Media - Digitization the game changer; sector update::Edelweiss

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The compulsory digitization mandate will provide a huge impetus to the domestic TV industry by reducing under-declaration and boosting ARPUs. We expect subscription revenues of major MSOs to jump ~2-3x over the next three years. At this point in time, the mandatory digitization is likely to fare better than conditional access system (CAS) because it has the backing of all key stakeholders (the government, broadcasters, MSOs and LCOs). Extent of success of digitization hinges largely on subscriber education and regulatory support. Our top bet in the cable TV space is Hathway Cable and Datacom (Hathway) and we initiate coverage on it with ‘BUY’.

Domestic TV industry going strong despite fragmentation

In spite of its fragmented nature, the Indian TV industry has managed to post strong growth. Cable & satellite (C&S) subscriber base has grown from 0.4mn in 1992 to ~127mn in 2011. The number of satellite television channels has increased from 136 in 2005 to ~720 currently. The large distribution sector now comprises 6,000 multi system operators (MSOs), more than 60,000 local cable operators (LCOs), seven DTH operators (including DD Direct) and a few IPTV service providers. The domestic TV industry is estimated at ~INR320bn, with subscription revenue accounting for ~INR190bn (59%). Given the current advertising slowdown and the anticipated spur in subscription revenues due to digitization, we expect subscription revenues to grow faster than advertising revenues.

Digitization to boost subscription revenue

We expect subscription revenues of major MSOs to jump ~2-3x over the next three years due to digitization as ARPUs will increase and under-declaration of subscribers by LCOs will reduce. Currently, MSOs like Hathway touch base with secondary subscribers only through LCOs. Post-digitization, each subscriber will be declared to the MSO and there will be less scope for under-declaration. MSOs’ carriage revenues are expected to decline substantially because of the higher bandwidth available on the digital platform. However, we expect growth in subscribers to overcome the impact of reduced carriage revenues. With digitization, the dual play model of combining television and broadband will gather pace.

Consumer education key to successful implementation

It will be important to educate consumers about the benefits of digital television over analog television. Subscribers need to be apprised of the superior quality/reliability of the digital signal, choice of channels, value-added services (VAS), triple play and other advantages of the digital technology. Equipped with this knowledge, customers would be in a better position to accept the transition to the digital world. Hathway has joined hands with primary competitor Den Networks (DEN) and launched a joint media campaign to educate customers about digitization.

Hathway Cable and Datacom (HATH IN, INR 126, Buy)

Hathway Cable & Datacom (Hathway) will be one of the biggest beneficiaries of compulsory digitization in India due to its humungous distribution network, ability to offer cable & broadband services and adequate infrastructure. We, however, believe that during the digitization process the company’s quarterly performance could be volatile. Key risks/concerns are slow/partial progress of digitization, drop in carriage revenue, funding issues and rising DTH penetration. However, we see value in the stock from a two year perspective. We initiate coverage with ‘BUY’ recommendation.

One of the largest cable operators in India

Hathway has cornered ~9.4% of the total cable and satellite households and has one of the largest distribution networks in the country. The company reaches ~8.7mn cable homes in 140 cities. If considered on the basis of number of paying subscribers, it is the largest cable operator in India with ~1.8mn paying subscribers.

Compulsory digitization and broadband growth to spur revenue

Compulsory digitization will boost Hathway’s subscription revenue due to lesser under-declaration of subscribers. Phase I & II will cover ~75% of the company’s subscriber base. Out of its ~8.7mn subscribers, Hathway has already seeded ~1.7mn set top boxes. It enjoys strong presence in ~20 out of the 38 cities covered under Phase II. Given the under-penetration of broadband in India and Hathway’s rapid progress in broadband, we expect its broadband revenue to jump ~2x till 2014.

Outlook and valuations: Execution remains key; initiate with ‘BUY’

On a conservative basis, we expect ~19% CAGR and in the best case scenario, we expect ~34% CAGR in EBITDA over FY11-15E. It is the best placed cable company to capitalize on the huge digitization opportunity. Though we value Dish TV at EV/EBITDA of ~15x FY13E, we have given a discount of ~20% (~12x) to Hathway because of its weaker brand, smaller size, uncertainty on funding and content agreements to arrive at a target price of INR165. Currently, the stock is trading at EV/EBITDA of 10.2x and 8.9x FY13E and FY14E, respectively. We initiate coverage with ‘BUY’recommendation.