Initiating Coverage - Den Networks LTD
Initiating Coverage - Den Networks LTD
Initiating Coverage - Den Networks LTD
BUY
Target Price `210
Index Details Sensex Nifty BSE 100 Industry 17,633 5,348 5,341 Cable TV
CMP `124
FY14 PE 17.6x
Scrip Details Mkt Cap (` cr) BVPS (`) O/s Shares (Cr) Av Vol (Lacs) 52 Week H/L Div Yield (%) FVPS (`) 1,638 61 13.3 0.4 130/35 0 10.0
We initiate coverage on Den Networks Ltd (DEN) as a BUY with a DCF valuation based Price Objective of `210. At CMP of `124, the stock is trading at 21.5x and 17.6x its estimated earnings for FY13 & FY14 respectively, representing a potential upside of ~70% over a period of 18 months. Being the only profitable MSO with a market share of 12% and a subscriber base of 11mn, DEN is well poised to benefit from the ongoing digitization wave in the cable industry. We expect revenues to grow multifold as the LCO will no longer be able to under report the subscriber base. We expect revenues and earnings to reach to `1,280.9 crore and `93.4 crore in FY14 from `714.3 and `14.6 crore in FY12 respectively.
Shareholding Pattern Shareholders Promoters DIIs FIIs Public Total % 53.8 2.5 8.5 35.2 100
Digitization is expected to be the turning point for the struggling cable industry. The cable industry has been characterized by drastic under reporting of subscribers leading to substantial revenue losses not only to the broadcasters & MSOs (Multi System Operators) but also the GoI (Government of India) in the form of lost taxation. With Digitization gradually replacing the analog distribution system, the entire universe of subscribers will now be uniquely recognized leading to a multifold jump in the paying subscribers for MSOs. This would lead to a quantum jump in the revenues for the MSOs and broadcasters, besides paving the way for the launch of higher value added services like premium content, high definition offerings and broadband services.
Key Financials (` in Cr) Net Y/E Mar EBITDA Revenue 2011 606.6 136.1 2012 714.3 134.0 2013E 936.4 259.1 2014E 1280.9 308.6
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STOCK POINTER
In its initiative to grow through partnership, Den Network and STAR India Ltd formed STAR DEN, a strategic 50-50 Joint Venture (JV) for the distribution of TV channels and services in India. To further reinforce STAR DENs visibility and ensure a better negotiation power aided by a strong bouquet of channels, the company formed a JV with Zee Turner Ltd in May 2011 called Media Pro Enterprise India Private Limited. DEN is a participant in this JV through its 50 percent stake in STAR DEN.
Valuation
At a CMP of `124, the stock is trading at 21.5x and 17.6x estimated earnings for FY13 and FY14 respectively. MSOs are expected to be the biggest beneficiaries of digitization as revenues will no longer be under declared by the MSOs. We believe DEN with a market share of 11% and a subscriber revenue base of ~11 mn is well equipped to meet the digitization deadlines for Phase I and Phase II cities. We initiate coverage on Den Networks Limited as a BUY with a price objective of `210 representing an upside potential of ~70% over the next 18 months.
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Company Background
Incorporated in 2007, Den Networks Ltd (DEN) is one of the largest Multi System Operator (MSO) in India reaching ~11 million households across 13 states and 88 cities. The company is engaged in distribution of television channels through analog and digital mode and broadband services. The company has major presence in Delhi (NCR), Uttar Pradesh, Rajasthan, Maharashtra, Gujarat, Karnataka, Haryana, Madhya Pradesh and Kerala amongst others. Presently, DEN has controlling stakes in 84 MSOs across its markets. Cable Industry in India
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188
146
mn households
89%
138
76%
90% 88% 86% 84% 82% 80% 78% 76% 74% 72% 70%
August, 2012
Key Highlights of TRAI Tariff Order & Interconnection Regulations for Digital Addressable Cable TV Systems
Basic Tier Since, the consumer is required to pay for Free to Air (FTA) channels, concept of Basic Service Tier (BST) has been introduced. The BST is priced at `100 max (+ taxes) per month. However, it is not compulsory for the consumers to subscribe the BST and the consumer can select his own 100 FTA channels in the BST. Minimum Pay TV package A pay channel package will cost atleast `150 per month. Minimum 500 channels st MSOs must carry a minimum of 500 channels from 1 January, 2013. Uniform Carriage Fees MSOs can declare their own carriage fees for any channel that the MSO has not asked the broadcaster for. Carriage fees cannot be increased for two years. No demanded placement Broadcasters cannot insist on placement of their channel in a particular slot. MSO LCO Revenue Share In case mutual negotiations for revenue share between the MSO & LCO fail, the revenue share shall be 55:45 (MSO : LCO) for BST or FTA channels. 65:35 (MSO : LCO) for Pay channels & their bouquets Compulsory a-la-carte by broadcasters Every broadcaster must offer all its channels to MSOs on a-la-carte basis. The broadcaster cannot compel any MSO to include its channels in any package or scheme offered by the MSO.
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Once each phase of digitization is implemented, each user in the network will be identifiable to the MSO, consequently driving away the prevailing under declaration and resulting in a multifold increase in revenues for the MSOs. The MSO will control the infrastructure and the role of a LCO will be limited to the extent of a collection and servicing agent of a MSO. MSO & Broadcasters Share to grow multifold post digitization
Stake-holder revenue share Pre-digitization Consumer ARPU LCO Distributor MSO Broadcaster
Source: FICCI KPMG 2012, Ventura Research
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170 66
75
5 0
11
13
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August, 2012
However, there is no consensus of opinion with regards to the movement of carriage fee in the near term. We believe that even a significant decline in carriage fees will not impact the MSOs as the gain from the subscription revenues will be far more than the decline.
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1000
Rs in crore
800
60% 50%
20.0%
15.0%
600
400
40% 30%
20%
18.5%
10.0%
5.0% 0.0%
200
0
10% 0%
FY11
FY12
FY13E
FY14E
FY15E
Subscription Revenue
FY11
FY12
FY13E
FY14E
FY15E
The Phase II rollout is also progressing well and once Phase I is completed concentrated effort on implementation in Phase II is expected to lead to accelerated seeding. From the current ~1.4 mn nos, paying subscribers are expected to go to 3.9 mn by the end of FY14.
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3 2.5
in Millions
2
1.5 1 0.5 0 FY13E FY14E FY15E FY16E
1.1
expect DTH to completely replace the existing analog distribution system. MSOs being deeply penetrated in the Phase I and Phase II regions will restrict the churn to DTH operators and with accelerated rollout of digitization, we expect the MSOs to further consolidate their position. MSOs clearly outperform DTH on various other parameters as enumerated below.
DTH vis--vis Cable
Parameters License Fees Major Investment Channels Broadband services Access to the end consumer Revenue Sharing Ad Spend Service quality
Source: Industry, Ventura Research
DTH 10% of DTH revenues Annual lease payments for transponders to trasnmit channels Limited channel carrying capacity of ~300 channels No broadband services
Cable No license fees One time investment for a head end High channel carrying capacity of ~500 channels Broadband services can be provided along with cable
Only direct subscribers i.e. primary More of secondary subscribers access No revenue sharing with LCO Huge ad spends Rains can disrupt signals Revenue sharing with LCO No huge ad spends since MSO's are well established Consistent signals
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In our opinion, DTH players will experience higher seeding in Phase III and Phase IV regions. However for them to make inroads into Phase I and II will be a tall task given the fact that we have not witnessed significant churn amongst cable subscribers to DTH services. And with completion of phase I already on anvil the going will only get tougher for them.
Carriage fees to rationalize, but multifold jump in subscribers to neutralize impact on revenues
The limited carrying capacity (90 to 100 channels) of the set top boxes provided a windfall to the MSOs with broadcasters paying carriage and placement fees to ensure that they featured in the bouquet of offerings to subscribers. However with regulation requiring that MSOs offer minimum 500 channels, the premium on placement fee are expected to moderate and the carriage and placement income is expected to come down. Discussions with various stake holders clearly points to the fact that the carriage and placement fee could collapse by as much as 50%. While the management of DEN believes that the revenues from this source would only correct post complete rollout we have chosen to be conservative in our forecast. Carriage fees which have so far contributed 47% to the consolidated revenues are expected to decline to 23% going ahead. We have factored a drop in carriage fees to `294 crore in FY14 from ` 327.9 crore in FY12. Given the expected multifold increase in subscription revenues, the drop in carriage revenues will have a minimal impact on total revenues.
Carriage Revenues to fall
350 300 60%
50%
40% 30%
250
Rs in crore
200
150
100
20%
10% 0%
50
0
FY11
FY12
FY13E
FY14E
FY15E
Carriage Revenue
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35.0
EBITDA %
30.0
25.0
20.0
15.0
10.0
CY07
Comcast
CY08
Time Warner
CY09
CY10
CY11
Direct TV
Dish Network
Consolidation will also enable MSOs to have a better bargaining power with broadcasters resulting in improved margins and thus better returns to the investors. DEN being one of the major players which has grown the inorganic way is best placed to benefit from consolidation.
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600 500
Rs in crore
400
300 200 100 0 FY11 FY12 FY13E FY14E FY15E
Media Pro enjoys better bargaining power aided by its strong bouquet of 64 channels along with 8 HD offerings, making it the biggest channel distributing agency in India. We expect gross revenues to post a CAGR of 10.3% over FY12-15 to `635 crore. However, we do not expect this business to contribute significantly to the bottom line being a low margin business.
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Financial performance
Revenues for the cable business were higher by 20.7% yoy to `190.1 crore led by increased subscription and carriage revenues whereas operating profits rose by 76.8% yoy to Rs. 46.2 crore. Earnings from the cable business before ESOP expenses almost doubled to Rs. 12.2 crore from Rs. 6.7 crore in Q1FY12. Consolidated revenues are not comparable with past periods due to the change in accounting policy at Media Pro which has started reporting revenues on a net basis (Gross Revenues Cost of Distribution Rights). Consolidated revenues were reported at Rs. 194.9 crore whereas operating profits stood at Rs. 38.5 crore as compared to Rs. 17.9 crore in Q1FY12. Earnings rose multifold from Rs. 1.8 crore in Q1FY12 to Rs. 12.2 crore in Q1FY13.
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Financial outlook
DEN is expected to be one of the biggest beneficiaries of the digitization leading to a quantum jump in its revenues and profitability. Despite factoring a delay of three months in the Phase II deadline and a years delay each in the Phase III and Phase IV deadline respectively, we expect the paying subscriber base to reach 3.9 mn by FY14 from the current 1.4 mn. On the back of the increased paying subscribers revenues are expected to almost double to `1,280.9 crore by FY14 from `714.3 core in FY12, while earnings are expected to leapfrog to `93.4 crore from `14.6 crore in FY12 despite higher depreciation from newly seeded STBs and interest cost. However the full benefit of digitization will be felt only FY15 onwards.
Revenue and EBITDA% trend
1800 1600 1400 30.0% 25.0%
PAT Trend
200
180 160
140
Rs in crore
Rs in crore
1200
1000
20.0%
15.0% 10.0%
120 100
800
600 400 200 0 FY11 FY12
Revenue
80 60
40 20 0 FY11 FY12 FY13E FY14E FY15E
5.0%
0.0% FY13E FY14E FY15E
EBITDA % (RHS)
Valuation
At a CMP of `124, the stock is trading at 21.5x and 17.6x estimated earnings for FY13 and FY14 respectively. We initiate coverage on DEN Networks Limited as a BUY with a price objective of `210 representing an upside potential of ~70% over the next 18 months. We have valued Den Networks on a single stage DCF, given the sustainable cash flows of the business post the complete digitization of the cable industry.
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DCF Valuation (Rs crore) Terminal Year (n) WACC (%) Terminal Value Discounted Terminal Value Present Value of firm till Terminal Year Total Discounted Value of Firm Less Current net debt of the firm Present Value of Equity No of equity shares (crore) Fair value of Equity Shares
WACC Risk Free Rate Market Risk Premium Beta Cost of Equity Cost of Debt Post Tax Cost of Debt Debt (Rs crore) Enterprise Value (Rs crore) WACC
Sensitivity Analysis
Perpetuity Growth Rate 3% 4% 225.3 245 209 225 195 210 181 194 169 180
WACC
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P/E
600 500
400
300
200
Mar-11
Mar-12
Mar-13
45X
60X
75X
90X
P/B
300 250
200
150
100
Mar-11
Mar-12
Mar-13
1.75X
2.25X
2.75X
3.5X
EV/EBITDA
7,000 6,000
5,000
4,000
3,000
2,000
1,000
0 Mar-10
EV 4X
Mar-11 9X 14X
Mar-12 19X
Mar-13 23X
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FY 2011
2.8 6.3 0.0 58.4 0.2 1.9 4.8 13.1 0.0 43.9 2.1 2.6 11.7 0.0 104.4 133.9
1.1 5.2 0.0 60.7 0.3 2.1 1.8 11.3 0.0 112.9 2.0 2.2 11.9 0.0 89.6 127.1
5.8 12.8 0.0 66.4 0.4 1.7 8.7 20.3 0.0 21.5 1.9 1.7 6.2 0.0 90.0 125.0
7.0 15.2 0.0 73.5 0.4 1.7 9.6 21.3 0.0 17.6 1.7 1.2 5.2 0.0 90.0 125.0
Debt / Equity (x) Current Ratio (x) ROE (%) ROCE (%) Dividend Yield (%) Valuation Ratio (x) P/E P/BV EV/Sales EV/EBIDTA Efficiency Ratio (x) Inventory (days) Debtors (days) Creditors (days)
Balance Sheet Share Capital Reserves & Surplus Minority Interest & Others Total Loans Deferred Tax Iiability Total Liabilities Goodwill Gross Block Less: Acc. Depreciation Net Block Capital Work in Progress Investments Net Current Assets Deferred Tax Assets Total Assets 133.2 641.4 36.5 158.0 0.0 969.1 0.0 607.3 94.2 513.1 41.3 19.0 382.6 13.1 969.1 149.2 655.7 62.5 258.2 0.0 1125.7 0.0 722.4 146.7 575.7 78.6 25.5 426.6 19.3 1125.7 149.2 732.4 76.6 318.2 0.0 1276.4 0.0 1158.4 239.4 919.0 78.6 25.5 234.0 19.3 1276.4 149.2 825.8 93.6 378.2 0.0 1446.9 0.0 1352.4 347.6 1004.8 78.6 25.5 318.6 19.3 1446.9
Cash Flow statement Profit After Tax Depreciation Working Capital Changes Others Operating Cash Flow Capital Expenditure Change in Investment Cash Flow from Investing Proceeds from equity issue Inc/ Dec in Debt Dividend and DDT Cash Flow from Financing Net Change in Cash Opening Cash Balance Closing Cash Balance 37.5 45.6 -5.8 4.8 82.2 -86.3 51.7 -34.6 0.0 -17.0 0.0 -17.0 30.5 243.2 273.8 19.6 53.8 -1.3 25.6 97.6 -115.1 -43.8 -158.9 -2.5 100.2 0.0 97.7 36.4 273.8 310.2 90.8 92.7 16.1 0.0 199.5 -436.0 0.0 -436.0 0.0 60.0 0.0 60.0 -176.5 310.2 133.7 110.4 108.2 -36.9 0.0 181.7 -194.0 0.0 -194.0 0.0 60.0 0.0 60.0 47.7 133.7 181.5
Ventura Securities Limited Corporate Office: C-112/116, Bldg No. 1, Kailash Industrial Complex, Park Site, Vikhroli (W), Mumbai 400079 This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither Ventura Securities Limited nor any of the contributors accepts any liability arising out of the above information/articles. Reproduction in whole or in part without written permission is prohibited. This report is for private circulation.
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Appendix
Working of the Analog mode of cable distribution
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