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Asia on the Ground: India Media Sector
D igitisation approved, ad revenue weak [EXTRACT]
We recently met with various Indian media sector participants
Over the past two weeks, we met with various participants in India’s media sector
to understand what has changed on the ground and what could lie ahead. We met
with: 1) media agencies Madison Media and TAM Media; 2) broadcasters Star
India, Sun TV, TV18 Broadcast (TV18), and Zee Entertainment (Zee); and
4) direct-to-home (DTH) operator Dish TV India (Dish TV).
We wanted to get an update on several issues affecting the media sector
We sought updates on: 1) the current advertising environment and the outlook for
Zee and TV18 given greater competition and macroeconomic weakness; and
2) mandatory cable digitisation. We also wanted to know if the sector participants
thought it would be implemented.
Key findings: digitisation was imminent, FY12 ad revenue under pressure
According to the sector participants, TV ad revenue could post double-digit growth
in 2011, led by two large cricket events in H111. We received mixed responses
from media experts on the FY12 advertising revenue outlook for the Hindi general
entertainment channels (GEC). Compared to their peers, Zee and TV18’s ad
revenue were more affected by: 1) increased ad spend on sports content; and
2) greater competition among the Hindi GECs. Most experts expect Sun TV’s
fundamentals to remain intact, given its strong content and movie library. We also
gathered that digitisation was imminent; it received cabinet approval today.
Positive medium-term outlook; our top picks are Dish TV, Eros and Zee
Despite advertising weakness, we maintain our positive view on India’s media
sector mainly due to increasing digitisation. In the TV distribution space, we prefer
DTH to cable. We think the first two phases of digitisation could be implemented
as per the government’s planned timeline.
Meetings with media sector
participants
We met with various participants in India’s media sector over the past two
weeks to understand what has changed on the ground and what could lie ahead.
We met with the following.
Media agencies: Madison Media and TAM Media
Broadcasters: Star India, Sun TV, TV18, and Zee
DTH operator: Dish TV
Key objectives for the meetings
We wanted to get updates on the following.
The advertising environment and outlook for broadcasters, Zee and
TV18. We wanted to get a sense of the ad outlook for Zee and TV18 for
FY12 as:
— ad volume and yields have been under pressure for the Hindi GECs,
mainly due to rising interest rates and raw material cost pressure.
— competition has increased among the Hindi GECs, with Sony gaining
viewership share. This could create pressure on ad revenue for the Colors
(TV18) and Zee TV channels.
Cable TV digitisation. Newsflow suggested the government was likely to
pass an ordinance to speed up the cable digitisation process (it approved
mandatory digitisation today). We wanted to get an update on the status of
this and analyse its impact.
Key takeaways from the meetings
Advertising outlook
According to the sector participants, advertising revenue for the TV industry
could post double-digit growth in 2011. Overall TV advertising revenue has
been robust in 2011 so far, but this was largely led by two cricket events in
H111—the International Cricket Council’s (ICC) Cricket World Cup and the
Indian Premier League (IPL). It is estimated that Rs18-20bn has been spent on
advertising for these two cricket events.
We received mixed responses regarding advertising spending on television during
our meetings. Some media experts believe advertising spending could be impacted
in FY12 and FY13 (partly) as it is sentiment driven, and it is currently negative.
Others highlighted that advertising spending has picked up in October 2011, and is
likely to improve over the next few months. They also pointed out that most
consumer companies are now looking to increase their ad spend in FY13.
Among the top four Hindi GECs, Star India (which owns Star Plus, the No. 1
channel in terms of viewership) has reported double-digit growth in its
advertising revenue in Q1 FY12. Sony should also report exceptional advertising
revenue growth as its viewership and ranking have improved (the latter from
No. 4 to No. 2 during week 34-40 in 2011; it is currently No. 3), led mainly by
its show Kaun Banega Crorepati (KBC), which contributed significantly to its
total gross rating points (GRPs). It is estimated that Sony sold its advertising
inventory for IPL prior to the start of the ICC’s Cricket World Cup at higher
rates than last year, which should have helped the company further. Both Star
India and Sony are not listed.
However, listed companies—Zee (its flagship channel, Zee TV, is now No. 4 in
terms of viewership) and TV18 (after seven weeks, Colors is now back to No.
2)—have been more affected by an increase in ad spend on sports content in
H111 and greater competition among the Hindi GECs.
Some media experts expect Sun TV to remain fundamentally strong, mainly due
to its strong content and movie library.
Digitisation
The sector participants believed digitisation was imminent. The ordinance received
cabinet approval today. Based on our discussions with sector participants, we
believe it will not need an approval from the Parliament.
We believe digitisation will be beneficial for TV18 and Zee as it would help
boost subscription revenue given significant subscriber under-reporting
currently. It would also lead to better monetisation of sports content for Zee,
helping the company reduce its sports losses.
DTH operators should benefit from digitisation as affluent viewers may prefer
DTH over digital cable. This is because DTH operators offer digital video
Asia on the Ground: India Media Sector 13 October 2011
UBS 42
recording (DVR) and high definition (HD) services, which are currently lacking
in the digital cable offerings by most multi-system operators (MSO).
The cable TV distributors would also benefit as their subscriber disclosures
should improve with digitisation over time.
Our view
Near-term advertising (excluding the festive
season) could remain under pressure
Advertising seems to have picked up in October 2011 (the festive season in
India). However, after November, we believe it could come under pressure for
Zee given its flagship channel’s (Zee TV) viewership share has dropped and it is
now ranked No. 4 among the Hindi GECs. Thus, we lower our FY12 advertising
revenue growth forecast for Zee from 5% to 0%.
In our note, TV18: Play on subscription growth published on 26 September 2011,
we lowered our FY12 advertising revenue growth forecast for TV18’s existing
entertainment channels from 14% to 4% to incorporate a weak advertising outlook.
We estimate TV18’s overall advertising revenue will grow 7.8% in FY12
(management guidance was less than 10%). In week 41 of 2011, Colors gained back
its No. 2 ranking, driven by a new strategy and the start of a reality show called Big
Boss 5. We expect its advertising revenue to recover in FY13.
Meanwhile, we estimate Sun TV’s advertising revenue will grow 8.5% in
FY12—despite an average 12-13% advertising rate hike in April 2011—as we
expect advertising volume to be impacted by: 1) weak advertising sentiment in
general; and 2) Tamil Nadu (TN)-related issues such as the launch of a TN staterun
cable TV distributor, Arasu Cable (TN contributes around 40% of Sun TV’s
total advertising revenue).
Broadcasters should benefit from subscription growth in
the long term
There are approximately 68m analogue cable-connected homes in India, and local
cable operators typically own the last mile access and under-report their subscriber
bases to the broadcasters and MSOs to retain a larger share of subscription revenue.
The digital subscriber base in India (primarily DTH users) has been growing rapidly,
which we believe is positive for the broadcasters. This is because incidences of
subscriber under-reporting would decrease with greater adoption of DTH and digital
cable. TRAI and the Ministry of Information Broadcasting (MIB) had recommended
the complete digitisation of analogue cable connections in four phases by December
2014. This has been approved by the cabinet today and we believe it would be a
significant boost to India’s broadcasting and TV distribution sector, if implemented.
We prefer DTH over cable
While India’s TV distribution sector is dominated by cable, we expect the DTH
subscriber base to grow more rapidly, while analogue cable should decline. We
believe India is a large market for digital cable (given its fragmented cable
industry), and digital cable and DTH are likely to co-exist. While cable has been
the favoured technology in Asia, we believe DTH is likely to grow faster than
digital cable in India as the market for the latter is very fragmented and lacks
scale.
While we think the first two phases of approved mandatory digitisation could be
implemented in good time, there could be execution delays in achieving 100%
digitisation.
Our stock picks
Our top picks are Dish TV, Eros and Zee.
Dish TV (Buy; Rs110.00 price target)
Dish TV benefits from India’s fast-growing DTH subscriber base, led by rising
income levels, increasing consumer awareness, the sports-heavy calendar in
2011, and low entry prices for new DTH connections. We expect Dish TV to
further benefit from the implementation of mandatory digitisation, which
received cabinet approval today. We believe the company remains
fundamentally strong as DTH subscriber additions should remain robust in
FY12 and average revenue per user (ARPU) is likely to increase in H2 FY12,
while content costs are largely fixed.
Eros (Buy; Rs300.00 price target)
Eros is one of largest film studios in India with a strong film pipeline for FY12-
13. It has a large film library, a wide distribution network, and relationships with
notable celebrities and production houses—which we believe are its key
competitive strengths. The studio approach enables it to work on multiple largebudget
films simultaneously, which lowers its dependence on any particular film
and also leads to a scalable business model. Greater competition among the
Hindi entertainment channels has increased demand for film content and has
helped Eros pre-sell its satellite rights at good prices due to its scale, thus
allowing it to recover a large portion of its costs pre-release. For the sale of its
international distribution rights, Eros recovers around 39% of its total Hindi film
costs from its parent Eros International plc.
Zee (Buy; Rs145.00 price target)
Zee benefits from increasing cable digitisation, which helps to reduce revenue
leakage from subscriber under-reporting. We believe the recent creation of a
distribution company in partnership with Star (operational since July 2011) is
positive for the medium term as it will strengthen Zee’s bargaining power with
broadcasters. Zee has a healthy balance sheet with Rs14bn in net cash as of June
2011 and a strong FCF yield. We believe there is limited downside to the share
price at current levels as Zee has announced (and started) a buy back of 6-7% of
its outstanding shares at below Rs126/share. Zee has bought back around 12m
shares so far.
Price target derivations
Zee. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool,
assuming a 12.3% WACC.
Sun TV. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a 15% WACC to incorporate the above high-event risk.
TV18. We value TV18 at 12x FY13E EBITDA, a 20% discount to its
historical trading average.
Dish TV. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool,
assuming 12.6% WACC.
Hathway Cable & Datacom. We value Hathway at 9x FY13E
EV/EBITDA.
Eros. We value Eros at 9x FY13E EBITDA, a 15% discount to the other
Indian media stocks under UBS coverage.
DB Corp. We derive our price target from our FY13 EPS estimate of
Rs16.53 and 18x FY13E PE.
HT Media. We derive our price target from our FY13 EPS estimate of
Rs10.91 and 18x FY13E PE.
Jagran. We derive our price target from our FY13 EPS estimate of Rs8.71
and 16.5x FY13E PE.
Statement of Risk
We believe the key risks for broadcasting sector are intense competition, heavy
reliance on advertising revenues and regulatory intervention. Content costs
could increase for Dish TV if broadcasters negotiate a variable fee structure
based on the number of subscribers. Hathway faces execution risk in
implementing its business model of executing a stream of value-accretive
acquisitions. We see upside risks to our estimates and valuation, if mandatory
digitisation is implemented.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Asia on the Ground: India Media Sector
D igitisation approved, ad revenue weak [EXTRACT]
We recently met with various Indian media sector participants
Over the past two weeks, we met with various participants in India’s media sector
to understand what has changed on the ground and what could lie ahead. We met
with: 1) media agencies Madison Media and TAM Media; 2) broadcasters Star
India, Sun TV, TV18 Broadcast (TV18), and Zee Entertainment (Zee); and
4) direct-to-home (DTH) operator Dish TV India (Dish TV).
We wanted to get an update on several issues affecting the media sector
We sought updates on: 1) the current advertising environment and the outlook for
Zee and TV18 given greater competition and macroeconomic weakness; and
2) mandatory cable digitisation. We also wanted to know if the sector participants
thought it would be implemented.
Key findings: digitisation was imminent, FY12 ad revenue under pressure
According to the sector participants, TV ad revenue could post double-digit growth
in 2011, led by two large cricket events in H111. We received mixed responses
from media experts on the FY12 advertising revenue outlook for the Hindi general
entertainment channels (GEC). Compared to their peers, Zee and TV18’s ad
revenue were more affected by: 1) increased ad spend on sports content; and
2) greater competition among the Hindi GECs. Most experts expect Sun TV’s
fundamentals to remain intact, given its strong content and movie library. We also
gathered that digitisation was imminent; it received cabinet approval today.
Positive medium-term outlook; our top picks are Dish TV, Eros and Zee
Despite advertising weakness, we maintain our positive view on India’s media
sector mainly due to increasing digitisation. In the TV distribution space, we prefer
DTH to cable. We think the first two phases of digitisation could be implemented
as per the government’s planned timeline.
Meetings with media sector
participants
We met with various participants in India’s media sector over the past two
weeks to understand what has changed on the ground and what could lie ahead.
We met with the following.
Media agencies: Madison Media and TAM Media
Broadcasters: Star India, Sun TV, TV18, and Zee
DTH operator: Dish TV
Key objectives for the meetings
We wanted to get updates on the following.
The advertising environment and outlook for broadcasters, Zee and
TV18. We wanted to get a sense of the ad outlook for Zee and TV18 for
FY12 as:
— ad volume and yields have been under pressure for the Hindi GECs,
mainly due to rising interest rates and raw material cost pressure.
— competition has increased among the Hindi GECs, with Sony gaining
viewership share. This could create pressure on ad revenue for the Colors
(TV18) and Zee TV channels.
Cable TV digitisation. Newsflow suggested the government was likely to
pass an ordinance to speed up the cable digitisation process (it approved
mandatory digitisation today). We wanted to get an update on the status of
this and analyse its impact.
Key takeaways from the meetings
Advertising outlook
According to the sector participants, advertising revenue for the TV industry
could post double-digit growth in 2011. Overall TV advertising revenue has
been robust in 2011 so far, but this was largely led by two cricket events in
H111—the International Cricket Council’s (ICC) Cricket World Cup and the
Indian Premier League (IPL). It is estimated that Rs18-20bn has been spent on
advertising for these two cricket events.
We received mixed responses regarding advertising spending on television during
our meetings. Some media experts believe advertising spending could be impacted
in FY12 and FY13 (partly) as it is sentiment driven, and it is currently negative.
Others highlighted that advertising spending has picked up in October 2011, and is
likely to improve over the next few months. They also pointed out that most
consumer companies are now looking to increase their ad spend in FY13.
Among the top four Hindi GECs, Star India (which owns Star Plus, the No. 1
channel in terms of viewership) has reported double-digit growth in its
advertising revenue in Q1 FY12. Sony should also report exceptional advertising
revenue growth as its viewership and ranking have improved (the latter from
No. 4 to No. 2 during week 34-40 in 2011; it is currently No. 3), led mainly by
its show Kaun Banega Crorepati (KBC), which contributed significantly to its
total gross rating points (GRPs). It is estimated that Sony sold its advertising
inventory for IPL prior to the start of the ICC’s Cricket World Cup at higher
rates than last year, which should have helped the company further. Both Star
India and Sony are not listed.
However, listed companies—Zee (its flagship channel, Zee TV, is now No. 4 in
terms of viewership) and TV18 (after seven weeks, Colors is now back to No.
2)—have been more affected by an increase in ad spend on sports content in
H111 and greater competition among the Hindi GECs.
Some media experts expect Sun TV to remain fundamentally strong, mainly due
to its strong content and movie library.
Digitisation
The sector participants believed digitisation was imminent. The ordinance received
cabinet approval today. Based on our discussions with sector participants, we
believe it will not need an approval from the Parliament.
We believe digitisation will be beneficial for TV18 and Zee as it would help
boost subscription revenue given significant subscriber under-reporting
currently. It would also lead to better monetisation of sports content for Zee,
helping the company reduce its sports losses.
DTH operators should benefit from digitisation as affluent viewers may prefer
DTH over digital cable. This is because DTH operators offer digital video
Asia on the Ground: India Media Sector 13 October 2011
UBS 42
recording (DVR) and high definition (HD) services, which are currently lacking
in the digital cable offerings by most multi-system operators (MSO).
The cable TV distributors would also benefit as their subscriber disclosures
should improve with digitisation over time.
Our view
Near-term advertising (excluding the festive
season) could remain under pressure
Advertising seems to have picked up in October 2011 (the festive season in
India). However, after November, we believe it could come under pressure for
Zee given its flagship channel’s (Zee TV) viewership share has dropped and it is
now ranked No. 4 among the Hindi GECs. Thus, we lower our FY12 advertising
revenue growth forecast for Zee from 5% to 0%.
In our note, TV18: Play on subscription growth published on 26 September 2011,
we lowered our FY12 advertising revenue growth forecast for TV18’s existing
entertainment channels from 14% to 4% to incorporate a weak advertising outlook.
We estimate TV18’s overall advertising revenue will grow 7.8% in FY12
(management guidance was less than 10%). In week 41 of 2011, Colors gained back
its No. 2 ranking, driven by a new strategy and the start of a reality show called Big
Boss 5. We expect its advertising revenue to recover in FY13.
Meanwhile, we estimate Sun TV’s advertising revenue will grow 8.5% in
FY12—despite an average 12-13% advertising rate hike in April 2011—as we
expect advertising volume to be impacted by: 1) weak advertising sentiment in
general; and 2) Tamil Nadu (TN)-related issues such as the launch of a TN staterun
cable TV distributor, Arasu Cable (TN contributes around 40% of Sun TV’s
total advertising revenue).
Broadcasters should benefit from subscription growth in
the long term
There are approximately 68m analogue cable-connected homes in India, and local
cable operators typically own the last mile access and under-report their subscriber
bases to the broadcasters and MSOs to retain a larger share of subscription revenue.
The digital subscriber base in India (primarily DTH users) has been growing rapidly,
which we believe is positive for the broadcasters. This is because incidences of
subscriber under-reporting would decrease with greater adoption of DTH and digital
cable. TRAI and the Ministry of Information Broadcasting (MIB) had recommended
the complete digitisation of analogue cable connections in four phases by December
2014. This has been approved by the cabinet today and we believe it would be a
significant boost to India’s broadcasting and TV distribution sector, if implemented.
We prefer DTH over cable
While India’s TV distribution sector is dominated by cable, we expect the DTH
subscriber base to grow more rapidly, while analogue cable should decline. We
believe India is a large market for digital cable (given its fragmented cable
industry), and digital cable and DTH are likely to co-exist. While cable has been
the favoured technology in Asia, we believe DTH is likely to grow faster than
digital cable in India as the market for the latter is very fragmented and lacks
scale.
While we think the first two phases of approved mandatory digitisation could be
implemented in good time, there could be execution delays in achieving 100%
digitisation.
Our stock picks
Our top picks are Dish TV, Eros and Zee.
Dish TV (Buy; Rs110.00 price target)
Dish TV benefits from India’s fast-growing DTH subscriber base, led by rising
income levels, increasing consumer awareness, the sports-heavy calendar in
2011, and low entry prices for new DTH connections. We expect Dish TV to
further benefit from the implementation of mandatory digitisation, which
received cabinet approval today. We believe the company remains
fundamentally strong as DTH subscriber additions should remain robust in
FY12 and average revenue per user (ARPU) is likely to increase in H2 FY12,
while content costs are largely fixed.
Eros (Buy; Rs300.00 price target)
Eros is one of largest film studios in India with a strong film pipeline for FY12-
13. It has a large film library, a wide distribution network, and relationships with
notable celebrities and production houses—which we believe are its key
competitive strengths. The studio approach enables it to work on multiple largebudget
films simultaneously, which lowers its dependence on any particular film
and also leads to a scalable business model. Greater competition among the
Hindi entertainment channels has increased demand for film content and has
helped Eros pre-sell its satellite rights at good prices due to its scale, thus
allowing it to recover a large portion of its costs pre-release. For the sale of its
international distribution rights, Eros recovers around 39% of its total Hindi film
costs from its parent Eros International plc.
Zee (Buy; Rs145.00 price target)
Zee benefits from increasing cable digitisation, which helps to reduce revenue
leakage from subscriber under-reporting. We believe the recent creation of a
distribution company in partnership with Star (operational since July 2011) is
positive for the medium term as it will strengthen Zee’s bargaining power with
broadcasters. Zee has a healthy balance sheet with Rs14bn in net cash as of June
2011 and a strong FCF yield. We believe there is limited downside to the share
price at current levels as Zee has announced (and started) a buy back of 6-7% of
its outstanding shares at below Rs126/share. Zee has bought back around 12m
shares so far.
Price target derivations
Zee. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool,
assuming a 12.3% WACC.
Sun TV. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool. We
assume a 15% WACC to incorporate the above high-event risk.
TV18. We value TV18 at 12x FY13E EBITDA, a 20% discount to its
historical trading average.
Dish TV. We derive our price target from a DCF-based methodology and
explicitly forecast long-term valuation drivers using UBS’s VCAM tool,
assuming 12.6% WACC.
Hathway Cable & Datacom. We value Hathway at 9x FY13E
EV/EBITDA.
Eros. We value Eros at 9x FY13E EBITDA, a 15% discount to the other
Indian media stocks under UBS coverage.
DB Corp. We derive our price target from our FY13 EPS estimate of
Rs16.53 and 18x FY13E PE.
HT Media. We derive our price target from our FY13 EPS estimate of
Rs10.91 and 18x FY13E PE.
Jagran. We derive our price target from our FY13 EPS estimate of Rs8.71
and 16.5x FY13E PE.
Statement of Risk
We believe the key risks for broadcasting sector are intense competition, heavy
reliance on advertising revenues and regulatory intervention. Content costs
could increase for Dish TV if broadcasters negotiate a variable fee structure
based on the number of subscribers. Hathway faces execution risk in
implementing its business model of executing a stream of value-accretive
acquisitions. We see upside risks to our estimates and valuation, if mandatory
digitisation is implemented.
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