Cable Revenues (Rsbn) Market Cap (Rsbn) 10 0.3 3.6 25 1.3 1.0 6.6 50 6 0.3 3.1 9.4 Revenues incl. Carriage fee Acc. to media reports, Hathway is expecting a market cap of Rs50bn while DEN IPO has already been subscribed at Rs25bn valuation Peers listing provides immediate term triggers for WWIL Valuation gap over DEN, Hathway 166% 432% Source: Elara Securities Research 14 Nov-10 Jan-09 Jan-10 Mar-09 Mar-10 Sep-09 Sep-10 Elara Securities (India) Pvt. Ltd. Wire & Wireless Financials Income Statement (Rs mn) Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses Less:- Provisions and write-offs PBT Less :- Taxes Adjusted PAT Less:- Share of Minority Interest Reported PAT Balance Sheet (Rs mn) Share Capital Reserves Borrowings Minority Interest Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Net Working Capital Other Assets Total Assets Cash Flow Statement (Rs mn) Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios(%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios (%) Net Debt/Equity (x) ROE ROCE Per Share data & Valuation Ratios Diluted EPS (Rs/Share) EPS Growth (%) DPS (Rs/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) Source: Company, Elara Securities Estimate FY09 3,082 25 22 47 322 (275) 603 23 (901) 41 (941) 22 (963) FY09 217 (2,186) 4,257 89 11 2,387 3,180 1,351 1,829 65 463 31 2,387 FY09 (17) (621) 603 (516) 88 (78) 0 9 FY09 13.7 113.5 (37.0) 0.8 (31.2) NA NA NA NA NA NA NA 507 4.1 FY10E 2,586 (356) 52 (304) 324 (628) 566 0 (1,194) 31 (1,225) 24 (1,249) FY10E 454 (1,309) 3,257 112 17 2,531 3,582 1,675 1,908 65 558 0 2,531 FY10E (359) 183 (542) (403) (945) 802 0 (143) FY10E (16.1) (1535.3) 29.7 (13.8) (48.3) NA NA NA NA NA NA NA NA 4.9 FY11E 3,412 (27) 68 42 862 (821) 491 0 (1,312) 34 (1,346) 26 (1,372) FY11E 454 (313) 3,257 139 24 3,561 6,331 2,537 3,794 65 (298) 0 3,561 FY11E 14 (756) 771 (2,748) (1,978) 1,877 0 (100) FY11E 31.9 92.5 9.8 (0.8) (40.2) NA NA NA NA NA NA NA NA 3.7 FY12E 5,177 724 104 828 (492) 642 0 (Rsmn) Revenue growth to turn negative in FY10E due to restructuring exercise at WWIL as the focus shifts on HITS. Growth expected to recover post HITS launch Revenues Growth Trend 6,000 4,000 2,000 0 FY09 FY10E FY11E FY12E Net Revenues (LHS) 60 40 (%) 20 0 (20) Revenue Growth (RHS) (1,134) 52 (1,185) 29 (1,214) FY12E 454 (1,527) 5,257 168 30 4,381 8,889 3,857 5,032 65 (716) 0 4,381 FY12E 782 (714) 1,497 (2,558) (1,061) 1,358 0 297 FY12E 51.7 2819.7 (11.5) 14.0 (23.5) NA NA NA NA NA NA NA 17 2.4 Source: Company Elara Securities Research EBITDA Margin Trend 1,000 800 600 (Rsmn) 400 200 0 (200) (400) FY09 FY10E FY11E FY12E 20 15 10 5 0 (5) (10) (15) (20) EBIDTA (LHS) EBITDA Margin (RHS) Source: Company Elara Securities Research EBITDA Margin expected to slip into red in FY10E on losses due to HITS launch, before recovering in FY12E as WWIL builds up scale EV/Sales (x) Trend 6.0 5.0 4.0 3.0 2.0 1.0 0.0 FY09 FY10E FY11E FY12E 4.1 4.9 3.7 2.4 Source: Company, Elara Securities Research Elara Securities (India) Pvt. Ltd. (%) Media & Entertainment 15 1,320 Wire & Wireless Wire & Wireless Investment Rationale Strong promoter background gives an execution edge to WWIL’s digital plans Early HITS license gives the company a competitive headstart over other MSOs Expected to build a subscriber base of 5 million subscribers through its HITS launch Revenue to jump 4x in 6 years, EBITDA to become positive by FY12E Current valuation do not capture the digital upside; trading at a huge discount Best placed to capture the digital opportunity Wire and Wireless is one of the largest multi system operators in India, active in this business since 1995, under the brand SitiCable. It has presence in 107 cities, with 8 regional offices and 500 employees. It provides analog and digital cable services through 73 analog and 5 digital headends in association with ~4,000 local cable operators. Exhibit 1: WWIL industry presence Presence Analog headends Digital headends Presence trough HITS LCO franchise Source: Company HITS to spearhead digital leadership As of now, the industry uses digital head ends on the ground in order to provide digital cable signals to the consumers. Under this strategy, one digital headend (which costs ~$600,000) is installed in each city, and then digital signals are carried through a fiber optic network to the local cable operator’s network. This greatly limits digital expansion as capex requirements become high and cities with fewer households become unviable to be present in. Moreover, MSOs need to either lease or invest in a fiber optic network to carry digital signals which further complicates the operations in cases where households are widely dispersed. HITS provides a pan India digital presence in the most cost effective way In case of HITS, programming content is first gathered and converted into digital signals on the ground. It is then sent to leased transponders on a satellite on the C band, which in turn sends these signals to small dishes at the local cable operator’s end, which costs around Rs0.3 million. Hence, one doesn’t need a digital headend per city as digital signals can be received via a smaller dish by the local cable operator anywhere in India. Conceptually, one can regard HITS as a DTH product for the local cable operator. Thus HITS assumes great relevance in big countries like India where population is widely dispersed, as one doesn’t need install expensive digital headend on the ground, and lay fiber optic cable in each city in order to reach the local cable operator’s network. WWIL is the sole owner of HITS license WWIL at present is the only MSO with a license to offer HITS services in India. The government has just approved the HITS policy and other players would be able to start their operations once they apply and fulfill license requirements. We believe that this gives WWIL a competitive headstart in building and testing its HITS backbone infrastructure. 107 cities 73 5 125 cities 4,000 Part of Essel group of companies, one of the biggest media conglomerate WWIL is part of the Essel group of companies, which is one of the largest media houses in India. Essel group, headed by Mr. Subhash Chandra, has a track record of successfully establishing Zee entertainment, Zee News, Essel Propack, Dish TV etc. as leading businesses in their respective segments. Proven execution track record It is comforting to note that the group has successfully built digital video distribution arm Dish TV, its DTH venture into ~ $1 billion plus enterprise with 5 million subscribers, in less than 5 years despite not being familiar with the digital technology at the start, and also had to build the distribution network from scratch. We believe that WWIL management would be able to capitalize on the digital opportunity faster than its rivals due to its vast knowledge of the space and spectacular execution track record. We see WWIL as the ideally placed MSO to capture a major chunk of this opportunity and emerge as one of the key players in the digital video market. 16 Elara Securities (India) Pvt. Ltd. Wire & Wireless HITS service launched in 125 cities since April, 09 WWIL has already finished it’s HITS trial runs and the offering is now available in 125 cities since April, 09. The company plans to target B and C category cities first (ex metros), as it believe that LCO acceptance of the digital platforms is higher in these cities than in metros. In addition to this, it also plans to target large housing projects, hotels, hospitals, cantonments, and defense colonies, where it can reach the customer directly. WWIL is expected to garner 1.25-1.5 million subscribers by FY11E through HITS and further accelerate depending on openness of the LCO to enter into partnership with the company. Digital subscriber base estimated to reach 5 million by FY15E Using its HITS platform, we expect WWIL to add 1 million subscribers per year starting FY11E. This is expected to take the total direct subscribers in the digital mode to 5 million in the next 6 years. We note that this is a slow pace of growth as compared to DTH players like Dish TV and Sun Direct who are adding ~2 million subscribers per annum. However, it is important to realize that growth in the digital cable domain is dependent on the demand from local cable operator, largely driven by consumer push and increasing threat from the DTH penetration. Hence, digital cable penetration is expected to pick up gradually as the LCO becomes more aware about the relevance of digital cable. WWIL at present services ~6 million estimated subscriber base in the analog mode indirectly through partnerships with over 4,000+ local cable operators. The company plans to first leverage its existing relationships with the local cable operators and independent MSOs to convert their analog subscribers into digital. We expect its analog subscriber base to shrink to ~3 million and HITS subscriber base to increase to 5 million by FY15E. Exhibit 2: HITS Subscribers 6 5.0 5 4.0 4 (mn) 3.0 3 2.0 2 1.0 1 0.03 0 FY10E FY11E FY12E FY13E FY14E FY15E Set top box offer price Rs Box Cost Rs ARPU Rs YoY growth (%) LCO share in gross ARPU (%) WWIL HITS net ARPU Rs Exhibit 3: Total subscriber base 9 8 7 6 5 4 3 2 1 0 0.0 0.0 1.0 2.0 3.0 4.0 5.0 4.4 4.0 3.6 3.2 FY09 FY10E FY11E HITS Subscribers FY12E FY13E FY14E FY15E Analogue Subscribers Source: Company, Elara Securities Research Key HITS model assumptions WWIL is at present in the initial stages of its HITS launch and hence the product offering is expected to evolve over time to suit the local customer requirements. In our assumptions, we have taken: ARPU – We have taken ARPUs under the digital cable at Rs180, which is what the consumer is already paying under the analog mode on an average. Thus, we do not expect consumer to pay anything more for getting digital signal, which we believe would be the key competitive edge of digital cable offering against DTH. ARPUs are expected to grow at 5% per annum. LCO share – We have assumed that WWIL would be entering into agreements with LCOs where the company would provide the set top box and digital signals to the LCO network and in return would demand a 50% share in subscription revenues. This share is expected to slowly rise up to 70% as the digital penetration increases and LCO becomes more dependent on the digital offerings. So the net ARPU for WWIL would be ~Rs95 to start with, which is expected to increase at a CAGR of 10% for the period FY10E-FY15E. Set top box cost and offer price – We have assumed the set top box to cost Rs2,000 to start with (FY11E) to fall by 10% per annum till FY15E. Set top box offer for the consumer is expected to be at Rs699 (currently, other MSOs are offering set top boxes at Rs699-999), and compares favorably with the DTH offering. Exhibit 4: HITS offering assumptions FY10E FY11E FY12E FY13E FY14E FY15E 699 189 5 50 95 699 198 5 50 99 699 208 5 45 115 699 219 5 40 131 699 230 5 35 149 699 241 5 30 169 2,000 2,000 1,800 1,620 1,458 1,312 Source: Elara Securities Research Source: Elara Securities Research Elara Securities (India) Pvt. Ltd. Media & Entertainment 17 6.0 5.4 4.9 Wire & Wireless Content cost – We expect content cost under HITS to be 25% of the gross ARPU and 50% of the net ARPU (post LCO’s share) for WWIL. Content cost proportion in the subscription revenues is expected to come down to 37% by FY15E, mainly because of reducing dependence on the analog business where content costs are very high and rising ARPUs under the HITS platforms. Overall content costs are expected to grow at a CAGR of 20% during FY09-FY1E. Exhibit 5: Content cost assumption FY10E FY11E FY12E FY13E FY14E FY15E Content Cost in analogue Content Cost as % of analogue subs Content cost in HITS Digital ARPU Rs Content cost per subscriber 778 95.8 10 189 47 665 86.2 316 198 50 569 77.6 956 208 52 486 69.8 462 69.8 439 69.8 3,278 241 60 demand for preferred frequency bands. Digital cable subscription depends upon the digital subscriber base growth and subscription sharing agreements with the LCOs. Analog subscription - WWIL is undergoing a major restructuring exercise at present to align its organizational resources to its HITS strategy and reduce dependence on the analog business. We expect analog cable subscription to decrease at the rate of 10% per year from hereon as the company focuses more on the digital business. Carriage fee – Carriage fee grew of 69% in FY08 and 45% in FY09 due to new channel launches during the period. As the number of new launches is expected to slow down, we are building in a 0% growth in carriage fees from the FY09 levels. Digital subscription - On the digital cable side, we have assumed the HITS ARPU to be the same as what the consumers are paying for analog cable at present, which is ~Rs180 per month. The share of local cable operator, out of this would be 50%. We expect WWIL’s net ARPU under HITS to increase at a CAGR of 10%, driven by a 5% growth in the gross ARPUs and rising share in the gross subscription income. The subscriber addition of ~1 million per year is expected to fuel a digital cable subscription CAGR of 95% during the period FY11E-FY15E for the company, taking the revenue to Rs2,104 million by FY12E and further to Rs9,179 million by FY15E. We expect the rising subscription income from the digital cable to help WWIL post an overall revenue CAGR of 27% in the period FY09-FY15E, resulting in overall topline growing four times in the period FY09-FY15E. This would result in contribution of digital cable subscription to WWIL’s total revenues to rise from 19% in FY09 to 54% by FY12E and 75% by FY15E. 1,661 2,433 219 55 230 57 Content cost % of net ARPU HITS Gross margin per subscriber Content Cost digital@ 40% Total content cost 50.0 47 64 852 50.0 50 71 1,052 45.5 63 86 1,611 41.7 77 103 2,250 38.5 92 123 3,018 35.7 109 146 3,863 As % of subscription revenues YoY Growth (%) 78.3 62.4 23.4 50.7 53.2 44.2 39.7 40.4 34.1 37.2 28.0 Source: Elara Securities Research Topline to expand four times in six years WWIL has at present three sources of revenues viz. analog cable subscription, digital cable subscription and carriage fee. Subscription income from analog networks depends on the negotiated subscriber base agreements with the affiliate LCOs. Carriage fee growth is driven mainly by the launch of new channels which bids up the Exhibit 6: WWIL revenue traction FY07 Subscription income STB rentals Carriage fee Other operating revenues Total Revenues Rs mn YoY Growth rate (%) Source: Company, Elara Securities Research FY08 1,301 0 937 469 2,707 50.1 FY09 1,553 9 1,359 223 3,144 16.1 FY10E 1,088 10 1,223 280 2,602 (17.2) FY11E 1,685 150 1,223 368 3,427 31.7 FY12E 3,180 290 1,223 499 5,191 51.5 FY13E 5,094 430 1,223 541 7,288 40.4 FY14E 7,479 582 1,223 588 9,871 35.4 FY15E 10,391 708 1,223 639 12,961 31.3 1,250 0 553 1,803 18 Elara Securities (India) Pvt. Ltd. Wire & Wireless Exhibit 7: WWIL topline expected to register a CAGR of 27& in FY09-FY15E 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 12,961 60% 50% 9,871 40% 30% 7,288 20% 5,191 10% 0% 3,144 2,602 3,427 -10% -20% -30% FY09 FY10E FY11E FY12E FY13E FY14E FY15E WWIL has posted a positive EBITDA in FY09, after suffering losses in the past. We expect WWIL’s FY10E EBITDA to again turn negative due to transponder lease expenses. However, the favorable effect of increasing gross margin in the subscription business and lower distribution charges would help WWIL to post a positive EBITDA by FY12E and reach a stable EBITDA margin of 31% by FY15E. Savings at content cost front - As per our thesis of rising bargaining power of MSOs under the digital cable domain, we expect WWIL to benefit from increasing addressability of digital subscribers resulting in content cost as % of subscription revenues to come down from 84% in FY09 to 52% by FY12E and 38% by FY15E. Savings at distribution charges front - WWIL’s distribution charges as a % of total revenues were 32% in FY08 and 17% in FY09. As per our estimates, the decreasing contribution of analog business to the total revenues would cause distribution charges to come down to 11% by FY12E and 4% by FY15E. Exhibit 10: Contribution from unviable analog business expected to come down significantly 100% 75% 50% 25% (Rsmn) Total Revenues Rs mn Source: Company, Elara Securities Research YoY Growth rate (RHS) Exhibit 8: WWIL revenue break-up FY09 HITS rev. 4% Digital rev. 19% STB rentals 0% Carriage fee 31% Analog rev. 31% Other oper. rev 15% Source: Company, Elara Securities Research Exhibit 9: WWIL revenue break-up FY15E STB rentals 5% Carriage fee 9% other oper. Rev. 3% Analog rev. 6% 0% FY09 FY10E FY11E FY12E FY13E FY14E FY15E Analogue revenues Digital Revenues HITS Revenues Source: Company, Elara Securities Research HITS rev. 70% Digital rev. 5% Exhibit 11: Reducing distribution charges and content cost expected to improve EBITDA margin 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 21% 14% 3% -7% -13% -1% 26% 31% 35% 30% 25% 20% 15% 10% 5% 0% -5% -10% -15% -20% Source: Company, Elara Securities Research EBITDA to turn positive in FY12E WWIL, like all other MSOs, has suffered from a meager share of cable subscription coming from the last mile operators, resulting in higher content costs. This has caused the company to post losses at EBITDA level in the past, which turned barely positive in the FY09. Another significant cost outlay is on the distribution charges front, which the company pays to its affiliate MSOs under the analog subscription model. FY10E FY11E FY12E FY13E FY14E Distribution Charges EBITDA Margin Source: Company, Elara Securities Research Operational Cost Elara Securities (India) Pvt. Ltd. FY15E FY08 FY09 Media & Entertainment 19 Wire & Wireless Rights issue to repair balance sheet WWIL has filed for a 1:1.09 right issue at Rs 19 per share which would bring in Rs4.5 billion, two installments, first of which has already come in. The company plans to use part of this to bring down debt, which at present is ~Rs4.2 billion. This would strengthen the balance sheet for further fund raising for its HITS expansion in FY11EFY15E. The subscriber acquisition cost under HITS is far lesser than that under the DTH platforms because there are no substantial advertisement expenses and dealer commission. As the consumer is already using the analog cable, all an LCO has to do is to provide her with a digital box, which costs around Rs2,000 at present. Moreover, there is no need to provide any free cable as the consumer is not expected to pay anything additional for digital cable apart from the analog payment that she is already paying. Under HITS platform, apart from providing set top boxes at a subsidized rate of Rs499-699, WWIL would be investing in a master digital headend on the ground which costs ~Rs350 million, and signal receiving dishes at the LCO’s end which cost ~Rs0.3 million per dish. We expect WWIL’s overall capex to be ~Rs9.2 billion for the period FY09-FY15E, which would be funded through right issue proceeds, borrowings and internal accruals. We believe that the ability to raise funds would be vital for the company as the expansion would be subsidy driven. However, WWIL would require debt funding only in FY12E, to the tune of Rs2.5bn, which we believe would not be highly improbable to assume given the improving operational prospects of the company by then. 20 Elara Securities (India) Pvt. Ltd. Wire & Wireless Valuation & Recommendation Core WWIL market cap trading below its analog business value Trading at a huge discount to expected market value of upcoming peers Arriving at a 1 year forward price target of Rs30 based on DCF method; recommend Buy Valuations do not capture digital opportunities WWIL at present is trading at a market cap of Rs7.5bn, which includes right issue funding of Rs4.5bn. This implies that the core business of WWIL is available at a price of Rs3bn. This is below WWIL’s analog business value itself, implying that market is giving zero value to the digital opportunity available to the company. Exhibit 12: WWIL Relative Valuation based on FY09 numbers Analogue Subscription fee Rs mn Analogue Carriage fee Rs mn Analogue revenues Rs mn Analogue ARPU Rs Analogue paying Subscribers mn Digital Subscriber acquisition cost Rs WWIL Digital Subscribers mn Acquisition cost Analogue Price/sales Multiple Analogue market value Rs mn Carriage fee multiple @1 Digital Subs Mcap Rs mn Total Market Value Rs mn Source: Elara Securities Research Estimate Exhibit 13: WWIL peer comparison DEN Years of experience in Cable Digital strategy 2 Hathway WWIL 14 10+ Comments Zee group is one of the pioneers in this industry HITS capex far less than digital head ends on the ground; WWIL sole owner of HITS license Claimed numbers Digital headends Digital headends HITS 1,161 1,359 2,520 200 0.5 2,400 0.30 Analogue Subscribers (mn) Total Cable Revenues (bn) Market Cap Rs bn 10 1.3 6 3.6 6.6 3.1 Revenues incl. Carriage fee Acc. To media reports and inferred from company DRHPs Hathway is expecting a market cap of Rs50bn while DEN IPO has already been subscribed at Rs2.5bn valuation Peer listing provides immediate trigger for WWIL 25 50 9.4 2 2,322 1,359 720 4,400 Valuation gap over DEN, Hathway 166% 432% Source: Elara Securities Research Arriving at a DCF based price target of Rs30; recommend ‘BUY’ We have used the DCF methodology to value WWIL as we believe that the value creative potential of the new initiatives lies in the long term, and hence will be better captured through DCF as it takes the operational value into account as the company builds its subscriber base. Our DCF model indicates a one year price target of Rs30 for WWIL, resulting in an upside of 44% from current levels. The stock has taken a steep beating due to lack of clarity over the ability to raise funding for expansion, and lack of monitorable performance drivers in the analogue mode. We believe that with the successful funding through rights issue and expansion in digital subscriber base through HITS launch bringing in clarity regarding business drivers, market would start pricing in the digital upside. We initiate coverage on the stock with a 'BUY' recommendation. Trading at a huge valuation gap with respect to upcoming peers Two of its peer group companies i.e. Hathway and Den Networks have filed for IPOs. Media reports and company DRHPs suggest that Hathway is expecting a valuation of ~Rs50bn whereas Den is expecting ~Rs25bn upon listing. WWIL’s market cap of Rs9.5bn is at a huge discount to both of these otherwise comparable companies. We believe that if the listing of these two players is successful, there would be an immediate upside trigger for WWIL. Elara Securities (India) Pvt. Ltd. Media & Entertainment 21 Wire & Wireless Exhibit 14: DCF Assumptions Tax rate Rf Rm - Rf Adj Beta kE Cost of debt kD D/E WACC Long term growth rate Source: Elara Securities Research 33.0% 7.0% 6.0% 1.10 13.6% 12.0% 8.0% 0.25 12.5% 5.0% Exhibit 15: DCF Model (Rs mn) EBIT-tax EBIT Growth rate (%) Depreciation Delta working capital Capital expenditure Capex Growth rate Free cash flow to firm FCF Growth rate Discounted value Total Discounted value Terminal value (Rs mn) FY10E (711) FY11E (923) FY12E (647) FY13E (333) FY14E 348 FY15E 1,350 110.6 324 (183) (403) 29.9 862 756 (2,748) (29.9) 1,320 714 (2,558) (48.5) 1,741 804 (2,389) (204.5) 2,122 714 (2,333) 287.4 2,473 331 (2,152) (21.9) (921) 582.1 (1,984) (6.9) (1,067) (6.6) (32) (2.4) 1,049 (7.7) 2,260 (926.1) (868) (1,547) 16,771 115.5 (1,664) (46.2) (796) (97.0) (21) (3356.2) 618 115.5 1,185 5332 Sensitivity Analysis Long term growth Total value (Rs mn) Debt (Rs mn) Cash (Rs mn) Total shareholders' value (Rs mn) No. of shares (post dilution) (mn) Present fair value, Rs 1-yr forward value per share (Rs) CMP Upside (%) Source: Elara Securities Research 15,224 3,257 WAC 117 12,084 454 27 30 21 44 29.9 11.0% 11.5% 12.0% 12.5% 13.0% 13.5% 2.0% 24.0 21.3 19.0 16.8 14.9 13.2 3.0% 28.8 25.5 22.7 20.1 17.9 15.8 4.0% 34.9 30.9 27.3 24.2 21.5 19.0 5.0% 43.5 38.2 33.6 29.6 26.2 23.1 22 Elara Securities (India) Pvt. Ltd. Wire & Wireless Company Description Wire and Wireless India Ltd., is one of India’s biggest Cable Television companies, having presence in 117 cities in India with 400 centers, 4,000 LCO partners, 73 analog headends and 5 digital headends. WWIL is a part of the Essel Group, which has diverse National and Global business interest encompassing media programming, broadcast and distribution, specially packaging, entertainment, telecom and trading. WWIL offers Analog Cable, Digital Cable Television, Broadband, HITS Satellite Television, and Local Television Channels. All products are marketed under SITI brand Umbrella. Wire and Wireless has been providing services in analog and digital mode, having technical capability to provide features like Video on Demand, Pay per View, Electronic programming Guide (EPG), gaming through a Set Top Box (STB) and is the first company in Asia to launch Headend-in-the-Sky (HITS) Technology. Board of Directors & Management Subhash Chandra - Non-Executive Chairman Subhash Chandra, promoter of Essel group, is regarded as a visionary entrepreneur in the industry with illustrious track record of building successful businesses in multiple domains. His business interests include television networks and film entertainment, cable systems, satellite communications, theme parks, flexible packaging, family entertainment centers and online gaming. Mr. Chandra has been the recipient of numerous honorary degrees, industry awards and civic honors, including being named ‘Global Indian Entertainment Personality of the Year’ by FICCI for 2004, ‘Business Standard’s Businessman of the Year’ in 1999, ‘Entrepreneur of the Year’ by Ernst &Young in 1999 and ‘Enterprise CEO of the Year’ by International Brand Summit. Arun Kapoor, Director - Distribution Business, Essel Group An MBA from Jamnalal Bajaj, Mumbai, Mr. Arun Kapoor holds over 25 years of experience and specializes in marketing. In his past avatars, he has been Instrumental in setting up and managing operations for Bharti/Spice, and Hutch in Punjab, in addition to holding CEO position at Dish TV. Previous top management positions held at UB Group, Gillette, Pepsi, Spice Cell, Airtel, IBM Daksh, Hutch, and Reliance ADAG. Sudhir Agarwal - CEO, WWIL Graduated from University of Delhi and holds a PGDBM from IMT Ghaziabad and an Advanced Management Program from the Wharton School, University of Pennsylvania in 2006. Prior to joining Wire and Wireless (India) Ltd., Mr. Agarwal has developed his platform creation expertise with Haier Telecom (Pvt.) Ltd., where he was President India and SAARC. Besides Haier, his previous appointments include Director - Sales at Motorola, COO at Bharti Televentures, Regional Director at Xerox and National Sales Head at Philips – India’s consumer durables division. Holds over 18 years of experience in commercial and marketing management with big names in telecommunication, consumer electronics and office automation. Widely acknowledged for his innovative business style, Mr. Agarwal made enduring contributions to business models in all his appointments. Raj Kumar Agarwal - CFO, WWIL A Chartered Accountant by profession, Mr Raj Agarwal also holds an L.L.B. degree. In his tenure of over 14 years with the Zee group, he has constantly been involved in financial modeling, credit control and corporate legal affairs. Chiefly instrumental in structuring and negotiating JV deals, strategic alliances and equity transactions for the company. Sanjay Jindal - Head, Technology An B.E. in Mechanical Engineering from B.I.T Sindri, Dhanbad, Mr. Sanjay Jindal has over 21 years of experience in techno-commercial projects. Sanjay started career with BHEL from 1985 to 1994, where he received recognition for developing a special type of transformer now used in Indian local trains. In 1995, he moved to SitiCable where he had the distinction of developing Hybrid Fiber Coaxial (HFC) Network, and was instrumental in setting up Digital Headends in three cities and implementing DTH and HITS projects for the first time in India. In the capacity of Head – Technology , he is responsible for setting up Digital Headends, networking with the cable operators to deliver digital signals at last mile, and setting up HITS for up linking of channels. He has attended and participated in various technical seminars abroad organized by Motorola, Telstra and Phillips. Elara Securities (India) Pvt. Ltd. Media & Entertainment 23 Wire & Wireless Coverage History 30 25 1 20 15 10 5 0 Jul-09 Jun-09 Apr-09 Feb-09 Feb-09 Apr-09 Jun-09 Jul-09 Aug-09 Aug-09 Mar-09 Dec-08 Dec-08 Mar-09 Jan-09 Jan-09 Sep-09 Sep-09 Oct-09 Oct-09 Nov-08 Nov-08 Oct-09 May-09 May-09 Not Covered May-09 Covered Date 1 16-Nov-09 Rating Buy Target Price Rs 30 Closing Price Rs 21 Guide to Research Rating BUY ACCUMULATE REDUCE SELL Absolute Return >+20% Absolute Return +5% to +20% Absolute Return -5% to +5% Absolute Return < -5% 24 Elara Securities (India) Pvt. Ltd. Nov-09 India | Media & Entertainment 19 November 2009 Initiating Coverage Dish TV Bigger takes more Critical mass achieved – crucial in a fragmented video value chain Rating : Buy Target Price : Rs 52 Upside : 30% CMP : Rs 40 (as on 16 November 2009) Key Data Bloomberg /Reuters Code DITV IN/ DSTV.BO Current /Diluted Shares O/S (mn) 946/946 Mkt Cap (Rsbn/US$mn) 37.7/813 Daily Vol. (3M NSE Avg.) 6,475,433 Face Value (Rs) 1 1 US$= Rs 46.3 Source: Bloomberg ; * As on 16 November 2009 Global Markets Research In the highly fragmented video value chain, a broadcaster deals with over 6,000 MSOs to get its content reached. Even though the reach of most of the channels is ~44 million HHDs plus, even the biggest broadcasters do not get paid for more than 8 million HHDs, in our estimates. Against this ground reality, Dish TV with an estimated 7 million subscribers by FY11E would command a very strong bargaining power viz. a viz. broadcasters while deciding its content payments, in our opinion. Content cost to slide down to 30% of subscription revenues We estimate content cost payment to grow at a CAGR of 20% during the same period resulting in content cost as % of subscription revenues to come down from 59% in FY09 to 31% by FY15E. In our view, this is consistent with the global video players and in the context of Indian value chain. Dish TV has signed fixed content cost agreements with major broadcasters, which is the first step in this direction. Incremental subscribers not to dent margins substantially The two main reasons for Dish TV suffering losses in the last three years were high subsidies paid to new customers coupled with high proportion of new subscribers in the total subscriber base. While we believe that subsidies are here to stay, the reducing proportion of new subscribers in the total subscriber base would ensure a minimal impact of these, thus assuring continuous improvement in margins. Strong EBITDA margin improvement expected We believe that worst is over for Dish TV, and the direct impact of above two levers would improve its EBITDA margin from -16.6% in FY09 to 24.4% by FY12E and further to 27.2% by FY15E. Dish TV is expected to become EBIT positive and start throwing free cash flows by FY12E. Hence, the current market positioning of Dish TV offers bright prospects of a good operational performance going forward. Price & Volume 60 50 40 30 20 10 0 Sep-09 Oct-09 Nov-08 Dec-08 Apr-09 May-09 Aug-09 Nov-09 72.8 11.0 7.0 9.2 12M 81.5 147.2 72.9 144.7 93.5 70% 20% 10% 52 NA NA 25.5 13.5 Feb-09 Mar-09 Jun-09 Jul-09 Oct-08 Jan-09 150 125 100 75 50 25 0 Vol. in mn (RHS) Source: Bloomberg Dish TV (LHS) Share Holding (%) Promoter Institutional Investors Other Investors General Public Source: Bloomberg Q3FY09 Q4FY09 Q1FY10 Q2FY10 57.9 17.2 6.2 18.7 80.1 9.0 2.7 8.1 3M 10.5 (14.0) 4.8 41.9 11.2 72.8 11.4 6.7 9.1 6M 39.9 17.9 39.3 88.4 54.4 Price Performance (%) Sensex Dish TV WWIL Zee Entertainment Sun TV Source: Bloomberg Target Narrative Price (Rs) Valuation Recommend ‘BUY’ with a target price of Rs 52 We recommend a ‘BUY’ on the stock with a weighted average target price of Rs 52, based on DCF method, stable state EV/EBITDA and ARPU adjusted EV/Sub method, implying an upside of 30% from current levels. The stock is trading at a rolling forward one year EV/EBITDA multiple of 25.5x and 13.5x for FY010E and FY11E respectively. Methodology DCF EV/EBITDA Weightage 53 Assuming WACC of 12.4% and long term growth rate of 4% 54 Taking today’s EV/EBITDA multiple of leading global video players and Dish TV's FY15E EBITDA to arrive at one year forward EV target 41 Taking ARPU adjusted EV/Sub multiple of two global DTH players at the time when they were 1 year away from EBIT break even EV/Sub Final target price Source: Elara Securities Research Key Financials Y/E Mar (Rs mn) FY09 FY10E FY11E FY12E Rev 7,381 10,933 15,440 20,495 YoY(%) 78.8 48.1 41.2 32.7 EBITDA (1,233) 977 2,736 5,009 EBITDA(%) (16.7) 8.9 17.7 24.4 Adj PAT (4,807) (3,135) (2,695) (1,194) YoY(%) (16.1) 34.8 14.0 55.7 Fully DEPS NA NA NA NA RoE(%) NA NA NA NA RoCE(%) NA NA NA 3.6 P/E(x) NA NA NA NA EV/EBITDA(x) Source: Company, Elara Securities Estimate Mohan Lal • email@example.com • +91 22 3220 9600 Elara Securities (India) Pvt. Ltd. Dish TV Valuation Trigger Continued subscriber base growth EBITDA break even 1 2 Improving gross margin 3 Investment Summary Dish TV is the largest DTH player in an expanding market Strengthening competitive positioning to improve gross margin Available at attractive valuations Valuation Trigger 1. Strong ARPU growth in FY11E due to rising weight of old subscribers in the overall subscriber base 2. EBITDA margin reaching to 24% by FY12E on falling content cost growth 3. Improving gross margin leading operational break even by FY12E 4. Possibility of license fee reduction to 6% from the current 10% 5. VAS emerging as significant revenue stream Key Risks 60 50 40 30 20 10 0 Continous EBITDA margin improvement Right issue announcement Jul-09 Jul-10 Nov-08 Nov-09 May-09 May-10 Source: Bloomberg Value Overview Methodology DCF Target Price (Rs) 53 Narrative Assuming WACC of 12.4% and long term growth rate of 4% Taking today’s EV/EBITDA multiple of leading global video players and Dish TV's FY15E EBITDA to arrive at one year forward EV target Taking ARPU adjusted EV/Sub multiple of two global DTH players at the time when they were one year away from EBIT break even Weightage 70% Nov-10 Jan-09 Jan-10 Mar-09 Mar-10 Sep-09 Sep-10 EV/EBITDA 54 20% EV/Sub 41 10% Final target price 52 Inability of the company to raise funding for future growth Slower than expected ARPU growth Slower than expected subscriber addition Irrational competition increasing subscriber base churn Major technological changes leading to obsolescence of current set top boxes Our Assumptions Source: Elara Securities Research Valuation Driver – Content cost savings to drive EBITDA expansion 12,000 10,000 8,000 (mn) 6,000 4,000 2,000 0 FY10E FY11E FY12E FY13E FY14E FY07 FY08 FY09 71.1 59.0 130.0 140 120 100 48.7 80 40.3 35.3 33.1 31.7 60 40 20 0 (%) Programming Costs Source: Elara Securities Research As % of subscription Subscriber base CAGR of 17% till FY15E Blended ARPU CAGR of 10.8% till FY15E, driven by 10%-15% growth in ARPU of old subscriber base and their proportion in the total subscriber base rising to 93% by FY15E from 69% in FY09 Content Cost CAGR of 20% Set top box subsidy for both new and replacement consumers; with a replacement cycle of 5 years Successful fund raising to the tune of Rs5bn in FY11E 26 Elara Securities (India) Pvt. Ltd. Dish TV Financials Income Statement Net Revenues EBITDA Add:- Non operating Income OPBIDTA Less :- Depreciation & Amortization EBIT Less:- Interest Expenses PBT Less :- Taxes Adjusted PAT Add/Less: - Extra-ordinaries Reported PAT Balance Sheet Share Capital Reserves Borrowings Deferred Tax (Net) Total Liabilities Gross Block Less:- Accumulated Depreciation Net Block Add:- Capital work in progress Net Working Capital Total Assets Cash Flow Statement Cash profit adjusted for non cash items Add/Less : Working Capital Changes Operating Cash Flow Less:- Capex Free Cash Flow Financing Cash Flow Investing Cash Flow Net change in Cash Ratio Analysis Income Statement Ratios (%) Revenue Growth EBITDA Growth PAT Growth EBITDA Margin Net Margin Return & Liquidity Ratios (%) Net Debt/Equity (x) ROE ROCE Per Share data & Valuation Ratios Diluted EPS (Rs/Share) EPS Growth (%) DPS (Rs/Share) P/E Ratio (x) EV/EBITDA (x) EV/Sales (x) MCap/Sales (x) Dividend Yield (%) Source: Company, Elara Securities Estimate FY09 7,381 (1,233) 13 (1,220) 2,289 (3,509) 1,293 (4,801) 6 (4,807) NA (4,807) FY09 687 (7,162) 11,492 6 5,023 14,211 4,600 9,611 3,734 (8,322) 5,024 FY09 (2,520) (241) (2,761) (6,032) (8,794) 9,090 0 296 FY09 78.8 40.8 (16.1) (16.7) (65.1) NA NA NA (6.99) NA NA NA NA 6.4 9.2 NA FY10E 10,933 977 13 990 3,174 (2,185) 939 (3,124) 11 (3,135) NA (3,135) FY10E 946 (2,006) 9,571 8 8,520 19,915 7,774 12,140 3,734 (7,355) 8,520 FY10E 42 (767) (725) (5,703) (6,429) 6,629 0 200 FY10E 48.1 179.2 34.8 8.9 (28.7) NA NA NA (3.31) NA NA NA NA 4.3 5.1 NA FY11E 15,440 2,736 13 2,749 3,980 (1,231) 1,449 (2,680) 15 (2,695) NA (2,695) FY11E 946 (4,702) 14,571 10 10,826 23,689 9,033 14,657 2,987 (6,818) 10,826 FY11E 1,287 331 1,617 (5,750) (4,132) 5,000 0 868 FY11E 41.2 180.1 14.0 17.7 (17.5) NA NA NA (2.85) NA NA NA 26 3.6 2.9 NA FY12E 20,495 5,009 13 5,022 4,677 344 1,749 (1,404) (211) NA (1,194) FY12E 946 (5,895) 14,571 11 9,634 27,265 11,210 16,055 1,792 (8,214) (%) (%) Dish TV expected to turn positive at EBIT level in FY12E Revenue Growth Trend 100 80 60 40 20 0 FY09 FY10E Net Revenues (RHS) FY11E 24,000 21,000 18,000 15,000 12,000 9,000 6,000 3,000 0 (1,194) FY12E Revenue Growth (LHS) Source: Company Elara Securities Research EBITDA & Margin Trend 30 20 10 0 (10) (20) FY09 FY10E EBITDA (RHS) 6,000 4,000 2,000 0 (Rs mn) 9,634 FY12E 3,485 427 3,912 (4,881) (969) 0 0 (969) FY12E 32.7 83.1 55.7 24.4 (5.8) NA NA 3.6 (1.26) NA NA NA 14 2.6 2.1 NA (2,000) (4,000) FY11E FY12E EBITDA Margin (LHS) Source: Company Elara Securities Research Strong improvement in EBITDA expected due to improving gross margin Select Valuation Ratios 10 8 6 4 2 0 FY09 FY10E EV/Sales (x) FY11E FY12E MCap/Sales (x) Source: Company Elara Securities Research Elara Securities (India) Pvt. Ltd. 27 Media & Entertainment (Rs mn) Dish TV Dish TV Investment Rationale The largest player in the fragmented Indian video value chain Increasing bargaining power to drive down content cost to 30% of revenues Rising proportion of old subscribers to support ARPU growth despite subsidies Valuations provide upside on the back of improving operational performance Critical mass achieved – crucial in a fragmented video value chain The Indian video delivery value chain is highly fragmented and un-organized in nature, which creates a lot of problems for the broadcasters. First, they have to deal with over 6,000 MSOs in order to reach 90 million Indian video consumers. Secondly, due to lack of addressability and vast geographic spread of operations, it is very difficult for them to gauge how many consumers are receiving their signals. Exhibit 1: Industry value chain Dish TV – a ready platform of 7 million HHDs by FY11E As against this ground reality, Dish TV is going to provide a one point access to 7 million HHDs, generating an ARPU of close to Rs200, by FY12E. This essentially enables the broadcasters to double their reach in one go, something that would result in a very high advertisement revenues case for the popular channels in future. This is even more crucial for the niche channels, which need not more than 2-3 million pay subscribers to break even. Co ntent Creators Co ntent Aggregators Co ntent Disseminators Broadcasters •40+ broadcasters •400+ channels •125+ pay channels MultiSystem Operators Local Cable Operators 60,000 DTH players Source: Elara Securities Research As a result, despite reaching ~44 million HHds plus, even the biggest Hindi GEC broadcasters do not get paid for more than 8 million HHDs. The fate of niche channels, new entrants and lesser known channels is even worse, and mostly they survive on advertisement revenues. We present case studies of Zee entertainment and NDTV group of channels as an evidence for this argument. Exhibit 2: Estimating paying subscriber base for leading broadcasters ZEE Ent. No of channels Cable Subscription revenues FY09 Rs mn Bouquet price for domestic cable Rs Implied pay subscriber base mn HHds Source: Elara Securities Estimate Exhibit 3: Dish TV’s Net Subscriber Base 10 8 (mn) 6 4 2 0 FY06 FY07 FY08 FY09 FY10E FY11E FY12E 0.8 1.7 2.5 5.8 4.3 6.9 8.2 NDTV 4 367 10 3.1 15 3,380 40 7.0 Dish TV Net Subscribers Source: Company, Elara Securities Estimate 28 Elara Securities (India) Pvt. Ltd. Dish TV Dish TV subscriber base – highly lucrative and least duplicated Dish TV’s subscriber base profile suggests that this platform is essentially of a semi-urban characteristic. More than 60% of its subscribers come from bottom 200 plus cities. We believe that broadcasters are unlikely to be getting paid for cable subscription in these areas because of the sheer geographical spread, making marketing networks prohibitively expensive for small to mid size companies. Hence, Dish TV is unlikely to be replacing substantial cable subscribers of broadcasters, but possibly be introducing new subscriber base of their content. Exhibit 4: Dish TV subscriber base composition Cities Top 15 Top 50 Top 200 Rest Source: Company, Elara Securities Estimate Exhibit 5: Content Entertainment cost case study – Zee 23 2 3 45 average price realization for Dish per Zee channel total sale per subscriber Content cost per subscriber subscription revenues Source: Elara Securities Estimate as % of total 52% Percentage 20% 23% 37% 40% Exhibit 6: Content cost case study – NDTV If Dish were to give a 30% rise to NDTV's subscription income NDTV's 30% 'decent' rise in subscription from Dish TV Rs mn Dish TV subscribers for NDTV (assuming 90% of Dish Subs base) Content cost per subs Rs (@6 million subsx12 months) Content cost per channel (total/4 channels) 110 6 1.5 0.38 1 4 as % of total 10 Content cost to come down to 30% of subscription revenues Seen in this light, we expect Dish TV’s rising competitive positioning to help the company command higher bargaining power viz. a viz. broadcasters while deciding its content payments. We firmly believe that content cost for Dish TV is going to fall drastically from the current 59% of revenues to 35% by FY12E and further to 31% by FY15E. The more powerful broadcasters might be able to command a higher share, and the less powerful a little lower share, but on a blended basis, it would amount to 30% or thereabout, still leaving the broadcasters happy. Broadcasters – No pains-decent gains Our analysis of current pay subscriber base of Zee Entertainment and NDTV suggests that Dish TV’s platform of 7 million subscribers is going to be very meaningful for them. In case of a leading broadcaster like Zee entertainment, whose content Dish TV would have to carry due to its popularity, we find that the content cost would come around to 52% for the Zee bouquet. However, for a new entrant like NDTV, which doesn’t have high bargaining power, and also needs to reach more HHDs in order to be operationally meaningful, Dish TV can choose to pay as little as 10% of its subscription income to NDTV and still leave decent income growth of 30% for the broadcaster. average price realization for Dish total sale per subscriber Content cost per subscriber subscription revenues Source: Elara Securities Estimate DTH subscription to surpass income from analog cable It is important to note here that the DTH platforms, either by converting a television household directly into pay TV subscriber or by converting a cable subscriber to DTH one, are bringing the erstwhile revenues occurring to LCOs, into an addressable format. This is going to result in subscription income from DTH platforms to surpass what broadcasters are receiving at present from analog cable. We believe that this is a highly welcome development for the broadcasters. In the past, broadcasters have paid carriage fees to large MSOs just to ensure that their content reaches the target customer base, leave alone seeking any programming fees. Hence, we have no doubt in our minds that broadcasters are likely to only welcome content cost coming from Dish TV, which they never got earlier, instead of haggling over its proportion in the total subscription income. Elara Securities (India) Pvt. Ltd. Media & Entertainment 29 If Dish were to give a 50% rise to Zee's subscription income Zee's 50% 'decent' rise in subscription from Dish TV Rs mn Dish TV subscribers for Zee (assuming 90% of Dish Subs base) Content cost per subs Rs (@6 million subsx12 months) Content cost per channel (total/15 channels) 1,690 6 Dish TV Analysis of programming cost of DTH players globally Our analysis of programming cost of global DTH players suggests that the content cost ranges from 35% to 43% for different players depending on their competitive positioning in the value chain. It is interesting to note that global players pay 40% plus content cost despite having exclusive rights to highly lucrative sports properties and also in the presence of giant broadcasters, both of which are absent in the case of Indian video market. Hence, we do not see any reason why content costs for Indian DTH players be at 40% or more, while they bring the erstwhile unreported subscription revenues under the analog to the broadcasters through their distribution networks, and have no content exclusivity. Exhibit 7: Content cost as % of subscription revenues for global video players 50 40 30 (%) 20 10 0 Dish DirecTV B Sky B Network Source: Company Annual Reports Dish TV positioned favorably against broadcasters We believe that in case a broadcaster starts negotiating for higher content cost, Dish TV has two very powerful defenses; First Defense – Dish TV can simply choose not to carry that channel over its platform. In this case, it is either ignoring a subscriber base of 7 million that is addressable, or coming to terms with Dish TV getting exponential rise in its channel reach. Second Defense – For those channels that are highly popular, viz. Zee, Star, Sony, Colors etc., which Dish TV cannot ignore, it can still chose to put them on an a la carte basis, thus increasing their price. This would result in higher proportion of content cost for these channels for sure, but also a lower reach, thus resulting in an uncomfortable tradeoff for broadcasters. Content cost growth to lag behind revenue growth; gross margins to expand Hence, we believe that content costs are going to come down substantially, giving a great push to the operational performance of Dish TV. We estimate content costs to increase by 20% per year starting from FY10E. Our sales CAGR estimate of 31% for the company is expected to result in content cost proportion in the subscription income to slide down to 35% by FY12E and 31% by FY15E. Exhibit 9: Content cost expected to grow at a CAGR of 20% 12,000 10,000 8,000 (mn) 6,000 4,000 2,000 0 FY10E FY11E FY12E FY13E FY14E FY07 FY08 FY09 71.1 59.0 48.7 130.0 140 120 100 80 60 40 20 0 43.3 38.6 39.9 35.4 34.4 35.7 Astro Comcast TWC Exhibit 8: Content cost analysis of global players Company Programming cost as % of subscription 34% Remarks (%) Comcast The largest cable player in US, boasts of a subscriber base of 24 million The 2nd largest cable player in US, subscriber base of 13 million The largest DTH player in US with 21 million subscribers, also offers exclusive sports programming like NFL SUNDAY TICKET™ and SuperFan™ 2nd largest DTH player in US with 13 million subscribers. The largest DTH player in UK and Ireland, holds exclusive rights of the highly popular Premiership football in UK (shares 2 out of 6 packages with another player starting 06-07) Largest DTH player in Malaysia; Produces/buys content movie rights etc. (Rs) 40.3 35.3 33.1 31.7 Time Warner Cable DirecTV 36% 39% Programming Costs Source: Company, Elara Securities Estimate As % of subscription Exhibit 10: Improving gross margin per subscriber 120 100 80 60 40 20 0 FY10E FY11E FY12E FY13E FY14E FY15E FY07 FY08 FY09 (30.0) 28.9 41.0 51.3 66.9 68.3 68.5 59.7 64.7 80 60 40 (%) 20 0 (20) (40) Dish Network 43% BSkyB 40% Astro 35% Source: Company Annual Reports Average Cost per user (LHS) Source: Company, Elara Securities Research Gross Margin (RHS) 30 Elara Securities (India) Pvt. Ltd. Dish TV Incremental subscribers not to dent margins substantially The two main reasons for Dish TV suffering losses in the last three years was high subsidies paid to new customers and a large proportion of new subscribers in the total subscriber base. Our close examination of these two factors suggests that they are unlikely to be a major drag on Dish TV’s operational performance in the coming fiscals. Incremental subscribers in FY09 came at very low ARPU For the period FY08, Dish TV ran the Rs3, 990 promotional offer for the most part of the year, wherein the subscriber would get set top box and 12 months free subscription. This resulted in an incremental ARPU of Rs 215, in our estimates. However, in FY09, Dish slashed the offer price of the introductory offer substantially to Rs2490, resulting in an incremental ARPU of as low as Rs91. In fact, it also ran a free set top box offer in Oct. that resulted in a subscriber addition of 0.44 million in just one month. Because of this, the new subscribers came at a very low ARPU. In addition to this, the subscribers that were added in FY08 at Rs 215, also chose to opt for lower priced monthly packages. These two factors resulted in overall ARPU being subdued at Rs146 for FY09. Exhibit 11: Dish TV promotional offer analysis FY08 Promotion offer tag price Less: dealer commission Less: taxes Net proceed to Dish TV Less: booked as rentals for STB Booked as subscription income Subscription income per month Source: Company, Elara Securities Research Exhibit 12: Blended ARPU Calculation Blended ARPU Calculation Old Consumer Old ARPU ARPU for renewing subs ARPU existing subscribers Old revenues % of existing subscriber base Incremental customers Incremental revenues Rsmn Incremental ARPU Rs Blended ARPU (Rs) YoY growth (%) 72 FY07 FY08 FY09 FY10E FY11E FY12E 0.7 72 1.6 86 111 2.3 135 152 157 4.2 155 131 153 5.6 179 139 176 6.7 206 146 203 113 639 2,100 4,421 7,746 11,991 16,536 59.7 1 74.9 1 69.5 2.1 82.7 1.7 88.5 1.5 1,160 133 171 15.3 89.0 1.7 1,387 139 196 14.7 580 1,188 1,476 1,317 97 82 190 132 61.3 119 146 10.2 126 148 1.8 Source: Company, Elara Securities Estimate FY09 2,500 (250) (130) FY10E 2,190 (250) Exhibit 13: Reducing proportion of new subscribers in total subscriber base 10 8 1.5 (mn) 6 4 2.1 1.0 1.2 FY07 1.0 2.1 FY08 3.4 FY09 5.0 FY10E 6.3 FY11E 7.5 FY12E 1.7 1.7 3,990 (250) (130) (130) (1,030) 2,580 215 (1,030) 1,090 91 (1,030) 780 130 2 0 Declining proportion of new subscribers to total base would ease up ARPUs Starting from a low base of 1.7 million subscribers in FY07, Dish TV added 1 million subscribers in FY08 and 2.1 million in FY09. This resulted in a high percentage of new subscribers to total base, and so the quality of new subscribers dictated the overall quality of total subscriber base. As the incremental subscribers in FY09 came at a very high subsidy, Dish TV suffered massive losses in FY09. As Dish TV keeps growing in size, quality of new subscribers would not substantially affect the overall ARPU, unlike in the past. So Dish TV can still continue to provide subsidized offerings to new subscribers, without Elara Securities (India) Pvt. Ltd. Old Consumer Source: Company, Elara Securities Research Incremental cus Exhibit 14: Dish TV Blended ARPU growth 250 200 (Rs) 150 100 50 0 FY07 FY08 FY09 FY10E FY11E FY12E 82 132 146 148 196 171 Source: Company, Elara Securities Estimate Media & Entertainment 31 seriously damaging overall ARPU. We believe that this will result in a healthy ARPU growth as the existing subscriber base upgrades to the premium packages. We expect Dish TV’s old subscriber base to migrate to its gold pack (priced Rs250 at present) in next 5 years, resulting in an overall ARPU CAGR of growth of ~10% annum. Dish TV Strong EBITDA margin improvement expected We believe that the worst is over for Dish TV, and the direct impact of the above two levers would improve company’s EBITDA margin from -16.6% in FY09 to 24.4% by FY12E and 27.2% by FY15E. Dish TV is expected to become EBIT positive and start throwing free cash flows by FY12E. Apart from this, the company has multiple triggers in store viz. license fee coming down to 6% of revenues from 10% at present, TAM rating for digital HHDs, emergence of multiple revenue streams viz. pay per view, in-channel advertisement, HD channel services, etc. to name a few. Hence, the current market positioning of Dish TV offers bright prospects of good operational performance in the coming times. While we are not factoring in any of new revenue streams in our analysis, we have noted that these services are contributing significantly to the topline of video players in other parts of the world. 32 Elara Securities (India) Pvt. Ltd. Dish TV Valuation & Recommendation Dish TV undervalued on stable state EV/EBITDA multiple and DCF method Trading close to fair value based on ARPU adjusted EV/sub multiple comparable Arriving at a weighted average price target of Rs52, recommend Buy BUY with a target price of Rs 52 We recommend a BUY on the stock with a target price of Rs 52. The stock is trading at an EV/EBITDA multiple of 26x and 14x for FY010E and FY11E respectively. We have used a weighted average of DCF method valuation, and relative valuation based on EV/EBITDA and EV/Sub. For the DCF method, we have used a WACC of 12.5% and long term growth rate of 4% for the model. For the stable state EV/EBITDA method, we have applied stable state EBITDA multiple of global DTH players to Dish TV’s FY15E EBITDA and discounted at WACC of 12.5%. For ARPU adjusted EV/sub multiple, we have used average EV/sub multiple of two US based DTH players during the time when they were 2 years away from operational break even, and have adjusted it to reflect ARPU differential in Indian and US markets. Exhibit 15: Valuation Summary Methodology DCF Target Narrative Price (Rs) Assuming WACC of 53 12.4% and long term growth rate of 4% Taking today’s EV/EBITDA multiple of leading global video 54 players and Dish TV's FY15E EBITDA to arrive at one year forward EV target Taking ARPU adjusted EV/Sub multiple of two global DTH players at 41 the time when they were one year away from EBIT break even Weightage 70% year forward EV and target price of Rs54 for the company. Exhibit 16: Global peers EV/EBITDA Comparables Company Dish Network DirecTV B Sky B (£ mn) Comcast Cablevision Astro (RM mn) Average Source: Bloomberg Mkt Cap 9,388 28,533 9,509 43,614 7,574 6,498 EV 41,471 32,373 11,352 72,848 18,789 7,845 EV/EBITDA FY11E 14.6 4.8 7.3 5.0 7.2 8.0 7.8 FY12E 14.2 4.3 6.4 4.8 6.7 6.3 7.1 Exhibit 17: Relative valuation based on EV/EBITDA multiple Dish TV's FY16E EBITDA Average one year Forward EV/EBITDA multiple for global DTH players FY15E target EV WACC FY15E EV discounted one year forward Dish TV Current Debt Target Market cap 13,157 7.8 102,988 12.5% 60,618 9,071 51,547 946 54 EV/EBITDA 20% No of Shares Target share price Source: Elara Securities Research EV/Sub 10% Relative valuation based on ARPU adjusted EV/sub multiple On EV/sub basis, we have used the average of EV/sub multiples of Dish Network and Direct TV, two US based DTH operators, when they achieved operational break even. We have adjusted this multiple for difference in ARPUs in the US and Indian market. For calculating one year forward EV target, we have taken FY12E subscriber base of Dish TV and multiplied it with the adjusted EV/sub multiple. We find that adjusted for ARPU differential, Dish TV is trading at the fair value at present. However, we assign low weight to this measure of valuation as this doesn’t account for potential growth opportunities available to Dish TV, which are far greater than what was available to these two players in the face of very strong cable operators. Final target price Source: Elara Securities Research 52 Relative valuation based on stable state EV/EBITDA We have tried to value Dish TV on EV/EBITDA basis, based upon current one year forward EV/EBITDA multiples of global major players. For this, we have taken Dish TV’s FY15E EBITDA, as we believe that by then the company would have reached a steady state period. For EV/EBITDA multiple, we have taken average one year forward multiple for four DTH players (Dish Network and Direct TV from US, BSkyB from UK and Astro from Malaysia). After arriving at one year forward EV for the company, we have discounted that to present to get one Elara Securities (India) Pvt. Ltd. Media & Entertainment 33 Dish TV Exhibit 18: Dish TV EV/Sub valuation Average EV/Sub of global players around operational breakeven Global players ARPU during the same period (USD) Dish TV ARPU (USD) ARPU adjusted EV/sub for Dish TV (USD) Dish TV subscribers FY12E Dish TV target EV (USDmn) Dish TV target EV Rs mn Dish TV Current Debt Target Market cap No of Shares Target share price Source: Elara Securities Research 1,820 53 4 126 8 1,033 48,543 9,571 38,972 946 41 capturing the full value available to the company over long term. We have used a WACC of 12.5% and long term growth rate of 4% for the model. We expect Dish TV to start throwing positive free cash flows post FY12E, which are expected to post a CAGR of 23% till FY20E. Exhibit 20: DCF Assumptions Tax rate (%) Rf (%) Rm - Rf (%) Adj Beta kE (%) Cost of debt (%) kD (%) WACC (%) long term growth rate (%) Source: Elara Securities Research 33.0 7.0 6.0 1.1 13.6 12.0 8.0 12.5 4.0 DCF method based Valuation We have given DCF method the most weightage for valuing Dish TV as we believe that it helps the most in Exhibit 19: DCF Model (Rs mn) DCF Model (Rs mn) EBIT-tax Depreciation Delta working capital Capital expenditure Free cash flow to firm Discounted value Total Discounted value Terminal value (Rs mn) Enterprice value (Rs mn) Debt (Rs mn) Cash (Rs mn) Net Debt Total shareholders' value (Rs mn) No. of shares (post dilution) (mn) Present fair value, Rs 1-yr forward value per share (Rs) CMP Upside (%) Source: Elara Securities Research FY10E (2,209) 3,174 767 (5,703) (5,492) (5,178) 14,420 39,109 53,529 9,571 8,766 44,763 946 47 53 40.0 33 FY11E (1,260) 3,980 (331) (2,685) (2,251) FY12E 542 4,677 (427) 778 580 FY13E 1,140 5,209 FY14E 2,407 5,562 FY15E 3,951 5,897 124 3,365 1,761 FY16E 5,168 6,205 764 5,547 2,581 FY17E 6,816 6,358 (1,388) (6,271) 8,305 3,436 FY18E 8,863 6,407 (326) (5,011) 10,598 3,898 FY19E 9,220 6,411 (1,443) (6,718) 10,370 3,390 FY20E 9,801 6,394 (1,168) (6,394) 10,981 3,192 535 (1,698) 2,140 1,418 2,705 1,593 (5,750) (4,881) (3,687) (6,976) (6,371) (5,074) Sensitivity Analysis Long term growth 53.2 10.4% WAC 11.4% 12.5% 13.4% 14.4% 2.0% 65.5 53.8 43.6 36.8 30.5 3.0% 73.6 59.7 47.9 40.2 33.1 4.0% 84.2 67.2 53.2 44.2 36.2 5.0% 98.7 77.0 59.9 49.3 40.0 805 34 Elara Securities (India) Pvt. Ltd. Dish TV Company Description Led by Mr. Jawahar Goel, Dish TV is the first company to launch DTH operations in India and first one to reach 5 million subscriber mark . At present, Dish TV is the market leader with 5 million subscribers. It plans to add 2 million subscribers in FY10 and a further 3.5 million in FY11E. Dish TV has on its platform 240 channels & services including 21 audio channels which the company distributes through a network of about 800 distributors & 48,000 dealers in 6,600 towns across the country. Board of Directors & Management Subhash Chandra - Non-Executive Chairman Mr. Subhash Chandra, promoter of Essel group, is regarded as a visionary entrepreneur in the industry with illustrious track record of building successful businesses in multiple domains. His business interests include television networks and film entertainment, cable systems, satellite communications, theme parks, flexible packaging, family entertainment centers and online gaming. Mr. Chandra has been the recipient of numerous honorary degrees, industry awards and civic honors, including being named ‘Global Indian Entertainment Personality of the Year’ by FICCI for 2004, ‘Business Standard’s Businessman of the Year’ in 1999, ‘Entrepreneur of the Year’ by Ernst &Young in 1999 and ‘Enterprise CEO of the Year’ by International Brand Summit. Jawahar Lal Goel - Managing Director Jawahar Lal Goel has been the Managing Director of Dish TV since January 6, 2007 Mr. Goel is been actively involved in the creation and expansion of Essel Group of Industries and has been instrumental in establishing Dish TV as a prominent DTH brand in India. He is the president of the Indian Broadcasting Foundation and is an active member on the Board of various committees and task forces, set up by Ministry of Information &Broadcasting. Salil Kapoor - Chief Operating Officer Salil Kapoor has been the Chief Operating Officer since July 2008. He is responsible for sales, marketing, service and overall supervision of the zonal offices of Company. He has work experience of over 18 years in the industry with various global corporations including Samsung India Elec. Ltd., Microsoft Corp.India (Pvt) Ltd., LG Electronics India, Blue Star Limited and Fedders Llyod Ltd. Mr. Kapoor holds a bachelor of engineering from Bangalore University and MBA from University of Delhi. Rajiv Khattar - President Projects Rajiv Khattar has been the President-Projects of our Company since September 1, 2005. He is responsible for strategic tie-ups and technology upgrades of the DTH platform. Mr. Khattar has an aggregate work experience of 20 years and experience of 12 years in the telecom industry. Prior to joining Dish, he worked with Reliance Infocom Limited as the President for Netway. Amitabh Kumar - President Technology Since September 2005 Mr. Amitab Kumar is responsible for broadcasting operations of the Company. Prior to joining Dish, he has held various senior positions in the Industry including the position of the acting Chairman and Managing Director of Tata Communications Limited (formerly known as Videsh Sanchar Nigam Limited). Mr. Kumar has an aggregate work experience of 31 years in the telecom industry and holds a professional certificate in electronic data interchange from All India Management Association and Deakin University, Australia. Rajeev Dalmia - CFO Mr. Dalmia has an overall work experience of 20 years in the finance industry and is responsible for maintaining finance and accounts of the company. He is a qualified fellow chartered accountant from the Institute of Chartered Accountants of India. Elara Securities (India) Pvt. Ltd. Media & Entertainment 35 Dish TV Coverage History 60 50 40 30 20 10 0 Jul-09 Jun-09 Apr-09 Feb-09 Feb-09 Apr-09 Jun-09 Jul-09 Aug-09 Aug-09 Mar-09 Mar-09 Jan-09 Dec-08 Dec-08 Jan-09 Sep-09 Sep-09 Oct-09 Oct-09 Oct-09 Nov-08 Nov-08 May-09 May-09 May-09 Nov-09 1 Not Covered Covered Date 1 16-Nov-09 Rating Buy Target Price Rs 52 Closing Price Rs 40 Guide to Research Rating BUY ACCUMULATE REDUCE SELL Absolute Return >+20% Absolute Return +5% to +20% Absolute Return -5% to +5% Absolute Return < -5% 36 Elara Securities (India) Pvt. Ltd. Elara Securities (India) Pvt. Ltd. Disclosures & Confidentiality The Note is based on our estimates and is being provided to you (herein referred to as the “Recipient”) only for information purposes. The sole purpose of this Note is to provide preliminary information on the business activities of the company and the projected financial statements in order to assist the recipient in understanding / evaluating the Proposal. 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Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. Elara Securities (India) Pvt. Ltd. Global Markets Research 37 Elara Securities (India) Pvt. Ltd. India 205, 2nd Floor, Trade Centre, Bandra Kurla Complex, Bandra East Mumbai – 400 051, India Tel : +91 22 4062 6868 Europe 29 Marylebone Road, London NW1 5JX, United Kingdom Tel : +44 20 7486 9733 Asia / Pacific 20, RAFFLES PLACE, # 14-02 OCEAN TOWERS, Singapore 048620 Tel : +65 6536 6267 Harendra Kumar Sales Joseph K. 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