DEN Network - Margin Pressure; Digitisation Kicker in The Waiting;:: Edelweiss

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DEN Networks’ (DEN) Q2FY15 revenue came in line, but EBITDA was below estimates. Key positive was ~377% YoY and ~20% QoQ surge in other income to INR225mn due to elevated cash levels. Key negatives were: (i) 61.5% YoY jump in other expenses due to higher soccer costs (EBIT loss of INR45.4mn in Q2FY15; INR85.7mn in H1FY15), broadband roll-out expenses (~INR90mn) and provisions; (ii) 1,704bps YoY decline in EBITDA margin to 14% due to higher costs and lower activation income; and (iii) INR205mn after-tax loss (for the first time). Currently, in spite of a lower subscriber universe, Hathway’s market capitalisation at INR57bn is more than double that of DEN. ARPU, performance of soccer business, JV with Snapdeal and broadband roll out are key monitorables for DEN. DEN continues to remain the best funded amongst MSOs. We continue to see value in the stock from a 2-year perspective.

Soccer, broadband and higher provisions mar profitability

DEN’s subscription revenue, ex LCO share, grew 18% YoY. Content cost surged 20.3% YoY and 2.3% QoQ to INR1.1bn. In comparison, Hathway’s content cost catapulted 41.7% YoY in Q2FY15. Provision for doubtful debt/advances (INR160mn) in some analog markets and in Karnataka increased as the business model changed from digital partnership to distributor model. DEN has added 0.22mn boxes in Q2FY15, taking the total digital subscriber base to 6.6mn. It has 9,600 broadband subscribers; broadband ARPU at INR740 per month. The company has zero net debt.

Q2FY15 conference call: Key takeaways

Benefit of proposed ARPU hikes will be shared with the broadcaster as well as LCOs. Packaging of content will increase dependency of LCOs on the MSOs. Till now, majority of DEN’s subscribers have subscribed to the top-tier package. Subscriber additions in Phase 3 and Phase 4 will start seeing an uptick from Q4FY15. Subsidy in Q2FY15 stood at INR300 per STB due to dip in STB prices and higher activation fee.

LINK

https://www.edelweiss.in/research/DEN-Network--Margin-Pressure;-Digitisation-Kicker-in-The-Waiting;-Result-Update-Q2FY15/27653.html