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

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Den Networks Ltd. Digitisation led growth :: Ventura

Den Networks Ltd.
Digitisation led growth
Outlook
Although the valuation of stock seems expensive at 35.8 & 29.4x for FY13/14, we maintain a BUY. Given the fact
that subscriber additions remain strong and the benefits of digitization would start accruing to the top line from
Q1FY14. Further with not much significant costs being associated with the incremental revenues, the profitability
should be positively affected. We have not yet modeled this incremental revenue, as we would like to see proof of
the pudding before revising our forecast.
The Ministry of information & broadcasting (MIB) has demonstrated the seriousness of DAS implementation in
phase 2 cities. This can be reiterated from the various key initiatives (such as increasing intervals of review
meetings and conducting workshops) taken by MIB to achieve the superior results. Given that MSO’s are expected
to be the biggest beneficiaries of digitisation, we believe Den Networks Ltd is well placed to reap the benefit on the
back of its strong subscriber revenue base of ~11 mn and aggressive management team.
Key Takeaways
• According to the management, various steps are being initiated by the Ministry of Information & Broadcasting
(MIB) to lay emphasis on the seriousness of digitisation in phase 2 cities. Some of the initiatives include
increasing the intervals of review meetings (from every 10 days to 3 days), one day workshop with all the
nodal officers and IAS officials (of 38 phase 2 cities) to discuss various issues (queries related to customers,
stakeholders, technologies, etc). Further, state level meetings are also likely to be held with participants being
LCOs, MSOs and nodal officers.
• Den Networks reported strong set sets of numbers during the quarter with 13.3% QoQ top-line growth in its
cable business led largely by consolidation of acquired JVs and successful completion of Phase I.
Consolidated revenues were at Rs 241.8 crore during the current quarter. It is to be noted that consolidated
top-line is not comparable with corresponding period of previous year 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).
• Moreover, the company has been able to save on operating costs (64.8% v/s 66.0% of sales QoQ) in cable
business which has lead to significant improvement in margins by 260 bps QoQ (25.5% v/s 22.9%).
Consequently, consolidated EBITDA was at Rs 60.4 crore (+21.8% QoQ). PAT growth (+12% QoQ) was
offset by higher depreciation (+21.4% QoQ; higher deployment of set top boxes) and higher interest expense

Cable & Satellite Industry: Sector Update- ICICI Securities, PDF link

Sector Update -Cable & Satellite Industry:


C o u n t d o w n   t o   s u n s e t  d a t e   f o r   P h a s e   I …
As the digitisation deadline of June 30, 2012 for Phase I approaches,
differences exist among the various parties involved in extending or
persisting with the same deadline. While the broadcasters have been
lobbying the government to stick to the existing deadline, some of the
MSOs (barring the large ones like Hathway Cable and Den Networks)
and LCOs have asked for an extension of two or three months as they
are finding it hard to seed set top boxes in all their households due to
late announcement of the revenue share model by Trai, unavailability
of set top boxes and lack of consumer awareness. MSO’s problems
could be a blessing for DTH operators who are gearing up to speed up
their subscriber addition. However, Hathway is best placed among
MSOs, having already seeded 40%  or ~1 million of its ~2.3 million
subscribers in the metros and having an inventory of ~ 0.7 million
STBs. Nonetheless, we expect at least a three month delay in
implementation of digitisation even if the deadline is not extended.
The final call will be taken by the ministry of Information &
Broadcasting on June 25, 2012.

http://content.icicidirect.com/mailimages/ICICIdirect_DigitisationDeadline.pdf

Den Networks - leading cable operator :PINC,

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Den Networks - leading cable operator
Den Networks, the only profitable MSO in India, has the largest reach with
11mn subscribers including ~1.4mn paying subscribers, acquired mainly through
secondary point acquisitions. Its strategic acquisitions helped it garner better
carriage revenue through improved subscriber base. Star-Den, a syndication
venture with Star, adds to the scale and stability of the business. Den's strong
execution capabilities, market leadership in key markets and profitable business
model makes it a strong contender to benefit from the digitisation wave. We
initiate coverage on the company with a 'BUY' recommendation on the stock
with a target price of Rs64(4.6x FY14E EV/EBITDA).
Paying subscriber base to grow further…
With a reach of 11 mn subscribers, paying subscriber base of ~1.4mn and digital
subscriber base of 0.5mn it has captured 25% market share in Mumbai and 40% in
Delhi. Within two years from the commencement of operations, Den turned profitable
in FY10. We believe the compulsory digitisation will be a key trigger to multiply the
subscription revenue by curbing the under-declaration of subscription revenue. We
estimate the company to digitise 1mn subscribers in FY13 (9% of its current subscriber
base) and 2.6 mn in FY14 (33% of its current subscriber base).
Distribution JV - provides scale to the business
The company has been well able to leverage its distribution network (subscriber reach)
through its Star- Den JV(50:50 JV with Star Network). We expect scalability and stability
to continue with its new distribution JV - Media-Pro (50:50 JV between Star- Den and
Zee-Turner formed in May'11). We expect the segment to register 9% CAGR during
FY11-FY14E (~46% of total revenue).
Revenue and profitability to elevate manifold
With improved paid subscriber base and scalability from the distribution business, we
expect revenue to show 13% CAGR (FY11-FY14E) led by subscription revenue increase
of 30%CAGR (FY11-FY14E) We believe its operating profits should augment 2.5x by
FY14 resulting in OPM expansion from 9% in FY11 to 15% in FY14E. We expect
overall PAT to register 21% CAGR over FY11-FY14E to Rs671mn in FY14E.
VALUATIONS & RECOMMENDATION
Den's strong execution capabilities with aggressive subscriber acquisition strategy
and profitable business model, comfort us on its ability to emerge as a formidable
player post digitisation. At CMP, the stock is trading at 5.3x EV/EBIDTA FY13E and
3.7xFY14E EV/EBIDTA. We initiate coverage on the stock with a ‘BUY’ recommendation
and a target price of Rs64(4.6x EV/EBITDA FY14E).We have valued the stock on
average of DCF, EV/Subscribers and EV/EBITDA (taking Comcast and Time Warner
as peers).

DEN Networks: Content advantage 􀂃:: Macquarie Research

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DEN Networks: Content advantage
􀂃 We met with the management of DEN Networks (DEN IN) to understand the
outlook for the Indian cable players, the business drivers of the company, and
its positioning vs. the offerings of other vendors.
􀂃 DEN Networks was founded in July, 2007 by Mr. Sameer Manchanda, who
has over 20 years of experience in media and channel distribution.
Key differentiator: Star DEN channel distribution JV
􀂃 JV provides content advantage. In 2008, the company formed a JV with
Star India to exclusively distribute all the broadcaster’s channels to different
platforms (i.e. Cable and DTH operators). This JV accounts for ~50% of the
consolidated revenue but only 10% of the EBITDA given the low pass-through
margins in the TV channel distribution business. This JV helps the company in
its Cable business given Star’s leading position in key TV genres.
􀂃 Partnership with arch rival to address leakage. In May 2011, Star DEN
announced the formation of a 50-50 Joint Venture with Zee Turner (the TV
channel distribution JV of Zee Entertainment and Turner). The arch rivals in
the TV channel distribution business came together to jointly market 68
channels. The JV has been in force since July 2011 but we expect to see the
financial performance of this JV only in FY13 across the ecosystem.
Dominant cable operator: potential threat from DTH
􀂃 Large subs base but largely analogue. DEN has about 10m subscribers
across 80+ cities. Its key markets are Delhi, Uttar Pradesh and Karnataka
followed by a presence in certain cities in Maharashtra (including Mumbai),
Gujarat, Rajasthan, Haryana, West Bengal and Kerala. The existing subs
base is largely analogue with only 700k subscribers on the digital platform.
􀂃 Leader in LCO consolidation. It has acquired and integrated 80+ MSOs
since inception and offers digital cable in 45+ cities.
IPO cash balance: Reason for strength of expansion
􀂃 IPO funding has strengthened the balance sheet. DEN had its IPO in Nov
2009 and raised Rs3.6bn. The company currently has cash of Rs2bn on the
balance sheet and debt of Rs1.25bn. The net cash position is sufficient to
fund free set-top boxes for 0.625m subscribers.
Risks and Valuation
􀂃 A play on digitisation but prefer DTH. Den is riding the digitisation wave in
the Indian TV distribution industry. Even so, we believe the company’s growth
forecasts are predicated on government strictly sticking to the analogue
sunset clause. We believe DTH players that have demonstrated consumer
pull are better placed than the digital cable industry in India.
􀂃 Steep correction results in trough valuation. Management expects FY12
EBITDA of Rs1,400m, implying an FY12E EV/EBITDA of 2.9x based on the
current share price. The biggest risk to the business model is potential
pressure on the carriage and placement fees that comprise ~27% of
consolidated revenues.

52-WEEK FLOP: DEN NETWORKS:: Business Line

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Cable distributor Den Networks' stock has taken a hammering at the markets over the past one year.

The company has a limited history of just 2-3 years in operation, but has quickly scaled up by acquiring majority stakes in multi-system operators (MSOs) across nine states in India.

In FY11, while revenues expanded by 12.5 per cent over the previous fiscal to Rs 1,023.9 crore, net profits rose 26.8 per cent to Rs 38.1 crore.

The Information & Broadcasting Ministry has mandated complete digitisation of cable networks in metros by March 2012. Pan-India digitization is to be completed by December 2014. This move is supposed to provide suitable thrust for players such as Den Networks to acquire analogue MSOs, complete the digitisation process and drive higher revenues.

But the cable industry, however, may face several scalability hurdles, with the limited growth in television households, the slow pace of conversion of analogue networks to digital ones and within that conversion of free-to-air viewers to pay-channel mode. All of these are subject to uncertainty.

Analysts too perceive that the pace of digitisation for operators such as Den Networks has slowed down over the past few months.

The other major hurdle comes in the form of competition from platforms such as DTH where subscriber additions have been robust. DTH operators now add over one million subscribers every month and have also been able to drive average revenues per user (ARPU) by increasing focus on delivering value-added services

IDFC research, DEN NETWORKS :: IDFC Emerging Stars Conference

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DEN NETWORKS
OUTPERFORMER (RS143, MCAP: RS18.7BN / US$415M)


• Promoted by Sameer Manchanda, DEN Networks forayed into cable distribution in late 2007. An aggressive
management and US$65m invested by IL&FS and EMSAF have helped DEN cover significant ground within a short
span of time via acquisitions. DEN has emerged as one of the fastest growing MSOs with a reach of ~10m homes and
1.3m paying homes.
• Star-DEN JV: In January 2008, DEN entered into the syndication business through a 50:50 JV with Star Network. The
JV is an aggregator and distributor of 29 channels (Star Network and NDTV Group channels among others) across
India, Nepal and Bhutan on analogue cable, digital cable as also the DTH platform. Being part of one of the largest
MSOs, Star-DEN JV is better placed to ensure higher collections from the cable industry. For DEN, the deal also offers
stability and higher returns at low capital involvement.
• Digitization – the way forward: Having acquired critical mass (reach of 10m+ and a 1.3m paying subscriber base) and
raised Rs3.6bn of public equity, DEN’s focus is shifting from ‘customer acquisition’ to ‘digitization’ and
‘monetization’. While digitization would reduce the risk of losing LCOs (or subscribers), monetization would happen
through higher declaration rather than ARPU growth. DEN has recently raised Rs3.6bn through public issuance.
These funds are planned to be largely utilized for upgrading the existing infrastructure as also for digitization.
• At the end of Q2FY11, DEN had a digital subscriber base of 425,000. It expects the pace of digitization to intensify
hereon and is currently estimated to be adding 50,000+ digital subscribers per month. It is targeting to add 1m digital
subscribers annually. As digitization gathers momentum, declaration levels would improve (currently at <15%) and,
thereby, underpin strong growth in profitability for DEN.
• Regulatory push towards digitization: In a major positive for the Indian TV distribution space, the I&B Ministry has
given its approval for the TRAI recommendations announced earlier and proposed a revised schedule for digitization
in the country. In August 2010, TRAI had announced key recommendations for the Indian TV distribution space,
including a sunset date of December 2013 for complete migration from analogue to digital TV distribution services.
The I&B Ministry has written to TRAI proposing a revised schedule for the same – indicating a sunset date of March
2015 for the country. The regulatory push towards digitization in the country could potentially underpin faster
growth in the overall TV distribution industry. Cabinet approval is the final step for these proposals to get
implemented and is likely in the next three months.

Den Networks,Growth momentum continues:: Elara

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Growth momentum continues
Consolidated revenue masks a robust cable growth
Den Networks reported a consolidated topline growth of 13% for
Q2FY11 on a YoY basis. However, revenue growth in cable business
was far more robust at 28% YoY as the company benefited from the
first full year of operations of all of its subsidiaries. Revenues growth in
the channel distribution JV, Star:Den (contributing 50% to the
consolidated revenues)came flat during Q2FY11, impacted by the
absence of Network18 group of channel during the quarter.