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Entering A New Era

Author: Administrator Account/Tuesday, February 23, 2010/Categories: Stocks

Entering A New Era

The penetration rate of TV sets in India is low compared to other countries like China and Brazil. While there are over 234 million households in India, only 65% households have TVs. However, the number of household with TV and penetration rate has risen from 73% in FY09 to 95% in FY13, indicating better prospects for the industry.
Nevertheless, in India, the cable and digital TV penetration is astoundingly high compared to major countries around the world. India’s cable and digital TV penetration is around 92%, which is fairly high compared to the UK’s 55%, US around 89% and emerging markets such as China and Brazil having cable and digital TV penetration of only 57% & 23%, respectively. 
Mumbai-based Hathway Cable & Datacom – promoted by Raheja Group – is a major cable TV service operator and one of the largest MSO and cable broadband service providers in India. Hathway offers cable TV services across 140 locations and high-speed cable broadband services across 21 locations. It has established 20 digital head-ends in India.

Advantage Hathway
With the Indian Government’s commitment to stick to its deadlines for DAS implementation, digitization benefits have begun to accrue to the MSOs. Hathway Cable and Datacom with its strong subscriber base should be one of the major beneficiaries of the same. Analysts give Hathway a ‘Buy’ rating and DCF-based target price of Rs 342 (30% upside).
Phase 1and 2 digitization will boost Hathway’s paying subscriber base three times during FY13-16E. This coupled with ARPU CAGR of 5% is expected to result in revenue CAGR of 34% over FY13-16E vs 22% for industry. Beyond FY16E, as Phase 3 and 4 digitization gets implemented all MSOs including Hathway will stand to gain. Of all the MSOs, analysts prefer Hathway due to its dominance in Phase 1 and 2 cities, its ability to collect subscription. 

Revenue To Remain Robust
Even though Carriage and Placement (C&P) revenue as a proportion of total revenue is expected to drop from around 40% to around 15% FY15E onwards, analysts believe this drop will be on account of substantial rise in subscription revenue. Absolute C&P will still be necessary to carry the channel on a particular slot or particular channel. It is estimated that the subscription income for Hathway will shoot 6.6x from the current levels of Rs 3,265 millions to Rs 21,768 millions. Hathway’s paying subscriber base has risen from 1.6 million in FY09 to 3.8 million in FY13 and it is expected to rise to 10.8 million by FY16-end, which will boost growth in revenue. 
Also, with dual advantage of digitization in the forms of increased number of addressable subscribers, and potential rise in ARPU, the ARPU of cable and DTH is likely to rise by around 74% to Rs 289 and Rs 293, respectively till 2017. 

Fresh Revenue Distribution Model
Currently in the analog mode, 85% of subscriber base is under reported leading to vast gap in revenue distribution. Importantly, the advertising revenue – which is likely to grow by 14% CAGR to Rs 240 billion in FY17 – is totally gulped by the broadcasters. However, with the implementation of DAS, every player in the value chain will be benefitted except the LCOs. 
Out of the total 130 million pay TV households, 58 million are analog, 28 million are digital and 44 million are DTH subscribers. Cable TV still has remained the preferred choice even though DTH has shown a very strong growth since its launch. 70% of pay-TVs are cable and with an ARPU of Rs 150 pm the total subscription for cable comes to Rs 104 billion. The DTH operator enjoys the higher share of the ARPU. Total subscription is estimated to be around Rs 245 billion of which a major chunk of about 41% is shared by the LCOs followed by broadcasters around 28%, DTH 18% and lastly MSOs 11%. This architecture is set to change post digitization, as the subscription revenue is likely to rise by 20% CAGR to Rs 610 billion by 2017 and distribution is expected to change drastically. 

The Game Changer
The Ministry of I&B has set sunset dates for the DAS rollout in four phases. While this time, the Ministry is committed to digital implementation; it has also taken strict measures like total blackout for non compliance of deadlines. While Hathway has already started monetizing Phase-I & Phase-II digitization, the full impact of which is likely to flow from FY15 onwards. Phase-III & IV are the key areas to focus in digitization roll-out, as 96 million – comprising 75% of total pay TV viewers out of total estimated 129 million of Pay-TV viewers – will be covered in the process. The tiff between DTH and the cable players will be intense in these phases due to their geographical feasibility. While DTH will have an upper hand in terms of direct reach, cable have an added advantage of giving localized content along with affordability i.e. lower ARPU.

Key Risks
Revising the sunset date for Phase-III, the Ministry of I&B has stipulated December 14, 2013 as sunset date for both Phase-III & Phase-IV. In the event of delay beyond three month in seeding the STBs can delay the revenue generation. Meanwhile, as there is a likelihood of General Elections during that time, there also exists a possibility that the new government may not continue the pace of seeding STBs.
Further, the dispute between the LCOs and MSOs on revenue sharing can lead to slowdown in whole process.

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