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Business – India;Stiff Pricing

Sarath Chelluri

With around 14 crore television households, India is one of the bigger markets globally. Little wonder that it has attracted big corporate entities to foray into the cable and satellite business. Among the newer entrants in this space, which has gained huge scale in a short span of time, is DEN Networks. Started in July 2007, DEN is now one of the leading MSO (multiple system operators) in the country with a presence in around 76 cities.

With the advent of alternate technology platforms like Direct to Home (DTH) which help deliver better quality digitised television content to Indian consumers, the process of consolidation in the cable industry has been hastened. Local cable operators, who lack financial muscle, are giving way (tying up) with larger MSOs like DEN and upgrading to digital networks to compete in the increasingly competitive industry.

DEN, which has a subscriber base of over 10 million households, intends to convert greater number of its analog connections to the digital platform, from the existing three lakh households. Besides digitalisation, it intends to expand its network through acquisition of local cable operators to further consolidate its position.

To fund its growth and modernisation plans worth Rs 285 crore, the company is coming out with an IPO.

Under-penetrated market

The cable and satellite (C&S) industry is predominantly of analog type; only 20 lakh out of the 8.6 crore households are based on digital technology. Increasing fondness by consumers to graduate to the digital-platform for better viewing experience should boost growth rates for this segment. As per FICCI KPMG, the digital television (through cable, DTH and IPTV platforms) households in India would be 3.5 crore by 2013, indicating an annual growth of 60 per cent for the next five years—significantly higher than the overall growth of 8 per cent for the industry.

For DEN, which has acquired 62 smaller players till 2008-09 at a cost of Rs 130 crore, the growth opportunities are immense. Meanwhile, the company has set aside Rs 125 crore to acquire and forge alliances with local cable operators in the future as well. During 2009-10 (up to August 2009), it has entered into agreements to acquire around 27 smaller players. This should help further boost its subscriber base. In terms of digitisation, the company intends to add (including conversions) around 10 lakh digital connections every year for the next couple of years.

De-risking business

Though the potential for growth is huge, the cable service providers are facing stiff competition from deep-pocket Direct-to-Home (DTH) players like Dish TV, Tata Sky, Airtel and Reliance. Thus, players like DEN have to strengthen infrastructure to support greater digitalisation. Through ‘Digitelly’, its digital television service, DEN provides digital services to 37 cities. The company proposes to spend Rs 210 crore (including Rs 165 crore for set top boxes) for rolling out its digital television service in all its existing markets, which the management believes will be completed in the next few months. This would also allow DEN to provide value-added services like movies-on-demand and local channel content. The company has also earmarked Rs 10 crore in 2009-10 and Rs 15 crore for 2010-11 to set up infrastructure to provide cable broadband services. Den has already obtained an all-India internet service provider and these investments are first-in-line to scale-up (now in three cities) and expand its broadband internet services to reach around about 1.5 to 2 lakh connections by end-2010.

With the ability to deliver digital content, value-added services, broadband internet and better sourced regional content through a single source should help DEN to face competition in the long-run. It is estimated that broadband and value-added services could contribute around 15-20 per cent of its consolidated revenues of DEN in the next two-three years.


An important source of revenues for DEN is its 50-50 joint venture, STAR-DEN. This venture, which distributes various television channel content to MSOs, contributes around half of the company’s consolidated revenues, besides providing an alternative revenue stream. In fact, the cable television business, that contributes the other half of company’s revenues, has not made profits in the first two years of operations. Although the company achieved profits at the operating level earlier, it is only in the June 2009 quarter that it delivered the first net profit. Going ahead, the scale-up from the cable business should deliver healthy growth rates. This would come on the back of organic growth, acquisitions and upgrading of analog cable consumers to the digital platform. Rating agency, ICRA, has assigned Grade 3 to the proposed IPO of DEN, indicating average fundamentals.

In June 2009 quarter, the company reported consolidated revenues of Rs 214 crore, EBIDTA of Rs 20.7 crore and net profit of Rs 3.2 crore. Based on these numbers, its growth plans and aim to retire debt of Rs 40 crore from the IPO proceeds, it should be able to deliver an EPS of Rs 5.7 for 2009-10 and Rs 11 in 2010-11. At the higher price-band of Rs 205, the stock is available at 18.5 times its estimated 2010-11 earnings, which indicates that pricing is stretched and gains limited in the short-term. Those with an appetite for risk and with a time-perspective of 2-3 years may invest.


October 26, 2009 - Posted by | Uncategorized |

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