TVDistribution - Jun10

Television Distribution
Carpe diem!
June 2010 Nikhil Vora ● Bhushan Gajaria ● Swati Nangalia
Don’t you think we

should switch to Even the next The picture quality is
digital or DTH? door RiYa has better & there are more
a Set top box channels…
Why should
we? What is
wrong with
this?
…but what about the

But, it would large initial investment
increase our cable on the set top box It’s only Rs1000-1500
bill… of one time cost…
No… it’s available
at the same price!!
Better quality, more Yes!!… now

That’s it??? Great!
channels, match even I can
recording and so tell riYa!
economical…lets go
digital!
And you will also be able to record

your matches and see movies of your
choice
30 June 2010
BSE Sensex: 17534
INDIA RESEARCH
Television Distribution
Media
Carpe diem*
Reason for report: Industry update
Indian TV Distribution industry, world’s second largest with 105m cable & satellite (C&S) homes, is set for
a makeover as the long-awaited ‘digitization’ becomes a reality. As of 2009, there are 22m digital homes
with 18m of these on the DTH platform. Going forward, we expect digitization to gather pace not only in
DTH but also in the ‘hitherto laggard’ cable space. While funded DTH players have invested Rs110bn so
far, cable players too are now equipped to seed set-top-boxes (STBs) after the recent fund raise and would
look to lock-in customers given the threat from DTH. We expect the total digital homes tally to rise 4x to
86m by 2015E, and address the biggest concern of ‘under-reporting’ in its wake. In the backdrop, we expect
a 6.5x increase in the organized pie to Rs340bn even on a modest 14.5% CAGR in industry revenues to
Rs480bn by 2015. As we expect C&S operators to retain the economic benefit of improved declarations and
turn profitable, the sector makes a compelling case for re-rating. We recommend Outperformer on Dish TV,
DEN Networks and Hathway Cable and expect 50% returns over an 18-month period.
Digital base to grow 4x…: India’s digital C&S base is set to expand to 86m by 2015E with 48m DTH (18m as of
2009) and 38m digital cable (4m) homes. While the six funded incumbents keep the momentum ticking in
DTH, we believe digitization is no longer a ‘choice’ for cable operators and assumes a sense of urgency in the
face of increasing threat from DTH. Importantly, national MSOs are now funded (Rs13bn of recent fund raise)
to exert customer pull through subsidized STBs – a competitive edge of DTH players so far. Limited scope of
‘carriage fees-led economics’ from here and industry consolidation are the other drivers of cable digitization.
…and organized pie to swell 6.5x by 2015E: We expect a modest 14.5% CAGR in C&S industry revenues to
US$10.8bn over 2009-15 as the C&S homes base expands to 140m and ARPU increases from $3.8 per month to
$6.3. However, digitization is bound to reduce the incidence of under-reporting – the bane of the Indian C&S
industry, and we expect the declared subscriber base to grow 4x from 23m to 89m by 2015. This, we believe,
would drive a 6.5x rise in revenues of organized players.
Economic retention to drive value creation: With the net share of organized MSOs and DTH operators
increasing from <10% of the distribution chain to 35% by 2015, the industry is on the threshold of profitability.
As MSOs are expected to retain the gains of higher declaration levels and operating leverage kicks in for DTH
operators, we see profitability of lead players trending closer to the global average of 30% in the coming
period. Drawing an analogy with US peers (top five cable operators are worth $190bn), we see a strong case
for re-rating of Indian C&S operators. We value these businesses using EV/ subscriber based on individual
subscriber cash flows and recommend Outperformer on Dish TV, DEN Networks and Hathway Cable.
Comparative valuations
FY13E
Companies Recommendation Price M Cap EPS PE EV/ EBITDA Target Price
(Rs) (Rs m) (Rs) (x) (x) (Rs)
DEN Networks Outperformer 198 25,837 15.9 12.4 5.7 292
Dish TV Outperformer 45 47,927 1.8 25.0 5.9 61
Hathway Cable Outperformer 176 25,072 14.7 11.9 4.6 274
Nikhil Vora Bhushan Gajaria Swati Nangalia

nikhil.vora@idfc.com bhushan.gajaria@idfc.com ashish.nangalia@idfc.com
91-22-6622 2567 91-22-6622 2562 91-22-6622 2576
*Seize the day

IDFC Securities Ltd.
Naman Chambers, C-32, G- Block, Bandra-Kurla Complex, Bandra (East), Mumbai 400 051 Tel: 91-22-6622 2600 Fax: 91-22-6622 2501
“For Private Circulation only” “Important disclosures appear at the back of this report”
IDFC Securities
Contents
Investment Argument.................................................................................................... 4
DTH: In Momentum .................................................................................................... 18
Cable: Digitization no more a choice........................................................................ 23
Round 1: A ‘miscarriage’ .......................................................................................... 23
However, on-ground dynamics are changing....................................................... 26
Head-end in the Sky (HITS) ..................................................................................... 29
86m Digital Homes by 2015E...................................................................................... 30
Monetization: Rs480bn by 2015E............................................................................... 31
Economics: Turning profitable .................................................................................. 39
MSOs to retain the gains of declaration ................................................................. 39
DTH: Operating leverage set to play out ............................................................... 40
Distribution Margins: Mapping global trends ...................................................... 42
Economics of MSO and DTH operators ................................................................. 44
Valuations: We see 50% returns................................................................................. 48
Key Risks .................................................................................................................... 53
Evolution of cable & DTH in the US ........................................................................ 54
Companies ..................................................................................................................... 58
Den Networks ................................................................................................................ 59
Dish TV ........................................................................................................................... 75
Hathway Cable .............................................................................................................. 87
Airtel Digital................................................................................................................. 107
Sun Direct ..................................................................................................................... 110
Tata Sky......................................................................................................................... 112
Digicable ....................................................................................................................... 114
You Telecom................................................................................................................. 116
WWIL ............................................................................................................................ 118
Reliance Big TV............................................................................................................ 119
InCable (Hinduja Group) ........................................................................................... 120
JUNE 2010 3
IDFC Securities
INVESTMENT ARGUMENT
¾ Indian C&S market paralyzed by rampant under-declaration and poor yields;
while cable industry did not deliver on digitization expectations in the past
three years, DTH garnered 18m subscribers (subs) as of 2009
¾ Growth momentum to be sustained on DTH platform with 48m homes
expected by 2015; cable industry too now compelled to digitize
¾ A fresh round of public equity, need to secure the existing base and increasing
threat of DTH to drive voluntary digitization on cable – 38m subs by 2015E
¾ A 4x increase in declared base and 9% CAGR in ARPU to drive industry
growth of 14.5% to Rs480bn and organized pie to grow by 6.5x
Exhibit 1: Indian TV distribution – redefining the landscape

2009 2015E
Non-C&S
homes,
Non-C&S
20m
homes,
30m
C&S C&S
homes, homes,
105m 140m
Total potential 4.9% CAGR
Declared
Declared
homes,
homes,
23m
89m
Declared homes 3.9x

Undeclared Undeclared
homes, homes,
82m 51m
Digital homes 22m 86m 4x
ARPU US$3.8 US$6.3 8.9% CAGR
2.8
AGR
4. 5%C
1
Industry size (US$ bn) The BIG
7.7
Unorganized 3.6 Opportunity
6.5x
Organized 1.2
• 50,000+ LCOs, 7,000+ MSOs and • Consolidation with top 5 MSOs

Industry composition 6,000 DTH operators accounting for ~70%
• Top 5 MSOs account for <30% • DTH could also see consolidation
• USD3bn in last 5 years to add 22m • USD5bn of investments need to

Capex digital subscribers reach 4x the scale
• External source of capital • Largely internally funded
• Industry losses of over USD1.5bn • Industry margins to increase to

Profitability 30%+
Source: IDFC Securities Research
JUNE 2010 4
IDFC Securities
India – second largest C&S market with 105m customers…

35m television homes With 135m television and 105m C&S homes, India has usurped the US (100m C&S
added in the past four homes) to become the second largest C&S market in the world after China.
years
Interestingly, Indian television distribution space has added 35m television homes
over the last three years, ahead of our estimates of 17m additional homes, on the back
of 7m-8m new television sets sold annually and penetration of DTH in cable-dark
areas (50% of the DTH market). While DTH penetration in India stood at 18m homes
as of 2009 (20m by March 2010), India still has 87m cable homes (substantially higher
than 62m cable homes in the US).
Exhibit 2: India – world’s second largest C&S market

(m) Cable DTH Global C&S market
(m) 160.0
3.5m 18m 160
120
Cable DTH
18.0
87m 18m 11.0 120
90
Cable DTH 5.0
105.0
100.0
2.0
0.5
135m 60 80
83.0 87.0
78.0
71.0
232m 64.0 37.0
30 40
24.0
13.5 10.0
Total Television C&S Digital
homes homes homes homes 0 0
2005 2006 2007 2008 2009 China India US Germany Japan UK France
…however, fraught with inefficiencies

Low ARPU (<USD4), While India is the second largest C&S homes market in the world, the industry earns
extreme fragmentation and just US$4.8bn in revenues. Notably, Comcast – world’s largest cable operator –
‘under-reporting’ as high as
85% characterize the Indian generates revenues of $33bn from its 24m subscribers. This can be explained by the
cable industry fact that ARPU (average revenue per user) in India is <$4 per month vis-à-vis $70-80
in the US and UK, and $15-20 in comparable Asian markets. More importantly, with
TV distribution dominated by analogue and addressability a concern on the cable
platform, 80% of the collection at the consumer end goes unreported in the hands of
the unorganized last mile operators. Additionally, the Indian cable distribution
industry is extremely fragmented with 7,000+ independent MSOs and 50,000+ LCOs.
Top five players account for <30% of the paying subscriber base, while DTH industry
has six players in the race, as against monopoly or duopoly in rest of the world.
JUNE 2010 5
IDFC Securities
Exhibit 3: India – an extremely cluttered cable and DTH market
Broadcasters: 400+ channels
7,000+ Multisystem operators (MSOs) & Independent satellite operators (ISOs) 6 DTH operators
MSOs MSOs MSOs MSOs ISOs

50,000+ LCOs
LCO LCO
LCO LCO LCO

LCO
LCO
LCO
LCO LCO LCO
87m subscribers 18m subscribers
Exhibit 4: Lowest in terms of ARPU… …LCOs retain the largest chunk out of USD4.8bn
(USD / month) Broadcasters
12.7%
80 75.0
65.0 MSO and DTH

operators
60 9.4%
50.0
40.0
40
20.0
20
LCO
3.6 78.0%
0
India Malaysia France Australia UK US
2006-09 – a period high on expectations…

Mandated CAS and entry Saddled with inefficiencies, the Indian TV distribution industry was considered to be
of funded players in DTH at the cusp of digitization boom in 2006. Mandated CAS in select areas of Mumbai,
had raised hopes on
digitization… Delhi and Kolkata, and the government’s target to reach 55 cities and 20m digital
homes by 2010 had raised hopes on cable digitization. Simultaneously, DTH
penetration was expected to take off with the influx of deep-pocketed corporates like
Tata Sky, Bharti Airtel, Reliance ADAG and Sun Direct besides the incumbent Dish
TV. In this backdrop, India was expected to garner a base of 90m C&S (including 22m
digital) homes by 2009.
JUNE 2010 6
IDFC Securities
Exhibit 5: C&S industry in 2006 – high on expectations
Mandated
7m-8m
CAS in
annual TV
notified
set sales 90m C&S homes
areas
…with estimates of 22m

digital homes by 2009 Funded DTH 13m DTH homes
participants reaching
in DTH cable dark
market areas 9m digital cable homes
Plans to
digitize 55 Consolidation in market
cities
By 2009, India has indeed scaled up to 22m digital C&S homes – in line with earlier
estimates. However, the composition within the digital platform is quite different
from the way it was expected to pan out. While DTH delivered ahead of
expectations, cable industry remained in a sorry state of affairs.
Exhibit 6: While DTH delivered ahead of expectations, cable failed

TV homes Digital TV homes
What delivered? What didn’t? (m) (m)
16 105 16.5 21.5
9 35m additional homes 8 Mandated CAS failed

17
72
9 USD2.5bn invested in 8 Cable industry attra cted

DTH only USD400m
9 18m DTH homes 8 3.5m digital cable 3.5

1.5
9 Paying subscribers 8 ARPU droppped further

increased to 22m to USD3.6 C&S homes -Cable DTH Total C&S homes Cable DTH Total
2006 - 2006
...deliverance in DTH…
Globally, DTH is a monopoly Globally, DTH markets are mostly a duopoly, whereas India is the only oligopoly
or duopoly, but it is a six-
with six players in the fray. While this means high competitive intensity, it has also
player race in India
ensured faster-than-expected ramp-up of the DTH market. With government push
(mandatory CAS), the seeds of digitization were sown in India in 2003. Sensing the
opportunity, two of India’s largest media houses (Essel group and Sun TV), two
largest telecom operators (Bharti Airtel and Reliance ADAG), India’s largest
conglomerate (the Tatas) and a leading consumer durable company (Videocon)
forayed into TV distribution – but on the DTH platform. Besides, Newscorp, which
owns USA’s largest DTH player – DirecTV, and UK’s largest DTH operator – BSkyB,
partnered with the Tatas (Tata Sky). Astro Malaysia, a leading media company in
Malaysia, partnered with Sun Group (Sun Direct). DTH business inherently entails a
long gestation period and is capital-intensive in the initial years given the subsidies
involved. Also, the less regulated and more organized nature of DTH space vis-à-vis
cable made it a preferable platform for these corporates.
JUNE 2010 7
IDFC Securities
With $2.5bn invested so Indian DTH has till date witnessed capital infusion of ~$2.5bn. The funds have
far, India has scaled up to primarily been utilized for ‘consumer pull’ through heavy subsidies (per subscriber
18m DTH homes as of acquisition cost of Rs2,500-3,000) and high ad spends (at Rs7bn of annual ad spend,
2009…
DTH among the largest after FMCG, Autos and Telecom). Fund availability, we
believe, has been the key differentiating factor that has allowed DTH industry to
scale up to 18m homes by 2009 (against the estimated 13m). Currently, Dish TV leads
the market with 5.7m net subscribers as of March 2010 (5.4m as of December 2009)
and Airtel Digital is the fastest growing with 25-27% share of the incremental market.
Exhibit 7: Influx of big names in the DTH space

Market value Investments Subscribers
DTH venture Group Group Companies
($ bn) in DTH ($ m) (m)
Zee Entertainment, Zee News, Amongst the largest media
Dish TV Essel 5.0 400 5.4
WWIL, Essel Propac, Fun Cinemas houses
India’s largest conglomerate
Tata and Tata Steel, Tata Motors, TCS, Tata
Tata Sky (Tata) and world’s largest 75.0 600 4.5
Newscorp Tea, Indian Hotels
media house (Newscorp)
Bharti
Airtel Digital Bharti Airtel India’s largest telecom player 25.0 400 2.2
Airtel
Reliance R-Communications, R-Infra,

Big TV Second largest telecom player 26.0 400 1.6
ADAG Reliance Entertainment
Sun Sun TV, Dinakaran, Sumangali Largest media house in South

Sun Direct 5.0 600 4.3
Networks Cable India
Videocon D2h Videocon Videocon Leading consumer Durables 1.5 100 0.1
…but a ‘miscarriage’ for cable

…while Indian cable The cable industry continues to be dominated by analogue distribution with just
industry has added just 2m 3.5m digital connections of the total 87m cable homes as of 2009. While government
digital homes in the past
three years apathy as also LCOs and broadcasters’ unwillingness to digitize de-railed mandated
CAS (only 25% of the notified areas switched to digital cable), capital constraints with
MSOs too hampered voluntary digitization. Importantly, of the ~$400m capital
available to MSOs till date, ~$275m flowed to new entrants (DEN, Digicable, You
Telecom, etc), for whom customer acquisition was a priority over digitization. While
DEN has invested $75m in acquisition of ~67 MSOs, Digicable has invested ~$100m+
to acquire a similar customer base. Thus, there was lack of funds with MSOs to drive
digitization through consumer pull the way DTH players did.
Exhibit 8: Reasons for failure of cable digitization
Failure of mandated CAS Only 25% of the CAS areas digitized
Entry of new players like

Failure of mandated CAS, USD250m into customer acquisition
inadequate funding and DEN, Digicable
focus on acquisitions –
key reasons for failure of Inadequate funding - just
digital cable Not funded for voluntary digitization
USD400m invested
LCO and independent

Acquisition price 2-2.5 years ARPU
operators' role
JUNE 2010 8
IDFC Securities
The way forward – digital base to jump 4x by 2015E…

Sustained momentum in If the hopes of digitization in the previous round rode on government initiative and
DTH and changing on- corporate funding, digitization from here would be driven by increasing consumer
ground dynamics in
cable… acceptance. With higher capital availability and peaking out of consumer subsidies,
we expect sustained momentum in DTH proliferation. More importantly, business
dynamics are changing in the cable industry, which we believe will be conducive for
cable digitization. Players with relatively funded balance sheets and increasing threat
of DTH would be the key drivers of voluntary digitization on the cable platform. We
see India at the cusp of a digital boom and expect it to emerge as world’s third largest
digital market – next only to China and US. We estimate the total digital subscriber
base to rise from 22m in 2009 to 86m by 2015 (of the total 140m C&S homes).
Exhibit 9: Rapid scale up of digital subscriber base

(m)
Analogue Cable Digital Cable DTH
160
120
…to scale up digital C&S 45 48
38 42
homes by 4x to 86m by 26 33
11 18
2015E 3 4
80 6 10 16 22 30 38
40 84 84 80 75 70 66 60 54
0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
…as DTH sustains momentum; 48m DTH homes by 2015E

Continued customer DTH industry, a 20m homes market as of March 2010, is finding increasing consumer
subsidies and aggressive
advertising – India to acceptance. Also, we do not anticipate further price wars as the industry is already
surpass US populated with six players and we rule out advent of new players. More importantly,
DTH market two key players – Reliance ADAG (Big TV) and Airtel Digital – are facing substantial
cash flow issues in the core telecom business given the increased competition and
huge outlay on 3G Bandwidth. This makes us believe that subscriber acquisition cost
(SAC) will be arrested at the currently prevailing 12-14 months of ARPU (globally at
8-10 months). Further, internal cash flows are improving in the business as operating
leverage delivers a marked improvement in operating numbers. (Dish TV is already
profitable at the operating levels; Tata Sky, Sun Direct and Airtel Digital expected to
turn profitable at operating level within the next two years.)
As capital usage towards subsidies stabilizes and the industry continues to spend
Rs7bn-8bn annually on advertising, we see sustained addition of 2m subscribers per
quarter. We expect the Indian DTH industry to ramp up to 48m homes by 2015 (30m
homes to be added over 2010-15E). At 48m DTH homes by 2015E, India would be a
bigger market than the US – an estimated 41m homes market by then.
JUNE 2010 9
IDFC Securities
Exhibit 10: India to have 48m DTH homes by 2015E… …and emerge as world’s largest DTH market (2015E)
(m) (m)
48
50 48 50
45
42 41
40 38 40
33
30 30
26
22
20 18 20 15
11
10 10 6.5
0 0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E India US China UK Latin America
…and digitization the ‘only’ option for cable

With the recent fund raise, While cable distribution is an inefficient and fragmented market, there are some
critical mass and growing structural changes under way that would drive a digitization boom on the cable
threat of DTH – digitization
becomes a priority platform. And unlike in the past when hopes were pinned on regulatory changes and
government mandate, digitization will be driven by market forces this time round.
Onslaught of DTH has increased the churn for cable distributors, and MSOs – rather
than ‘add’ – are now working to ‘secure’ and then ‘monetize’.
Exhibit 11: Key drivers for cable digitization

Rs bn Details Factors driving digitization
Hathway 4.8 IPO Rs13bn of fund raise ● Funded for subsidizing STBs
DEN 3.6 IPO ● Rs4.6bn allocated for digitization
WWIL 5 Rights issue Critical mass achieved ● Incremental carriage revenue growth
You Telecom 3.6 Filed DRHP limited
Total 17 Increasing threat of DTH ● Need to secure subscriber base
● LCO willing to re-align
Hathway, DEN Networks and WWIL have raised a cumulative Rs13.4bn in the past
Rs4.6bn of the recent/
planned fund raise one year while Digicable and You Telecom are set to raise an incremental $150m.
allocated for digitization With players having attained critical mass, the focus would now turn to securing
(locking-in) the existing subscriber base and improve upon declaration levels. From
our interaction with some MSOs and LCOs, we gather that key operators have struck
a truce-of-sorts. Incrementally, MSOs are deploying capital more judiciously and
allocating higher spends towards seeding of STBs (Hathway, DEN, WWIL and You
Telecom have allocated Rs4.6bn for digitization and network upgrades). MSOs are
offering STBs at Rs1,000 each, implying a subsidy of Rs700-800. The process of
digitization is picking pace on ground as LCOs are more receptive to digitization
rather than lose out subscribers to DTH, an alternate digital platform. To ensure
rapid roll-out, MSOs are not looking to disrupt LCO economics in the initial phase.
We expect digital cable to gather pace from hereon and reach 38m homes by 2015,
with 28m subscribers to be added over 2012-15. Besides rapid digitization, we also
anticipate a major consolidation wave in the market, as smaller LCOs and MSOs do
not have the wherewithal to drive digitization.
JUNE 2010 10
IDFC Securities
Exhibit 12: Digitization on cable platform gathering pace
(m) Analogue Cable Digital Cable
100
3
3.5 6
10 16 22 30
75 38
Indian cable industry to
add 35m digital homes by
2015E
50
84 83.5 80 75 70 66
60
54
25
0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
Declaration-led monetization to begin; 89m paying subs by 2015E

As digitization brings in As digitization picks up pace, monetization is bound to follow sooner than later. We
‘addressability’… believe the first round of monetization would be driven by higher declaration, and
not higher ARPU. While all DTH homes would be paying subscribers, improvement
in declaration levels in cable industry would lag digital subscriber addition. Initially,
MSOs would be keen to seed STBs to prevent subscribers from moving to DTH. At
the same time, they would not prefer to disrupt the economics of LCOs, and therefore
addition of digital subscriber base may not translate into a correspondingly higher
paying subscriber base. We expect paying cable subscriber base to increase from 10m
in 2009 to 16.7m in 2012, whereas digital cable subscriber base would expand from
3.5m to 16m over the same period. Only when an MSO digitizes a relevant mass of
subscribers under a particular LCO, its share of ARPU can be expected to inch up.
From our interaction with LCOs, we understand that MSOs are currently not pushing
for higher declaration. We expect declarations to improve significantly 2012 onwards
and estimate the total declared cable homes base to touch 43m by 2015. Overall
declared homes would increase from 23m in 2009 to 89m by 2015E.
Exhibit 13: Declared subscriber base to grow by 4x
(m) Non-paying/undeclared homes Declared cable homes Non-subsidized DTH homes
140
43 46
34 40
105 20 28
…declared subscriber 12
7
base to grow from 23m in 11 11 12 13 17
2009 to 25 34 43
89m in 2015E 70
80 82 81 77 73 65
35 59 51
-
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
JUNE 2010 11
IDFC Securities
…ARPU gains to be gradual but guaranteed

Expect overall ARPU to At <$4 a month, India is among the cheapest in terms of TV entertainment. Not only
rise from $3.8 now to $6.3 that, per month television ARPU is abysmally low against the cost of a single movie
by 2015
($3) within India. As against this, global monthly cable ARPU is 5-8x the cost of a
movie ticket. The wide margin between Indian and international ARPU suggests that
TV ARPU in India has to move up substantially. While subsidy-led growth, lack of
content differentiation and slow pick-up in VAS would keep ARPU growth at low
ebb in the near term, we expect cable and DTH ARPU to increase to $6.3 by 2015.
Exhibit 14: India cable ARPU lower than international peers… …and also compared to multiplex and telecom
(USD / Month)
ATP Movies (USD) ARPU (USD) Multiple (x)
80 75
India 4.0 4.0 1.0
65
USA 6.5 75 11.5
60 UK 11.4 65 5.7
45 45 France 6.1 45 7.5
40
Telecom ARPU (USD) ARPU (USD) Multiple (x)
20 India 5.0 4.0 0.8
20 USA 49.0 75 1.5
4 UK 45.0 65 1.4
France 46.0 45 1.0
0
India Malaysia Australia UK US France
A Rs480bn industry by 2015E – organized pie growing 6.5x

While we expect 14.5% With basic ARPU improving from $3.6 to $5 and C&S home base expanding from
CAGR in industry revenues
130m in 2009 to 140m by 2015, we expect 11.5% CAGR in basic subscription revenues
by FY15, organized pie to
grow by 6.5x to Rs373bn. However, share of organized players in TV distribution would grow
multifold as declarations go up by 4x. We expect the share of organized MSOs and
DTH operators in subscription revenues to rise from Rs38bn in 2009 to Rs240bn by
2015, with Rs125bn of this for DTH industry. Besides, we see TV distribution revenue
model being enhanced with newer streams like STB rentals, upfront digitization
revenues, broadband revenues (10x growth in subscriber base to 7m by 2015E),
advertising revenues and VAS revenues on gaming, Movie on Demand, recorder
services, etc. On the other hand, carriage revenues, currently accounting for >40% of
cable operators’ revenues, will stagnate. Overall, we expect 14.5% CAGR in C&S
revenues to Rs480bn over 2009-15 with 20% of revenues coming from newer streams.
Exhibit 15: Growing share of organized players

(Rs bn)
480
500
14.5% CAGR 408
375 346
307 Unorganized
268 Rs139 bn
245
Organized 250 216
202
Rs48.4bn Organized
Rs341bn
125
Unorganized
Rs154bn
0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
JUNE 2010 12
IDFC Securities
While MSOs would retain the gains of better collections...

MSOs to retain the gains of After two decades of operations for the cable industry and five years for DTH
improved declaration level businesses, only a handful of them are making any money. As we expect MSOs to
retain a substantial portion of the gains arising from higher declaration, content cost
would increase at a much lower pace. While content cost for cable operators is Rs150-
160 per paying subscriber, the same on the DTH platform is <Rs100. This gives
comfort that improved collections do not imply a proportionate increase in content
cost. Thus, even a marginal improvement in declarations would drive a sharper
profit improvement. Profitability would further improve on the back of primary
point acquisitions (LCOs retain 80% of the distribution revenues).
Exhibit 16: Increasing share of MSOs in the distribution pie and declining content cost to sales
(bn) MSOs share of net subscription Content cost % of subscription collection

(%)
120 115.3 90 84.4 82.9 81.1 79.0 77.6 75.9
71.2
65.8
90 85.0
60
56.6
60
39.8
31.7 30
25.9 25.5 28.2
30
0 0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
DEN is the first MSO in India to be profitable (PAT of Rs303m in FY10; estimated
PAT of Rs2.1bn by FY13E). Hathway too is expected to turn profitable in FY11.
Exhibit 17: While DEN has already turned profitable… …Hathway to turn profitable in FY11
(Rs m) (Rs m)
PAT PAT
2100 2,500
1,800
1450
2,077 1,100
2,103
800
400 871
908
(623) (580) 291
150 461
303
-300
-151
-500 -1,000
FY09 FY10 FY11E FY12E FY13E FY09 FY10 FY11E FY12E FY13E
JUNE 2010 13
IDFC Securities
…DTH industry witnessing operating leverage gains

Operating leverage gains DTH industry is incrementally moving towards achieving operating leverage
coming to the fore in DTH
benefits with 40% of the cost structure in the initial phase being fixed in nature and
industry as ~40% of the
costs are fixed in nature 10% linked to new subscriber acquisition. With an expanding base and stabilizing
customer acquisition cost, we see improving operational performance ahead for DTH
operators. While Dish TV clocked Rs845m of operating profits in FY10, Sun Direct,
Tata Sky and Airtel Digital would turn profitable over the next two years as they
achieve 5.5m subscribers and operating leverage sets in. Further, given the rapid
scale-up of DTH businesses, broadcasters are willing to enter into fixed content-cost
deals with players (a case in point is Dish TV’s latest deals with some broadcasters).
Dish TV is expected to turn profitable at the PAT level in Q4FY12 and operating
margins would improve from 8% currently to 32% by FY13E.
Exhibit 18: Cost components of a DTH model

Expense Nature of expense
Content cost Variable
License cost Variable
Transponder cost Step variable
Other goods and services Fixed
Employee cost Step variable
Administrative Fixed
Advertisement cost Fixed
Selling & Distribution Variable to new subscriber addition
Exhibit 19: Dish TV – operating leverage coming to the fore
Content Cost Selling & Distribution Cost Subcribers

88 2.9
66 4.0
Dish TV – significant 4.6 5.3
operating leverage gains in 6.0 6.7
the offing 44 7.1 7.6
22
0
Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11E Q3FY11E Q1FY12E Q3FY12E
Just $5bn of incremental investments required to turn the tide

Of the $5bn, $3.4bn to be The C&S business has failed to generate free cash so far while it is inherently a
invested in seeding STBs, capital-guzzler. DTH industry too has been in the investment phase for the last three
and remaining for market
consolidation years. However, we see profitability round the corner. DTH industry, with consumer
premise equipment cost of <Rs3,000, would need only $2bn to add 30m incremental
homes over the next five years, even at the prevailing per customer acquisition
subsidy of Rs2,500-3,000. Similarly, cable industry too would require $1.4bn to touch
the estimated base of 38m homes by 2015, assuming STB cost of Rs1,700-1,800 each.
Additionally, we expect $1.5bn to go into consolidation as C&S players (Hathway,
DEN, etc) continue to acquire LCOs and MSOs (acquisition of 20m customers).
JUNE 2010 14
IDFC Securities
Exhibit 20: USD5bn of capital investment needed over 2010-15

Cable -
consolidation
31%
DTH - STBs
40%
Cable - STB
29%
As DTH operators and More importantly, the industry has so far been dependent on external funds and
MSOs turn profitable, we while we expect this to continue for another couple of years, players like Dish TV,
expect capex to be largely
internally funded DEN and Hathway would not need any incremental capital and the capex would
entirely be internally funded. At the same time, as we expect players (Tata Sky, Sun
Direct and Airtel Digital) to turn profitable over the next 18 months, the dependence
on external capital would reduce even further.
Profits in sight; we turn bullish on the distribution space

With industry showing With multifold growth in the revenue base of organized players in the distribution
signs of profitability for the
chain and profitability round the corner, we believe it is time to invest in the TV
first time, we have a
positive stance on the distribution space. While structural changes in the cable space would drive
sector profitability of MSOs closer to the global average of 30%+, we believe competitive
intensity in the DTH business would also abate.
Exhibit 21: Outperformer on Dish TV, Hathway Cable and DEN Networks
Player Investment rationale Subscribers - FY10 Subscribers - FY13 Revenues (Rs m) PAT (Rs m)
FY10 FY13E FY10 FY13E

Dish TV • Largest DTH player - 30% market share 5.7m net 8m net 10,853 22,492 (2,612) 1,916
• 22% of the incremental market 6.9m gross 11.3m gross
• Funded balance sheet - raises Rs16bn
• Operating leverage – 32% by FY13E

Hat hway Cable • Largest national MSO in India 1.6m paying 4.1m paying 7,361 17,057 (705) 2,103
• Rs13bn+ fund raise since 2000 1m digital 4.7m digital
• Aggressive on LCO acquisition 0.3m broadband 1.4m broadband

• Credible management
DEN Networks • 2nd largest MSO in 2nd year 1.1m paying 3.8m paying 9,191 19,651 303 2,077
• $75m invested in acquiring 67 MSOs 0.4m digital 3.5m digital
• Raised USD80m through IPO 0.7m broadband
• St ar DEN offers scale

• First MSO to turn profitable
• Aggressive management
JUNE 2010 15
IDFC Securities
Distribution businesses Cable and DTH distribution is among high value-creating media businesses globally,
create value – EV of top particularly in the US where three of top 10 media companies are in distribution. Top
five operators in the US is five distribution companies (Comcast, DirecTV, Dish Network, Time Warner Cable
$190bn
and Cable Vision) account for market capitalization of $120bn and EV of $190bn on a
base of 77m subscribers. In this context, Indian TV distribution (89m declared homes
by 2015E) offers immense value creation potential – particularly as business
economics are progressively trending towards the global average.
Exhibit 22: C&S companies – among the largest value creators

Subscribers Revenues EBITDA PAT Mkt cap EV EV / subscribers
(m) (USD bn) (USD bn) (USD bn) (USD bn) (USD bn) (US $)
Comcast Corp 23.8 35.8 13.7 3.6 51.5 80.2 3,368
DirecTV 23.2 21.6 5.3 0.9 32.7 38.5 1,659
Dish Network 14.2 11.7 2.7 1.4 13.7 14.4 1,015
Time Warner Cable 13.0 17.9 6.5 1.1 17.6 39.2 3,022
Cablevision Systems Corp 3.1 7.8 2.7 0.3 7.6 18.5 6,042
Total 77.2 94.6 30.9 7.3 123.1 190.8 2,470
We value businesses on EV/ subscriber basis; 50% returns

We use a different Given that the Indian DTH and cable industry is in the investment phase, which
valuation matrix – EV/ implies high growth but muted profits, we do not see merit in valuing the stocks on
subscriber based on cash
flow of individual earnings multiple or EV/ EBITDA methodology. Global peers too are not the best
subscriber comparables as these industries are in the maturity stage of their life cycles. We also
do not find the discounted cash flow valuation method appropriate given the back-
ended nature of returns and aggressive subscriber addition in the initial years.
We value DTH business at We have hence adopted a different parameter to value distribution businesses. To
33 months of ARPU, 29
capture the potential to scale up, we have used the EV/ subscriber methodology.
months for secondary
points, and 32 months for However, at the same time, we believe it is not fair to use the global comparable of
primary points $1,000+ EV/ subscriber as ARPU and profitability are not comparable with the Indian
market. Hence, to capture the inherent ARPU, profitability and long-term subscriber
economics in India, we have used cash flow of individual DTH, primary point
digitized, secondary point subscribers and broadband subscribers from the time of
acquisition. Using this methodology, we have arrived at a fair EV/ subscriber of 29
months of ARPU for secondary point acquisition, 32 months ARPU for primary point
acquisition, 33 months ARPU for DTH and 36 months ARPU for broadband subscriber.
Exhibit 23: Valuation assumptions

Rs DTH Secondary Point Primary Point Broadband
SAC/ Basic capex 1,315 2,000 4,500 2,500
Consumer premise equipment 2,750 1,500 1,500 1,100
Less - Receipts 1,690 750 750 500
Net acquisition cost (2,375) (2,750) (5,250) (3,100)
Total APRU - year 1 115 320 220 300
5 year ARPU CAGR 16 3 3.3 1
Revenue / subscriber - year 3 2,353 4,046 2,849 3,600
EBITDA % - year 3 20 29 48 41
Terminal growth rate (%) 5 5 5 5
WACC (%) 11.9 11.9 11.9 11.9
Discounted EV/ subscriber 5,997 9,794 7,543 10,928
Non-subsidized ARPU 184 337 237 300
Number of months of ARPU 33 29 32 36
JUNE 2010 16
IDFC Securities
18-month price target of We have used this methodology on players’ FY13 subscriber base. This methodology
Rs61 for Dish TV, Rs274 for helps us to arrive at a fair value of Rs61 for Dish TV, Rs292 for DEN Networks and
Hathway and Rs292 for DEN Rs274 for Hathway.
Exhibit 24: Comparative valuations
Dish TV Hathway DEN Network

Secondary Primary Broadband Secondary Primary Broadband Star DEN
Number of subscribers (m) 8 2.1 2.0 1.4 2.72 1.05 0.7
ARPU (Rs/month) 260 325 300 315 350 300 300

Month of ARPU 32.5 29.0 31.8 36.4 29.0 31.8 36.4
EV / subscriber (Rs) 8,451 9,440 9,530 11,474 10,166 9,530 10,928

Enterprise value (Rs m) 67,607 19,823 18,689 16,265 27,651 10,007 7,649 4,400
Total EV (Rs m) 67,607 54,777 49,707

Less: Debt (Rs m) 3,250 2,500 (2,500)
Equity value (Rs m) 64,357 52,277 52,207

Number of shares (m) 1,065 142.9 131
Per share value (Rs) 61 366 400
Less; Minority stake (%) 25 27
Target price (Rs) 61 274 292
JUNE 2010 17
IDFC Securities
DTH: IN MOMENTUM
¾ An organized industry with no last-mile hassles, DTH industry has attracted
big corporate houses like the Tatas, Bharti, Essel, Sun Network, Reliance
ADAG and Videocon, as also global partners like Sky and Astro
¾ With $2.5bn invested so far, DTH has grown ahead of expectations to 20m
subscribers by FY10 (earlier estimates of 16m by Dec’10)
¾ With $500m+ spent annually on subscriber acquisition and advertising, 28m
more DTH subscribers are expected to be added; the 48m base by 2015 would
be bigger than the US DTH industry
¾ With abating competition, no rationale for ‘irrational’ price wars; on the
contrary, players moving up the curve to DVR and HDTV technology
DTH industry has lured deep pocketed players…

DTH industry attracted big TV distribution businesses are inherently long gestation and entail heavy
corporates, large private investments in the initial years. Being a more organized market and positioned as a
equity players as also
strategic investors premium offering to analogue cable, DTH industry saw influx of deep-pocketed
corporate houses like Tatas, Bharti, Reliance ADAG and Videocon, as also two of the
largest media companies – Essel Group and Sun Networks. Besides large Indian
corporates, DTH industry has also attracted players like Newscorp (owner of the
largest DTH operators like DirecTV, BSkyB, Sky Perfect, etc) and Astro Malaysia
(Malaysia’s sole DTH operator) aligning with Tata and Sun Networks respectively.
With heavyweights as also their strategic partners and financial investors like
Temasek and Apollo Management entering the space, the Indian DTH industry has
so far seen investments to the tune of $2.5bn.
Exhibit 25: Strong participants in the DTH space
Market value Investments

DTH venture Group Group Companies
($ bn) in DTH ($ m)
Zee Entertainment, Zee News, WWIL,
Dish TV Essel Amongst the largest media houses 5.0 400
Essel Pro pac, Fun Cinemas
India’s largest conglomerate
Tata and Tata Steel, Tata Motors, TCS, Tata
Tata Sky (Tata) and world’s largest media 75.0 600
Newscorp Tea, Indian Hotels
house (Newscorp)
Airtel Digital Bharti Airtel Bharti Airtel India’s largest telecom pla yer 25.0 400
Reliance R-Communications, R-Infra, Reliance
Big TV Seco nd largest telecom player 26.0 400
ADAG Entertainment
Sun
Sun Direct Sun TV, Dinakaran, Sumangali Cable Largest media house in South India 5.0 600
Networks
Video con D2h Videocon Videocon Leading consumer Durables 1.5 100
JUNE 2010 18
IDFC Securities
Ability to create consumer pull and distribution push…

Presence of funded players enhances the sector’s ability to create customer pull
through heavy advertising and distribution. With an annual spend of Rs7bn-8bn
annually on advertising, DTH is among the largest advertisers on television (32% of
total television advertising by the service sector in 2009) and print (3% of total
advertising spend). Similarly, DTH operators have created strong pan-India
Rs7bn+ of advertising
spends and deep distribution networks. Presence of India’s two largest telecom operators, Bharti Airtel
distribution network and Reliance Communications – with distribution networks next only to FMCG, has
helped DTH’s cause
helped create deep distribution in DTH business. Tata Sky also reaches out to >5,000
towns while Dish TV has a dealer network of 40,000+.
Exhibit 26: DTH amongst the lead advertisers
…and drive voluntary digitization through aggressive subsidies

Rs2500-3,000 of In the absence of mandatory digitization and with a well-entrenched alternative in
subsidization to drive the form of analogue cable (at low ARPU), customer pull through heavy ‘subscriber
voluntary digitization
subsidies’ was the only way to drive digitization. With funded players investing
$1.5bn+ on customer acquisition in the last three years, DTH industry has been able
to generate consumer pull and drive voluntary digitization. Funded balance sheets of
players have helped them offer an upfront subsidy of Rs1,500+ on hardware and
incur a per subscriber acquisition cost of ~Rs3,000 (including subsidized ARPU).
Exhibit 26: Continuous subsidized offerings…
JUNE 2010 19
IDFC Securities
Exhibit 27: …reflected in increased cost of customer acquisition

(Rs m)
3,000
2,250
SAC up 5x in four years

1,500
750
0
Q1FY07 Q1FY08 Q1FY09 Q1FY10
Broadcasters too are willing to align with DTH

DTH contributes as much Broadcasters have been more receptive to the DTH technology so far, as it is
to broadcasters’ revenues perceivably the only platform driving better declaration levels. While initial pricing
as analogue cable does
was set by the TDSAT (must-provide content at half the rate charged on the analogue
cable), broadcasters end up getting paid higher as the declaration is 6-8x that of
analogue cable. Of the total 30m declared C&S homes in India today, 18m are on the
DTH platform. Relevance of DTH platform for broadcasters’ revenue stream is
visible in the pay revenues of Zee TV and Sun TV. While Sun TV’s collection on the
DTH platform is higher than that on analogue cable (Rs630m and Rs450 respectively
in Q4FY10), Zee Entertainment earns as much from DTH as from its cable operations.
Exhibit 28: DTH contributing as much as what cable does to broadcasters’ kitty
1600 (Rs m) DTH Cable
1200
While DTH is equal

contributor to Zee’s pay
revenues, Sun TV gets 800
more from DTH
400
0
Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10
JUNE 2010 20
IDFC Securities
DTH surpasses expectations – 20m homes by FY10…

Dish TV, with 5.7m net With entry of funded players (and thereby the ability to subsidize subscribers),
subscribers, leads the 20m
absence of unorganized LCOs in the chain and acceptance from broadcasters have
DTH space in India
helped the DTH industry grow rapidly in the past three years. With entry of every
new player, the pace of subscriber acquisition has accelerated with DTH industry
adding 7m subscribers in 2009 to touch 18m homes (20m homes by March 2010;
ARPU collection of Rs23bn). While Dish TV, the industry pioneer, continues to be a
market leader with 5.4m subscribers by December 2009 (5.7m now), Airtel Digital is
the fastest growing player accounting for 25% of the incremental subscribers. DTH
subscriber addition has clearly surpassed our earlier estimate of 16m homes by 2010.
Exhibit 29: DTH industry grew multifold… …with Dish TV leading the space
Revenues (Rs m - LHS) Subscribers (m - RHS) Number of subs (m)

28,000 20
Videocon
0.1%
Sun Direct
21,000 15 Dish TV
24%
30%
14,000 10
7,000 5 Big TV
9%
Airtel Digital
- - Tata Sky
2,006 2,007 2,008 2,009 12%
25%
…on course to grow to 48m subscribers by 2015E

Industry’s funding With strong consumer-pull ability, we see DTH sustaining the high growth
capabilities are momentum in the coming years. Capital availability is improving further with Dish
improving…
TV (the only inadequately funded player so far) raising funds to the tune of Rs16bn
and now generating profits at the operating level.
While analogue cable remains an easy hunting ground for DTH, the industry
continues to target the 25m television homes in cable-dark areas as well. Further, we
expect India’s TV owning homes to increase from 135m currently to 160m by 2015.
Also, we believe digitization is bound to gather pace with the gradual shift towards
higher-end TV sets (LCD TV, HD TV, etc), and DTH stands to gain. We expect DTH
industry to add 30m subscribers over 2010-15 with 8m customers to be added in
2010E. By 2015, India is expected to be the largest DTH market in the world –
overtaking the US in terms of subscriber base (US DTH industry has 33m subscribers
and adds 1.5m subscribers per year).
JUNE 2010 21
IDFC Securities
Exhibit 30: 48m DTH subscribers by 2015

(m)
50 48
45
42
40 38
33
…which would drive 30 26

industry size up to 48m
subscribers
by 2015 18
20
11
10
0
2008 2009 2010 2011 2012 2013 2014 2015
HDTV – the next wave

HDTV to drive While India has been a decade and half late in adoption of DTH technology, it is just
improvement in ARPU couple of years late in High Definition TV. With upwardly moving consumer base
and increasing sales of HD LCD TV in India, DTH operators are increasing their
focus on offering HDTV services. All the players have launched HDTV services at a
heavily subsidized upfront cost. Tata Sky has launched HDTV services at Rs2599
only. Besides the television set and STB enabling HD viewing, it is important for
channels to move to HD technology. Few channels are moving in this direction,
including Sun TV and ESPN. While upfront subsidies remain high, HDTV offering
can garner better ARPU, as operators are charging as high as Rs35 per month. We
believe that India would see a rapid scale up of HDTV.
JUNE 2010 22
IDFC Securities
CABLE: DIGITIZATION NO MORE A CHOICE

¾ The 87m-homes Indian cable industry is the most fragmented and under-
reported globally as paying subscribers are just 10m
¾ Cable digitization a dud (~3.5m connections) so far due to lack of funding,
LCO resistance and government apathy
¾ However, cable digitization imminent as industry now funded (Rs13bn of
recent fund raise), and with LCOs feeling the heat of DTH and MSOs turning
their focus on digitization to ‘secure’ the base
¾ Indian digital cable base set to expand 10x+ to 38m subscribers by 2015E;
declared subscriber base expected to increase to 43m
¾ Consolidation would continue as larger MSOs keep acquiring primary as well
as secondary points
Round 1: A ‘miscarriage’
Even as DTH technology ramped up to 18m homes by 2009 within a short span of
five years, cable industry failed on the digitization front. The government, LCOs and
broadcasters showed indifference, whereas MSOs were not funded. Of the $400m
invested in the cable industry, $275m flowed mainly to new entrants – focused on
first amassing the critical subscriber base by secondary and primary point
acquisitions (at any cost). Also, MSOs, with no recourse to additional funds for
seeding of STBs, had solace in the form of carriage revenues. This stream, linked to
reach, supported the acquisition economics. While the industry did see consolidation
to an extent, digital cable could penetrate only 3.5m subscribers as of 2009.
Mandated CAS failed

Cable industry in a sorry CAS was mandated in 2006 in select areas of Mumbai, Delhi and Kolkata, and set
state of affairs as high expectations on cable digitization in the country. Though the areas selected were
mandated CAS fails
in relatively premium pockets, and also at notified pricing to ensure consumer
acceptability, the move met with stiff opposition from LCOs and broadcasters. While
success of CAS would have meant moving to 100% reporting for LCOs (which would
have stemmed unreported revenues), broadcasters were miffed at the pricing cap of
Rs5. This, coupled with MSOs’ inadequately funded books, prevented CAS from
being a success with only 25% of the 2m homes in notified areas shifting to digital
cable. Ironically, more than cable, it was DTH that gained from mandated CAS.
Inadequate funding…and limited to new ventures

Cable industry funded to While mandated CAS failed, voluntary digitization called for heavy customer
the tune of just $400m, vs subsidization. Unlike DTH, cable industry was inadequately funded for the same –
$2.5bn invested by DTH
not even the incumbent national MSOs. Also, unorganized nature (cash transactions,
and suspect legitimacy of many participants) of the cable business kept large
corporate houses away. Against $2.5bn invested in DTH till early-2009, the cable
industry could attract only $400m from private equity players like ChrysCap, CVC,
Ashmore, New Silk Route, etc. Notably, only $125m of this was invested in the
incumbent player – Hathway, whereas a much bigger chunk was channelized into
new ventures including DEN Networks, Digicable, You Telecom, etc.
JUNE 2010 23
IDFC Securities
Exhibit 31: Cable funding through the private equity route

Company USD m Investor
As large part of funding
Hathway 125 ChrysCapital, Morgan Stanley
went to the new entrants…
Digicable 140 Ashmore
DEN 75 IL&FS, EMSAF
Ortel 25 NSR, Actis, SREI
YouScod18 60 CVC
Funds went in for subscriber acquisition

Funding came largely to new entrants, which was used to acquire subscribers rather
than for digitization. To quickly gather critical mass, DEN, Digicable and You
Telecom opted to acquire reach through secondary (smaller MSOs/ independent
operators) and primary point (LCOs) acquisitions. For instance, DEN has invested
$75m in 67 acquisitions for a controlling stake in the last three years to have a reach of
10m homes, while Digicable has invested $100m+ in achieving a similar scale.
Overall, we estimate the cable industry to have invested $250m+ only in acquisitions.
Exhibit 32: Operators acquire critical reach…

(m)
12
…funds used for 9

aggressive MSO and LCO
acquisition so as to
achieve critical mass 6
0
DEN Hathway DigiCable WWIL InCable YouTelecom
Networks
Exhibit 33: …through aggressive acquisitions
JUNE 2010 24
IDFC Securities
Carriage stream supported aggressive acquisition costs

With MSOs incurring losses on the subscription stream, it is the carriage stream that
justified acquisition economics. With a series of new launches in 2008, the Indian
television industry saw exponential growth in carriage revenues. For instance, DEN
earns Rs2.2bn through carriage fees, more than the subscription stream of revenues,
and Hathway Rs3bn of carriage revenues. Ability to further consolidate the market
and garner a higher share of carriage revenues has halved the payback period for
these MSOs to 3.5-4 years.
Exhibit 34: Carriage revenues justifying business economics

Time of acquisition Post acquisition
Customer acquisition cost - per sub 600 600
Number of subscribers 10,000 10,000
Total acquisition cost (Rs m) 6.0 6.0
Declaration levels 12.0% 12.0%
Paying subscribers 1,200 1,200
Increasing carriage stream Average ARPU per month 160 160
of revenues justified the Total subscription revenue collection (Rs m) 2.3 2.3
economics of acquisition Carriage revenues - Rs m 1.6 2.3
Total Revenues 3.9 4.6
Content Cost and placement cost - per sub 170 165
Total content and placement cost 2.45 2.38
Other operating costs 0.58 0.58
Total costs 3.0 3.0
Operating profit / (loss) 0.88 1. 60
Payback period 6.8 3.7
Exhibit 35: Carriage stream forms a relevant chunk of MSOs’ revenues

Digicable
DEN Hathway
Other
revenues Other
6% revenues
Other
revenues Subscription 11%
Subscription 22% revenues Subscription
revenues 36% revenues
Carriage
43% Carriage 41%
revenues
Carriage revenues
51%
revenues 48%
42%
JUNE 2010 25
IDFC Securities
However, on-ground dynamics are changing

The Indian cable industry is finally finding its feet. While the need to secure the
existing base is driving a shift to digitization, the recently raised Rs14bn by various
MSOs gives them the wherewithal to drive voluntary digitization. Even LCOs are
now more receptive to aligning with MSOs as DTH has already eaten into 20% of the
market and every subscriber loss causes a hole in the pocket. With players like DEN
and Hathway having aggressive plans and Rs4.6bn earmarked for digitization, we
see Indian digital cable space scaling up to 38m by 2015.
Fresh round of public money infusion

MSOs raise / plan fund Capital has been a key constraint for the cable industry. Various MSOs could raise
raise of Rs16.4bn only $400m through the private equity route but had to utilize it largely for
subscriber acquisition, and not digitization. While acquiring a customer base was an
imperative, critical mass has been achieved and we believe these players are now
equipped to deploy incremental funds into driving digitization. Importantly, a fresh
round of capital infusion is underway with Hathway and DEN Networks raising
Rs4.8bn and Rs3.6bn respectively through IPO, and WWIL raising Rs5bn through a
rights issue. You Telecom too has filed the DRHP to raise Rs3.6bn. Also, we believe
Digicable would have to raise capital as the $140m invested by Ashmore has been
largely utilized. Notably, this round of capital raise is through public issuance which,
we believe, will bring in more accountability (and pressure) to monetize.
Of the total planned outlay of Rs16.4bn by the key players, Rs4.6bn has been
allocated for digitization (implying the ability to fund 5.8m STB subsidy), Rs2.8bn set
aside for subscriber acquisition and Rs2.6bn towards broadband.
Exhibit 36: Objects of IPO and rights issues by various players

(Rs m) Hathway DEN Networks WWIL YouTelecom Total
Rs4.6bn of allocation for MSO / LCO Acquisition 2,436 347 2,783
digitization suggests shift Digitization and infrastructure 1,564 2,100 978 4,642
in focus away from Broadband 830 250 1,573 2,653
acquisition… Repayment of debt / advances 967 400 3,180 48 4,595
General corporate purpose 625 972 171 1,768
Total 5,797 3,375 4,499 2,770 16,441
Source: IDFC Securities Research, Companies
Incumbents have achieved critical mass

…as new entrants have In last three years, cable industry saw entry of three national players – Digicable,
achieved critical mass…
DEN Networks and You Telecom (You Scod18), whose focus was to first build a
relevant subscriber base through acquisitions. Hathway, the funded incumbent, too
participated in the acquisitions to get access to the last mile. While acquisition costs
shot up in the process, economics were supported by the carriage stream of revenues.
Currently, five national operators (Hathway, DEN, Digicable, WWIL and InCable)
have a reach of 5m+ subscribers each, with a paying subscriber base of 0.5m+.
Carriage revenues can no more justify additional reach

…and we see limited Carriage stream of revenues has trebled in the last four years to Rs15bn and now that
scope of incremental
~80% of TAM homes are covered, we do not expect material growth in carriage
carriage revenues
revenues from here. Hathway and DEN, that have been the most aggressive on
acquisitions, already account for Rs5bn of carriage revenues and going forward,
incremental acquisitions will yield a proportionate increase in carriage fees for these
players. While DEN in the past gained from its ability to increase per subscriber
JUNE 2010 26
IDFC Securities
carriage revenues by 60-70% on the back of consolidation, we do not expect such

differentials in incremental acquisitions. While we do not rule out acquisitions, they
would not be driven by carriage revenues – and hence we see a sharp correction in
acquisition costs ahead.
Digitization required to secure the existing base

With increasing threat of Digitization, we believe, is no more an option but a compulsion for MSOs. Having
losing LCOs to another paid a hefty price for MSO and LCO acquisitions for securing a customer base, cable
MSO and from DTH,
digitization needed to players will now have to work on retaining the same. While the secondary point
secure the base acquisition strategy poses risk of losing the LCO to another MSO, primary point
acquisition is more detrimental to economic health by losing an end-customer to
DTH. The only way to secure a subscriber, or an LCO, is to start seeding STBs and
make LCO/ customer acquisition unviable for the acquiring company. For instance, if
an MSO manages to digitize 25% of the subscribers under a particular LCO, upfront
acquisition cost of that LCO will increase by 10% and payback period will get
extended by five months.
On the other hand, if an MSO loses an LCO or the subscriber that it has acquired, the
economics of the acquisition would get disrupted as a drop in revenues will directly
hit the bottom-line.
Exhibit 37: Digitization makes LCO acquisition expensive

Not digitized 25% digitized
Customer acquisition cost - per sub 4,500 4,500
Set Top Box replacement cost 400
Total acquisition cost - per sub 4,500 4,900
Number of subscribers 100 100
Total acquisition cost (Rs m) 450,000 490,000
Declaration levels 100% 100%
Acquisition of LCO becomes Paying subscribers 100 100
uneconomical with
increased digital subscriber Average ARPU per month 190 190
base Total subscription revenue collection (Rs m) 228,000 228,000
Carriage revenues (Rs m) 57,000 57,000
Total revenues 285,000 285,000
Content cost 48,000 48,000
Other operating costs 79,800 86,640
Total costs 127,800 134,640
Operating profit / (Loss) 157,200 150,360
Payback period (months) 34 39
DTH threat more prominent – LCOs willing to realign

LCOs willing to align With DTH already accounting for 20% of C&S homes, LCOs (analogue platform)
with MSOs… have started feeling the heat. Even assuming that 50% of the DTH subscribers have
come in from cable-dark areas, cable industry has lost ~10m (or 12%) of its
subscribers to the DTH industry. Given the heavy under-declaration at LCO level,
loss of subscriber base would not get compensated for by lower content cost as the
content cost paid by an LCO to the MSO is for a lower number of subscribers. Thus,
revenue loss would mean loss of profit. As the development unfolds, some LCOs
have already either sold off or aligned with an MSO to drive digitization. Hathway
has, in the last two years, acquired 0.5m and DEN 0.2m primary points.
JUNE 2010 27
IDFC Securities
Exhibit 38: Impact of subscriber loss on profitability

12% subscriber loss
Paying subscribers 100 88
Average ARPU per month 190 190
Total subscription revenue collection (Rs m) 228,000 200,640
…as subscriber loss to Carriage Revenues - Rs m 57,000 50,160
DTH a direct hit to bottom- Total Revenues 285,000 250,800
line Total content and placement cost 48,000 48,000
Other operating costs 79,800 79,800
Total Costs 127,800 127,800
Operating Profit / (Loss) 157,200 123,000
Change in profits (21.8)
Digitization execution has begun

MSOs have started Digitization has become a reality in India and the process is picking up pace with
seeding STBs – Hathway MSOs seeding STBs at consumer homes without pushing LCOs to improve
and DEN likely to add
1.25m-1.5m digital declaration levels. For instance, if an LCO has seeded 100 boxes, higher than the
subscribers in FY11 declared customer base of 75, it will continue to pay for 75 subscribers to the MSO.
This, we believe, will go a long way in ensuring LCO acceptance of digitization. Also,
on-ground execution of seeding STBs has become easier given consumers’ increasing
awareness of digital technology (thanks to the heavy investments committed by the
DTH industry) and favourable pricing with just Rs1,000 of upfront charges (Rs700 of
subsidies) and no change in ARPU (even for multiple TV homes). While Hathway
leads the pack with 1m digital homes, DEN as also Digicable have attained a reach of
0.4m digital homes.
India to have 38m digital cables by 2015E

While we are not betting big on a mandated digitization drive, voluntary digitization
is bound to increase as cable operators are now funded, focus is shifting from
acquisition to digitization and LCOs are feeling the heat of DTH. Cable industry is
adding digital homes at a monthly rate of ~0.1m currently and the pace is expected to
accelerate to 0.25m per month by the end of the year to increase further to 0.3m per
month in 2011. We expect cable industry to add 34m digital homes in the next five
years, to touch 38m by 2015. Hathway and DEN are at the forefront of the drive and
are expected to account for 50% of the digital market by that year.
Exhibit 39: Rapid scale-up of digital cable base

(m)
38
40
30
30
22
India to have 38m digital
cable homes by 2015E 20 16
10
10 6
3 4
0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
JUNE 2010 28
IDFC Securities
Continued acquisitions to consolidate the existing base

Hathway has lined up While the near-term focus of cable companies is expected to shift to digitizing the
Rs2.5n and DEN Rs3bn on
acquisitions existing subscriber base, we believe acquisition would continue to be the long-term
growth strategy. As digitization picks up pace, smaller LCOs and independent
operators lacking the wherewithal to digitize and subsidize would be the potential
acquisition targets for larger MSOs. Also, consolidation of the carriage stream of
revenues would put pressure on business model of independent operators. However,
if the latest round of acquisition strategy was characterized by secondary point
acquisition to acquire reach, the next round would comprise primary point
acquisition within the existing market to consolidate the base. Hathway, which has
been the most aggressive on primary point acquisition so far, has earmarked Rs2.5bn
for subscriber acquisition in the coming years. DEN is expected to spend Rs3bn over
the next three years on MSO and LCO acquisitions.
Head-end in the Sky (HITS)

HITS is a digital cable distribution technology. In HITS, an operator downlinks signals from various broadcasters at
a single location (called hub/ teleport) and then uplinks it to a single satellite (called HITS) after encryption. This is
downlinked at the LCO’s head-end and then the channels get distributed to consumers through a wired network. A
HITS operator need not be an MSO and can just provide passive infrastructure like transponder space on satellite,
earth stations and offer simulcrypting and multicrypting facilities to MSOs. HITS operator can use C Band or Ku
Band. In India, HITS licenses have been issued to the Essel group (through Dish TV) and Jain Studios (owner of Jain
News Channel).
Difference between HITS and Digital head-ends

While an MSO would need multiple digital head-ends in various cities to downlink and then uplink content, a single
satellite can reach out to multiple markets using the HITS technology. Hathway, for instance, has 70+ analogue head-
ends and ~20 digital head-ends. HITS does not require multiple uplinking facilities in various cities; however,
investments are required at the LCO end to turn digital.
Difference between HITS and DTH

While DTH reaches out to the end consumer, HITS services can be offered only through an LCO. Also, DTH services
can use only Ku Band, whereas HITS has the option to use Ku or C Band. C Band is a superior technology. Also,
unlike DTH, HITS offers a two-way path.
Capital requirement
While the initial license fee for HITS has been pegged at Rs100m, capital is also required for transponder facilities
(each transponder costs $1m per year), digitizing the LCO infrastructure and seeding of STBs at the consumer end.
We estimate an overall investment requirement of Rs1bn-1.2bn to implement HITS technology.
Advantages of HITS
HITS can help step up the pace of digitization as an MSO then need not set up digital infrastructure in multiple
cities. Also, HITS technology can help reach out the sparsely populated cable dry area, which would otherwise be an
unviable business proposition. However, many of the MSOs believe that fibre network in India is adequate for
offering services in multiple cities without having head-end facility in each of the cities.
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IDFC Securities
Challenges
Regulation has been the biggest hurdle for HITS roll-out. While HITS licenses were issued in 2003, it was only in
2009 that the government came out with guidelines pertaining to the technology.
The government has not yet come out with guidelines pertaining to content tariff and distribution of collection
among MSOs and LCOs.
On HITS, there is no option of analogue transmission and the MSO does not have an option but to invest in STBs
at the consumer end. This, we believe, could see immense resistance.
WWIL exits HITS platform

WWIL, an Essel group company, was the only player to have launched services on the HITS platform. However, it
has recently announced its exit from this in the wake of lack of regulatory guidelines, non-allowance to use DTH
transponder and satellite to transmit HITS signal. WWIL has supposedly incurred losses to the tune of Rs1bn.
86m Digital Homes by 2015E

With 86m digital homes by With DTH industry all set to sustain the growth momentum and a turnaround in
2015E, India would inch
closer to US’s estimated sight in the cable industry, digitization of TV distribution in India is a reality. From a
105m homes by then meager 3m digital homes three years ago, India is already a 24m homes market as of
March 2010 and is well on its way to garner a base of 86m subscribers by 2015 –
higher than the digital C&S home base in US today. While DTH industry would
touch the 48m mark by 2015, higher than the DTH penetration in the US, digital cable
would grow by >10x, to 38m homes (42m in USA currently). This would make India
the second largest C&S homes market by then, next only to the US (~100m digital
subscribers by 2015E; 85m currently).
Exhibit 40: India to have 86m digital subs by 2015… …as against estimated 105m in the US
(m) (m)
Analogue Cable Digital Cable DTH India US
160 100
120 75
45 48
42
33 38
18 26
11
80 3 4 6 50
10 16 22 30 38
40 84 84 80
25
75 70 66 60 54
0 0
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E 2009 2015
JUNE 2010 30
IDFC Securities
MONETIZATION: RS480BN BY 2015E

As digitization picks up pace, monetization to follow
While monetization would initially be led by higher declarations (89m
subscribers by 2015E; 23m currently), ARPU-led growth to happen gradually
Also, business models of both cable and DTH players would evolve with
newer streams of revenues like STB rentals, advertising, broadband and VAS
We expect 12% CAGR for the TV distribution industry over 2009-15 to Rs480bn;
revenues from declared subscribers to grow 6.5x to Rs341bn
Monetization to be declaration-led – 89m paying subs by 2015E

Expect 4x increase in We believe industry revenues from here would be driven by improving declaration
declared subscriber base levels rather than higher realizations. Cable distribution currently has ~10m paid
by 2015 to 89m
subscribers. We believe the initial round of STB installation will not directly translate
into a corresponding increase in paying subscribers as it will be more towards
securing subscribers as also ensuring LCO acceptability. Therefore, while we expect
the cable industry to digitize 12.5m incremental subscribers over 2009-12, overall
paying cable subscriber base will increase by only 6.5m. However, once critical mass
is achieved, MSOs will push for higher declaration by LCOs – which we expect to
happen 2013 onwards. By 2015, we expect a 43m strong overall paying cable
subscriber base and 38m digital cable homes. On the DTH platform, subscriber base
will increase to an estimated 48m by 2015 with 46m paying homes. This would take
the tally of overall paying subscribers to 89m by 2015.
Exhibit 41: Digitization ahead of declaration initially… …before declaration levels improve to 89m by 2015E
Paying homes Digital homes (m)
100 100 89.0
76.4
75 75 64.5
50.9
50 50 41.1
31.1
22.7
25 25 18.0
0 0
2008 2009 2010 2011 2012 2013 2014 2015 2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
ARPU bound to grow in the longer term…

Low ARPU in India offers While cable ARPU in USA and UK stands at >$75 per month, it is $40-50 in Australia
immense upside and $15-20 in comparable Asian markets like Malaysia and Singapore. At $3.6 of
potential…
basic video ARPU and $5 of total ARPU (including other streams of revenues),
television entertainment is thus one of the cheapest in India when compared to cable
charges globally or other forms of entertainment in the country itself (like movie in a
multiplex). For a content-heavy market like India with 400+ television channels,
ARPU of $4 is extremely low. Entertainment cost in India is moving up – as seen in
multiplex ticket prices (~5% of the tickets sold at $4-5 per movie ticket). Globally,
cable ARPU is 8-10x higher than multiplex ticket prices as against 1x in India. Also,
when compared to telecom ARPU, global cable ARPU is 1-1.5x the telecom pricing,
JUNE 2010 31
IDFC Securities
whereas it stands at 0.8x in India. These are some indicators that suggest that cable
ARPU in India is bound to move northward in the long run.
Exhibit 42: Indian cable ARPU lower to international peers… …and also compared to multiplex and telecom
(USD / Month)
ATP movies (USD) ARPU (USD) Multiple (x)
80 75
India 4.0 4.0 1.0
65
USA 6.5 75 11.5
60 UK 11.4 65 5.7
45 45 France 6.1 45 7.5
40
Telecom ARPU (USD) ARPU (USD) Multiple (x)
20 India 5.0 4.0 0.8
20 USA 49.0 75 1.5
4 UK 45.0 65 1.4
France 46.0 45 1.0
0
India Malaysia Australia UK US France
…but only gradually in the near term

…though initial growth While we remain upbeat on the long-term ARPU potential in cable and DTH
would be gradual as the industry, we believe ARPU in the near term would remain low as DTH industry
focus would be to seed STBs
continues to grow on the back of subsidies and cable business would be more
focused on digitization rather than monetization. Also, we expect the pick-up in
value added service in India to be only gradual and limited to movie-on-demand.
Incrementally, triple play too remains some time away for the cable industry.
We expect a limited 5.5% CAGR in basic subscription ARPU over 2010-12 to Rs176
per month and then scale up to Rs222 per month by 2015 (8% CAGR over 2012-15).
Exhibit 43: Overall ARPU growth ahead of basic ARPU growth
300 Total ARPU Video ARPU
225
While basic ARPU to grow

to $5, overall ARPU to grow
150
to $6.3 by 2015E
75
-
2008 2009 2010 2011 2012 2013 2014 2015
JUNE 2010 32
IDFC Securities
ARPU subsidization to continue in DTH

Given the six-player race in the DTH industry, we believe the focus is more on
ramping up volumes. As the industry is expected to add 8m subscribers per year, we
believe DTH players will continue to offer aggressive pricing (initial package of Rs55-
125) and overall ARPU would remain low. For instance, 0.8m of the total 6.9m gross
subscribers of Dish TV are at an ARPU of Rs35 per month. Similarly, average ARPU
for Sun Direct is at Rs75-100 per month. Also, 50% of the DTH market is from cable-
dark areas, where ARPU is lower.
Exhibit 44: DTH – ARPU is subsidized

(ARPU / month)
250
200
DTH industry continues 150

with heavy subscription
subsidies
100
50
0
Sun TV Dish TV Big TV Bharti Airtel Tata Sky
Non-differentiated content – no content exclusivity

Lack of differentiated Given the ‘must carry’ clause and content for all, there is no content differentiation in
content the biggest hurdle India. Globally, movies, sports events and adult programmes are differentiating
to sharp improvement in
ARPU content for operators – and this enables them to earn higher ARPU. For instance,
BSkyB gained on the back of English Premiere League and in the US, DirecTV and
Echostar garner higher ARPU by offering Asian content, cricket matches and movies.
In the absence of any differentiated content in India, ARPU would remain subdued
in the near term. However, as addressability issues get sorted out, distribution of
niche differentiated content would become a relevant contributor to the ARPU.
Value added services – a slow pick-up

Only 0.1m of the total Tata While Indian DTH operators have already started offering VAS like movie-on-
Sky subscriber base of ~5m demand, matrimonial, education, gaming, etc, we believe growth will happen only
are high-end STBs
gradually. Reasons for the slow uptick in VAS are (i) less than 2% of STBs sold offer
two-way interactivity as against 65%+ in UK; (ii) a shorter movie telecast window;
and (iii) non-exclusivity of sports content.
JUNE 2010 33
IDFC Securities
Exhibit 45: VAS growth to be gradual….. …though increasing focus from DTH operators
Sports content
is not Predominantly
differentiated basic STBs
Why would
VAS growth
Movie telecast be gradual? Less than 2%
window as penetration of
short as DTH high end STBs
No content
exclusivity
However, this could emerge as an avenue with significant revenue potential as sale
of two-way interactive STBs increases, movie release window on pay per view
platform shortens and operators populate services like pay per view of international
non-cricket sports (WWF, F1, etc). Tata Sky has also been aggressively marketing its
premium offering (like video recording services) under Sky+. We expect VAS
revenues, which are negligible today, to scale up to Rs27.5bn by 2015.
Exhibit 46: Overall VAS revenues to grow to Rs27.5bn by 2015E
20000 Cable DTH

18,900
15000
Expect VAS growth from 10,125

2013 onwards 10000
8,550
5,670
5000 4,050
2,052 1,650
9 99 8 122 27 234 90 693 504
0
2008 2009 2010 2011 2012 2013 2014 2015
Broadband gathering momentum, telephony some time away

Broadband and telephony form an integral part of an operator’s offering in the global
market with cable operators in the US offering broadband services to ~42m
subscribers and telephony to 22m homes. Comcast is the largest residential telecom
and broadband player in the US. Time Warner currently has 9.3m internet
subscribers and 4.2m telephony subscribers, and these two streams contribute ~40%
of the total subscription revenues of Time Warner Cable.
JUNE 2010 34
IDFC Securities
Exhibit 47: Internet and telephony subscribers of cable operators in the US

(m) Comcast Time Warner Cable Cable Vision
25
23.6
20
Broadband and telephony

15.9
a major contributor to 15
cable operators’ revenues 12.9
in the US
10 9.3
7.6
5 4.2
3.1 2.6 2.1
0
Video Internet Telephony
Exhibit 48: Internet and telephony form relevant source of revenues
Comcast
Time Warner Cable
Telephony
Telephony
11.0%
10.7%
Internet Internet
25.5% 26.3%
Video Video
63.7% 62.7%
Expect 7m of the estimated Broadband penetration in India is extremely low at 3% as against 70% in the US and
40m broadband 30% in China. India currently has 0.6m broadband subscribers being serviced by
connections by 2015 to be
cable operators – and this means that less than 10% of the total broadband users are
serviced by cable operators
on the cable platform. As against this, 50%+ of the broadband connections in the US
are bundled with or provided by C&S operators. Comcast alone reaches out to ~16m
households with its high-speed internet services. With basic infrastructure in place,
cable operators, we believe, would now up the ante. We expect India to have 7m
broadband homes serviced through cable networks by 2015. However, telecom
services by cable operators is still some time away.
JUNE 2010 35
IDFC Securities
Exhibit 49: Broadband penetration in Asia Pacific… …Indian broadband too picking up pace
(m) Indian Broadband industry
14.0
(%) 2008 12.0

Singapore 88 10.5 10.3
HongKong 82
8.7
Korea 82
7.2
Taiwan 64 7.0
5.5
Japan 62
Australia 61
3.5
3.0
China 19 2.2
India 2
0.0
2006 2007 2008 2009 2010 2011 2012
DTH can offer a synthetic triple play

While technology does not permit DTH players to offer triple play services, global DTH operators have found a way
to compete with cable operators by bundling the three services – video, telephony and data – through tie-ups.
DirecTV has tied up with Verizon and AT&T to offer telephony and internet services, which are bundled at a
discount. Therefore, though DTH sector will technically not be in a position to offer triple play, it can offer synthetic
triple play (cable industry too currently not offering the three services through a single cable). We expect DTH to
step up bundling activities, more so as three of the largest telecom and broadband players (Bharti, Reliance
Communication and Tata Indicom) are in the DTH business. While this may not form a relevant revenue base for
DTH operators, it would help players stay competitive post triple play on the cable platform.
Exhibit 50: Dish TV marketing triple play services… …triple play forms a relevant source of DirecTV’s revenues
Voice
15.0%
Broadband
17.1%
Video
67.9%
Carriage fees – to continue but consolidate

At Rs16bn, carriage revenues have grown manifold in the past five years prior to
2009. While broadcasters cut carriage spends in 2009, the share of national MSOs only
increased – thereby suggesting consolidation of carriage revenues. For operators like
Hathway and DEN, carriage revenues are currently higher than subscription
revenues. Though we expect carriage revenue growth to incrementally taper as TAM
homes are largely covered now, we see further consolidation of carriage revenues.
JUNE 2010 36
IDFC Securities
Also, contrary to the market belief that carriage revenues would discontinue post
Carriage revenues to
digitization, we expect them to sustain though the mode of transaction could change.
continue, but consolidate
in the hands of few large The digital platform could create an artificial logjam by creating multiple offering
players bouquets and broadcasters will have to pay for being part of the basic package. Also,
India is yet to see one more round of aggressive channel launches before the
broadcast market consolidates. In addition, FTA channels will remain an advertising-
driven business model – and would thereby pay to get an effective reach (as
operators will not carry the signals in the absence of pay revenues).
Carriage fees prevalent in the US too, but in a different form

Even in a mature market like the US with >82m digital homes, carriage fees have not dried up. However, the color of
the revenue is different. Operators continue to charge a placement fee on new channel launches. The placement fee,
or carriage fee, charged at the time of launch is either adjusted from content cost (affiliate fees) or operators take
equity stakes in new launches. From our interaction with DirecTV and Comcast, we gather that another form of
placement fee is advertising slots. Operators are offered two minutes every hour as advertising slot for them to
market. While DTH players have advertising slots only on national networks, cable companies have advertising slots
on national as well as local networks. Even as the revenue stream accounts for a paltry $2 of the total $75 ARPU for
DTH operators, it forms nearly $4 of the total ARPU of $100 of cable ARPU.
Television distribution – a Rs480bn opportunity by 2015E

Overall industry expected C&S businesses are largely dependent on basic subscription and carriage revenues.
to register 14.5% CAGR to With emergence of new revenue streams, we see substantial improvement in
Rs480bn; subscription
revenues to grow to business models of distribution companies. As the overall declared subscriber base
Rs373bn moves up to 89m and basic ARPU increases to Rs222 per month by 2015E, we expect
subscription revenues to rise to Rs373bn (11.8% CAGR over the period). However,
declared subscription revenues are likely to witness 41% CAGR to Rs234bn. We
expect broadband and telephony revenues to increase to Rs32.6bn and VAS revenues
to Rs27.5bn. We expect overall revenues to grow to Rs480bn by 2015.
Exhibit 51: 14.5% CAGR in industry size (2009-15) Source of distribution revenues
(Rs bn) 2015
500 480
STB Rentals, Advertising,

14.5% CAGR 408
Carriage fees, Rs10bn
Rs22bn
Rs19bn
375 346
307
Broadband
Rs29bn
268
245
250 VAS, Rs27bn
216
202
125
Subscription,
0 Rs373bn
2008 2009 2010E 2011E 2012E 2013E 2014E 2015E
JUNE 2010 37
IDFC Securities
Organized pie to grow 6.5x to Rs341bn by 2015E

While the overall industry CAGR of 14.5% over 2009-15E looks a normal growth
trajectory, the organized pie is set to grow much faster than this. This would happen
on two counts – a 4x increase in the declared non-subsidized subscriber base to 89m
by 2015 and increasing direct access to end consumer (DTH and primary point
consumer). The share of organized players within the distribution channel is
expected to rise from Rs41bn now to Rs240bn by 2015 and including the other
streams of revenues, the share would increase by 6.5x to Rs341bn.
Exhibit 52: A much steeper growth in the organized pie

(Rs bn)
341
350
280 260
4x increase in declaration
and newer stream of
revenues to drive 6.5x 210 191
growth in revenues of
141
organized pie
140
102
78
48 58
70
0
2008 2009 2010 2011E 2012E 2013E 2014E 2015E
JUNE 2010 38
IDFC Securities
ECONOMICS: TURNING PROFITABLE

As monetization gathers momentum and overall paying subscriber base grows
4x, C&S industry looking to break even
As profits would be mainly declaration-led, C&S operators (cable in particular)
would retain the gains
Share of operators in the chain would increase from 8% to 35% by 2015E
Revenue streams expected to grow multifold while content cost increase would
lag over the period; we see operating leverage setting in
MSOs to retain the gains of declaration

As industry growth would be declaration-led in the near term, we believe
incremental collections would largely be retained by the MSOs. While this would
ensure substantial operating leverage on content cost, overall profitability in the
business would also be driven by other profitable revenue streams like broadband,
VAS, STB rentals, etc. Reported profits of MSOs would get further fillip from
accounting of upfront digitization fees. While DEN is the first MSO to have turned
profitable in FY10, Hathway is expected to follow suit in FY11.
Increasing share of ARPU collection…

MSOs to eventually push Given the high under-declaration levels (85-90%) at LCO level, MSOs receive only 10-
for higher declaration, 15% of the total ARPU collection done at the customer end. However, we see this
thereby improving their
share in collection pie… changing rapidly on two counts – MSOs have started acquiring the end consumers
and they would now push for higher reporting as digitization accelerates. As
declaration levels move up from 15% to 20%, MSOs’ revenues would tend to increase
by 33% and share of the reported ARPU collection to 18.4% from 13.8% currently.
Exhibit 53: MSOs share of ARPU collection with improving declaration

Secondary point Secondary point Secondary point Secondary point Primary Point
Declaration levels 15% 20% 25% 30% 100%
Number of subscribers 10,000 10,000 10,000 10,000 10,000
End consumer ARPU 190 190 190 190 190
LCO's revenues 22.8 22.8 22.8 22.8 22.8
ARPU paid to MSOs 175 175 175 175 190
MSOs revenues 3.15 4.20 5.25 6.30 22.80
Gross share of ARPU collection 13.82 18.42 23.03 27.63 100.00
…while content cost growth to lag

…and MSOs expected to MSOs’ content cost is currently more than what they earn in subscription revenues.
retain the gains of This is a stark anomaly vis-à-vis the DTH platform, where content cost is ~40% of the
declaration – content cost
increase to lag basic revenues. As against the per subscriber content cost of Rs80 per month for Dish
TV, Hathway and DEN pay Rs150 per month as content cost. However, we expect
content cost for cable operators to incrementally trend closer to the DTH cost
structure, as MSOs retain a major chunk of improved collections. The bargain would
increasingly be in favour of MSOs as the distribution channel consolidates. All these
factors suggest that content cost would inflate at a lower pace initially – 12-15%
increase as against subscription revenue growth of 35%+. However, broadcasters
would subsequently push for higher pay revenues as profitability of cable companies
improves disproportionately. We expect MSOs’ net share of the ARPU collection to
JUNE 2010 39
IDFC Securities
increase from nearly nil currently to 12% if declaration levels were to increase to 30%.
In case of primary subscriber acquisition, MSOs should retain 88% of the collection.
Exhibit 54: Increasing net share of MSO

Secondary point Secondary point Secondary point Secondary point Primary Point
Declaration levels 15% 20% 25% 30% 100%
LCOs’ revenues 22.8 22.8 22.8 22.8 22.8
MSOs’ revenues 3.15 4.20 5.25 6.30 22.80
Gross share of ARPU collection 13.82 18.42 23.03 27.63 100.00
Subscribers paid for to broadcasters 15% 15% 17% 18% 15%

Content cost per sub 160 160 160 160 160
Content Cost 2.9 2.9 3.3 3.5 2.9
Residual income for MSOs 0.27 1.32 1.99 2.84 19.92
% of total ARPU collection 1.18 5.79 8.71 12.47 87.37
Video Internet Telephony Newer revenue streams highly profitable

100 93.3 97.1
81.5 While improving declaration would boost profitability on account of higher
75 subscription revenues, other streams like broadband, advertising and STB rentals
63.6 66.4
58.4
50
would further enhance profitability. Broadband business is highly profitable with
bandwidth cost at just 16-18% of the revenues and overall profit margins of 45-50% in
25
the business. On the other hand, MSOs are pushing for monetization through rental
0 collection. Notably, these revenues would flow through to the bottom-line in entirety.
Comcast Time Warner cable For instance, Comcast’s gross margin on video business is 63%, whereas that in HSD
and telephony business is 93% and 81% respectively.
DTH: Operating leverage set to play out

Expect sharp operating Operating leverage has already set in for Dish TV with 5.7m net subscribers, while
leverage gains for DTH… other players are expected to achieve breakeven on attaining 5.5m subscribers each.
Given that nearly 40% of the cost structure is fixed in nature and selling &
distribution cost is linked to only new subscriber acquisition, operating leverage
gains can be quite significant despite the high subscriber acquisition cost. We expect
Dish TV’s operating margins to increase from 8% in FY10 to 32% in FY13.
SAC will remain at Rs2,500-3,000

Over the last four years, subscriber acquisition costs have moved up from Rs400 per
subscriber in 2006 to Rs2,400 in 2010 for Dish TV (peak of Rs2,800 per subscriber).
Including subsidized ARPU, SAC works out to ~Rs3,000. While we rule out any price
wars, and thereby an increase in SAC, we do not also expect any decline in the cost
given that the industry is in a high-growth phase. In India, SAC is at 12-15 months of
blended ARPU for every player compared to 10 months of ARPU in mature markets
like USA and UK. Dish Network, USA, currently has SAC of $700 – 10 months of
ARPU, which used to be 12 months in 2005. While the absolute SAC amount has not
dropped, the number of months has come down on the back of higher ARPU.
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Exhibit 55: Subscriber acquisition cost in DTH

Basic Offer - Rs1590 Offer Current
Receipts 1690
Costs
STB, dish and other hardware 2750
…with stabilization in Dealer margin 225
subscriber acquisition VAT 115
costs… Activation charge 200
Advertising cost per sub 800
Total cost 4090
Net subsidy (2,400)
Subsidized content cost 480
Total subscriber acquisition cost (2,880)
Exhibit 56: SAC at 10-12 months of ARPU - DISH Network, US

2005 2006 2007 2008 2009
ARPU (USD / month) 58.3 62.8 65.8 69.3 70.0
SAC (USD) 693.0 686.0 656.0 720.0 697.0
Number of months of ARPU 11.9 10.9 10.0 10.4 10.0
Fixed cost model – high operating leverage benefit

…and a fixed content cost DTH is a fixed cost model and at a subscriber base of 3m, over 50% of the costs are
(40% of total) model fixed in nature or step-variable. Fixed cost structure includes employee cost,
transponder, advertising cost (to retain subscribers) and other administrative costs.
Among other costs, license fees and content costs are directly linked to revenues. Of
the selling & distribution cost, while commission on recharge is variable (5% of
ARPU) to overall revenues, a large portion of S&D expenses are related to dealer
commission on new subscriber addition. Dish TV has already started realizing
operating leverage gains with the fixed cost component dropping from 58% of
revenues in Q1FY09 to 35% in Q4FY10 on a net subscriber base of 5.7m. We see
further scope for operating leverage benefits and expect the fixed component to
decline to 27% by Q4FY12 at 7.7m net subscribers. Operating leverage comes in even
after assuming a steady SAC. DTH industry would also stand to gain on
implementation of the proposed change in license cost from 10% to 6% of revenues.
Exhibit 57: DTH cost components

Expense Nature of expense
Content cost Variable
License cost Variable
Transponder cost Step variable
Other goods and services Fixed
Employee cost Step variable
Administrative Fixed
Advertisement cost Fixed
Selling & Distribution Variable to new subscriber addition
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Exhibit 58: Dish TV – operating leverage to the fore
Content Cost Selling & Distribution Cost Subcribers

88 2.9
66 4.0
4.6 5.3
6.0 6.7
44 7.1 7.6
22
0
Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11E Q3FY11E Q1FY12E Q3FY12E
Fixed content-cost deals to augment profitability

Broadcasters willing to Besides operating leverage accruing from the fixed content cost model, broadcasters
enter into fixed content have shown willingness to enter into fixed content-cost deals with players like Dish
cost deal – added leverage
gains TV. This deal would make content cost step-variable, and thereby add to the
operating leverage of Dish TV. Content cost for Dish TV has come down from 48% of
revenues in Q1FY09 to 35% now and is expected to drop further to 30% in the
absence of differentiated content. In the long run, we expect content cost to stabilize
at ~40% of basic revenues, as witnessed globally.
Distribution Margins: Mapping global trends

TV distribution business entails annuity with profitability at >25% for DTH operators
and 30%+ for cable operators. However, Indian players – given the rampant revenue
leakage and unorganized structure – have been in the red since inception. Going
forward, we see clear signs of profitability driven by improving declaration levels,
and access to last mile in cable business and operating leverage in DTH.
Notably, DEN has turned profitable at the net level, while Hathway and Dish TV
From huge losses, industry have broken even at the operating level. We expect operating margins for DEN and
margins expected to trend
closer to global averages Hathway to trend closer to the global average of 35%. Dish TV too has already
surpassed the 5.5m net subscriber base, which is a critical milestone for turning
EBITDA-positive. Dish TV clocked in Rs845m of EBITDA in FY10 and as operating
leverage sets in, the margins would increase to 32% by FY13E. Tata Sky, Sun Direct
and Airtel Digital are also expected to turn EBITDA-positive in the next 18 months as
they approach the 5.5m subscriber base. We expect EBIT margin of Indian cable
operators to be at 20% and for DTH operators at 10-11% - in line with global trends.
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Exhibit 59: EBIT margins – India in FY13E v/s global today
(%) EBIT margins

CY09 FY13E
25
23.1
20.2 20.3
20 19.0 18.4
15.2 15.0
15
12.4
10.7 10.1
10
0
Comcast Time Cablevision BSkyB Dish DIRECTV SKY Hathway Den Dish TV
Warner Systems Network Perfect Networks
Cable
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Economics of MSO and DTH operators

Secondary point acquisition
With players looking to consolidate their existing subscriber base, secondary point subscriber acquisition costs have
corrected in the past one year. With tapering growth in carriage revenues and DTH eating into the existing subscriber
base, we expect acquisition costs to drop from Rs4,500 (2-2.5 years of ARPU) per paying subscriber now to Rs3,500 in
the next couple of years. While the payback works out to around four years at the current prices and declaration levels,
the key lies in ability to drive declaration levels. For instance, a 8% improvement in collections to 20% would lead to a
considerable drop in payback period from 3.7 years to 2 years.
Exhibit 60: Economics of a secondary point acquisition

On acquisition Improved declaration
Total subscription revenue collection (Rs m) 2.3 3.8
Carriage revenues - Rs m 2.3 2.3
Total revenues 4.6 6.1
Content cost and placement cost - per sub 165
Total costs 3.0 3.0
Operating profit / (Loss) 1.6 3.2
Primary point acquisition – upfront profitable

While the economics of secondary point acquisition are largely linked to the ability to improve declaration, primary
point acquisition offers better upfront payback. With acquisition cost higher at Rs4,500-Rs5,000 per subscriber (up to
Rs7,000 per subscriber in some cases), the MSO gets access to the entire under-reported mass, which brings down the
payback to ~2.9 years. However, barring ARPU improvement, there is no scope for further improvement in economics.
Also, the risk on loss of subscriber to DTH is substantially higher.
Exhibit 61: Economics of a primary point acquisition

Primary Point Acquisition
Customer acquisition cost - per sub 4,500
Number of paying subscribers 10,000
Total acquisition cost (Rs m) 45.0
Average ARPU per month 190
Total subscription revenue collection (Rs m) 22.8
Carriage Revenues – (Rs m) 5.7
Total Revenues 28.5
Content Cost and placement cost - per sub 200
Total content and placement cost 4.8
Other operating costs 8.0
Total costs 12.8
Operating profit / (loss) 15.7
Payback period 2.9
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Digitization – pay off in case of rentals

With a view to secure the existing subscriber base, MSOs are turning aggressive on seeding of STBs. As against the
average cost of Rs1,600-1,800 for an STB, MSOs are currently charging Rs750-1,000 upfront – which translates into net
per subscriber acquisition cost of ~Rs800. While MSOs are not pushing hard for higher ARPU, they are trying to garner
rental revenues of Rs25-30 per month. Even if MSOs manage to collect rental revenues from 50% of the customers, the
payback period would be 4.4 years.
Exhibit 62: Economics of digitization

Economics of Digitization Rental - 50% pay Rental - 100% pay ARPU - 50% pay ARPU - 100% pay
Set Top Box Cost 1,500 1,500 1,500 1,500
Upfront recovered from customer 750 750 750 750
Net subsidy 750 750 750 750
Rental @Rs30 / month
ARPU @Rs160/month
Annual Revenues 180 360 960 1920
Pay back period 4.2 2.1 0.8 0.4
Broadband economics – highly attractive for scaled-up operations

Broadband business is not just a very profitable proposition, but has a short payback period as well. However, the
economics of the business will start to look good only post critical mass is achieved as per subscriber capex cost
depends on the number of subscribers. Notably, the cost of laying the network up to a building is substantially higher.
Exhibit 63: Economics of broadband business

250 customers 500 customers
Cost of equipment 1,100 1,100
City network 1,500 1,000
Drop it capex 500 500
Total capex 3,100 2,600
Upfront charged 500 500
Net subsidy 2,600 2,100
Total subsidy 650,000 1,050,000
ARPU 300 300
Broadband revenues 900,000 1,800,000
Bandwidth cost (%) 20% 20%
Bandwidth Cost 180,000 360,000
Other cost (%) 35% 25%
Other cost 315,000 450,000
EBITDA 405,000 990,000
Payback 1.60 1.06
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DTH payback at five years

At the current subscriber acquisition cost of Rs2,500 and three months of subsidized ARPU, we believe payback period
for an individual DTH subscriber is five years. However, given the growth model, overall business breakeven would
happen once a player achieves scale (5m subscribers).
Exhibit 64: Economics of a DTH subscriber

Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7
Receipts 1690
Costs
STB, dish and other hardware 2750
Dealer margin 225
VAT 115
Activation charge 200
Total cost 4090
Net subsidy (2,400)
Basic video revenues 1,350 1,980 2,059 2,142 2,227 2,316 2,409
3 months of subsidized ARPU -
Normalized ARPU 150 165 172 178 186 193 201
% ARPU growth 10.0 4.0 4.0 4.0 4.0 4.0
VAS revenues - 50 150 200 280 360 480

% yoy growth
Total revenues 1,350 2,030 2,209 2,342 2,507 2,676 2,889
Content cost 900 900 936 973 1,012 1,053 1,095
Cost per subscriber 75 75 78 81 84 88 91
% of revenues 67 44 42 42 40 39 38
License cost 135 203 221 234 251 268 289
% of revenues 10 10 10 10 10 10 10
Advertising cost 200 196 192 188 184 181
% of revenues 10 9 8 8 7 6
Recharge commission cost 68 99 103 107 111 116 120
% of revenues 5.0 5.0 5.0 5.0 5.0 5.0 5.0
Corporate cost allocation 68 102 110 117 125 134 144
% of revenues 5 5 5 5 5 5 5
Total cost 1,170 1,504 1,566 1,624 1,688 1,755 1,830
% of revenues 87 74 71 69 67 66 63
Net EBITDA 180 527 643 718 819 922 1,059
EBITDA margins 13.3 25.9 29.1 30.7 32.7 34.4 36.7
Net cash flow (2,220) 527 643 718 819 922 1,059
Cumulative cash flow (2,220) (1,694) (1,051) (333) 486 1,408 2,467
Payback period 5 years
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Accounting policies critical to reported profitability

We believe reported profitability of players would depend on the accounting policy pertaining to reporting of upfront
collection on STB, rental allocation and depreciation. Players could likely resort to an aggressive accounting policy in
the initial years. While cable operators at present report upfront installation charges as revenues in year-one, Dish TV
accounts for Rs300 as upfront activation and Rs950 as rental income apportioned over a period of three years.
Exhibit 65: Accounting policies

Dish TV Hathway DEN Networks
Upfront charges 1,590 750 750
Revenue reporting
Upfront activation / Year 1 300 750 990
Rental booking 950
Rental booking over 3 years 3 years 1 year
Asset price 2,750 1,500 1,500
Depreciation of STB 5 years - 20% 8 years 8 years
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VALUATIONS: WE SEE 50% RETURNS

Organized pie of Indian TV distribution industry set to grow to Rs341bn;
profitability moving closer to global peers
Globally, distribution has created immense value; Comcast, DirecTV, Dish (US)
and Time Warner Cable among USA’s top 10 most valuable media companies
We have valued Indian distribution companies on EV/ subscriber ARPU month
– derived from the normal economics of an individual subscriber
We have a positive stance on the sector; Outperformer on Dish TV, Hathway
and DEN with 18-month price target of Rs61, Rs274 and Rs292 respectively
Distribution businesses among the largest value creators globally

Comcast, the largest cable company in the US, is also among the largest media
companies globally in terms of market capitalization. Five largest cable and DTH
operators in the US – Comcast, DirecTV, Dish Network, Time Warner Cable and
Cablevision Systems – cumulatively account for 77m subscribers, and have a market
capitalization of ~$123bn and an enterprise value of $190bn. Value attributable to
these businesses is aptly justified given the annuity model and high profitability in
the business (EBITDA of $31bn and PAT of $7.3bn). In UK, BSkyB – the largest DTH
player with 9.5m subscribers – is being valued at $15bn.
Exhibit 66: C&S operators amongst leading value creator

US’s top 10 media companies Mkt cap (USD m) EV (USD m)
Google 158,603 132,089
Walt Disney 68,530 80,185
Comcast Corp 51,903 79,543 Largest cable operator
Three C&S operators Time Warner 37,611 49,095 Also owns Time Warner Cable
among US’s top 10 media - mkt cap of USD20bn
companies News Corp 39,360 45,481 Conglomerate owning a
majority stake in DirecTV
DirecTV 35,670 41,380 Largest DTH operator in the US
Viacom 21,502 28,057
CBS Corporation 10,451 16,549
nd
Dish Network 9,745 13,787 2 largest DTH operator
Omnicom 11,848 13,644
We value Indian distribution on EV/ subscriber basis

We take a different Given that Indian DTH and cable industry is in the investment phase, which implies
approach – EV/ subscriber high growth but muted profits, we do not see merit in valuing the stocks based on
value based on cash flows
of individual subscriber the earnings multiple or EV/ EBITDA methodology. Global peers too are not the best
comparables as these industries are in the maturity stage of their life cycles. We also
do not find the discounted cash flow valuation method appropriate given the back-
ended nature of returns and aggressive subscriber addition in the initial years. We
see rationale in valuing these stocks on EV/ subscriber basis (at number of months of
ARPU), arrived at by using cash flow of individual subscribers. We have separately
valued the economics for a new DTH, primary, secondary and broadband subscriber.
From our workings, we gather that EV/ subscriber comes to 33 months of steady ARPU
for DTH, 32 months for primary subscriber points, 29 months for secondary subscriber
points and 36 months for broadband subscribers.
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Exhibit 67: Cash flow valuation of primary point – 32 months of ARPU

Year 1 2 3 4 5 6 7 8 9 10
Subscriber acquisition cost 4,500
Set Top Box 1,500
Less - Receipts 700
Net acquisition cost (5,250) - - - - - - - - -
Basic Video ARPU - per month 190 195.7 202 210 218 227 243 260 278 297
Video revenues - per year 2,280 2,348 2,419 2,516 2,616 2,721 2,911 3,115 3,333 3,567
Carriage Revenues 365 387 411 428 419 435 437 436 450 464
VAS and Advertising revenue - 12 68 138 265 409 546 687 967 1,257
Total Revenues 2,645 2,748 2,849 2,983 3,104 3,271 3,502 3,748 4,064 4,405
ARPU 220 229 237 249 259 273 292 312 339 367
Content Cost 570 587 617 654 693 735 786 872 967 1,070
Other overheads 821 845 871 931 981 1,048 1,135 1,246 1,383 1,534
EBITDA 1,254 1,315 1,362 1,398 1,430 1,489 1,580 1,630 1,714 1,801
% of total revenues 59 47.4 47.9 47.8 46.9 46.1 45.5 45.1 43.5 42.2 40.9
Total fixed Assets 2,100
Depreciation & amortization 375 375 375 375 375 75 75 75 50 50
Profit Before interest and tax 879 940 987 1,023 1,055 1,414 1,505 1,555 1,664 1,751
PAT 615 658 691 716 738 990 1,054 1,088 1,165 1,226
WACC 11.9
Discounted cash flow (3,808) 825 761 697 635 543 515 474 442 415
Terminal growth rate (%) 5
Terminal value discounted to today 6,042
Total Net present value 7,543
Average ARPU 237
Number of months of ARPU 32
Exhibit 68: Cash flow valuation of secondary point – 29 months of ARPU

Year 1 2 3 4 5 6 7 8 9 10
Subscriber acquisition cost 2000
Set top Box 1,500
Less - Receipts 750
Basic Video ARPU - per month 160 160 160 166 173 180 193 206 220 236
Video revenues - per year 1,920 1,920 1,920 1,997 2,077 2,160 2,311 2,473 2,646 2,831
Carriage Revenues 1,920 1,920 2,112 2,196 2,284 2,289 2,311 2,300 2,249 2,180
VAS and advertising revenue 0 10 14 80 152 236 366 498 662 883
Total Revenues 3,840 3,850 4,046 4,224 4,415 4,538 4,742 4,928 5,115 5,306
ARPU 320 321 337 352 368 378 395 411 426 442
Content Cost 2,304 2,266 2,208 2,097 2,077 2,160 2,195 2,225 2,381 2,548
Other overheads 729.6 729.6 672.0 698.9 726.8 755.9 808.8 791.3 793.7 849.3
EBITDA 806 854 1,166 1,429 1,611 1,623 1,738 1,911 1,940 1,909
% of total revenues 21.0 22.2 28.8 33.8 36.5 35.8 36.7 38.8 37.9 36.0
Depreciation and amortization 362.5 362.5 362.5 362.5 362.5 62.5 62.5 62.5 30 30
PAT 311 344 563 746 874 1,092 1,173 1,294 1,337 1,315
WACC 11.9
Average ARPU 337
Number of months of ARPU 29.0
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Exhibit 69: Cash flow valuation of broadband subscriber – 36 months of ARPU

Year 1 2 3 4 5 6 7 8 9 10
General Capex 2,500
Set top Box 1,100
Less - Receipts 500
Broadband ARPU - per month 300 300 300 309 318 328 338 348 358 369
Broadband revenues 3,600 3,600 3,600 3,708 3,819 3,934 4,052 4,173 4,299 4,428
Bandwidth cost 720 720 720 742 764 787 810 835 860 886
Other overheads 1,620 1,512 1,404 1,372 1,337 1,377 1,418 1,461 1,505 1,550
EBITDA 1,260 1,368 1,476 1,594 1,719 1,770 1,823 1,878 1,934 1,992
% of basic revenues 35.0 38.0 41.0 43.0 45.0 45.0 45.0 45.0 45.0 45.0
Depreciation and amortization 533 533 533 533 533 313 313 313
PAT 509 585 660 743 830 1,020 1,058 1,096 1,354 1,395
WACC 11.9
Average ARPU 300
Exhibit 70: Cash flow valuation of DTH subscriber – 33 months of ARPU

Year 1 2 3 4 5 6 7 8 9 10
Receipts 1,690
Costs
STB, Dish and other hardware 2,750
Commission, VAT, Advertising 1.315
Total Cost 4,065
Net subsidy (2,375)
Basic video revenues 1,350 1,890 1,985 2,123 2,272 2,431 2,626 2,836 3,062 3,307
Normalized ARPU 150 158 165 177 189 203 219 236 255 276
VAS revenues - 50 150 250 400 600 700 700 800 1,000
Other stream of revenues 27 38 79 106 136 170 210 284 337 397
Total Revenues 1,377 1,978 2,214 2,480 2,808 3,201 3,536 3,819 4,199 4,704
Total ARPU 115 165 184 207 234 267 295 318 350 392
Content Cost 960 912 885 929 1,052 1,199 1,324 1,431 1,573 1,762
License Cost 138 198 221 248 281 320 354 382 420 470
Advertising and sub management cost 200 196 192 188 183 177 172 163 155
Recharge commission cost 68 95 99 106 114 122 131 142 153 165
Corporate Cost allocation 551 494 443 397 393 384 389 382 420 470
Total Cost 1,716 1,899 1,844 1,872 2,028 2,208 2,375 2,508 2,729 3,024
% of revenues 125 96 83 75 72 69 67 66 65 64
Net EBITDA (339) 79 370 608 780 994 1,160 1,311 1,470 1,681
EBITDA margins (24.6) 4.0 16.7 24.5 27.8 31.0 32.8 34.3 35.0 35.7
Asset cost per subscriber 2750
Depreciation / amortization 550 550 550 550 550 50 50 50 50 50
Profit before interest and Tax (889) (471) (180) 58 230 944 1,110 1,261 1,420 1,631
Profit after tax (889) (471) (180) 52 196 755 744 845 951 1,093
WACC 11.9
Average ARPU 184
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Mature markets valued at 26 months ARPU, EMs at 45+ months

Even at lower growth, Even in maturity stage, US and UK distribution businesses trade at an average PE of
mature markets trading at
23x and EV/ EBITDA of 7x. During the high-growth phase, and particularly at the
25+ months of ARPU
time of turnaround, these businesses traded at 2-year forward EV/ EBITDA of 14-16x.
On an average, players trade at 26 months of EV/ subscribers. As against mature
markets, operators (Astro All Asia and Austra United) in growing markets, like
Malaysia and Australia, trade at premium valuations of 46-49 months of ARPU.
Exhibit 71: C&S operators trading at 25-36 months of ARPU

M cap ($ m) EV ($ m) Subscribers EV/ Subs EV/ subs EV/ EBITDA - EBITDA CAGR
(m) (USD) ARPU month CY11E 2yr (%)
Comcast Corp 51,903 79,543 23.8 3,342 30.4 5.4 3.9
DirecTV 35,670 41,380 23.2 1,784 23.2 5.9 15.1
Dish Network 9,745 13,787 14.2 971 13.9 4.6 5.6
Time Warner Cable 19,536 40,618 13.0 3,134 31.3 5.7 4.9
Cable Vision Systems 7,699 18,634 3.1 6,078 28.8 6.8 0.1
BSkyB 18,289 21,321 9.8 2,176 36.0 10.5 6.9
Indian distribution space offers 50%+ returns

Target price – Dish TV With profitability in sight, we turn positive on the sector and put an Outperformer
Rs61, Hathway Rs274 and rating on Dish TV (leader in the DTH space; turning profitable), Hathway (the largest
DEN Rs292
MSO) and DEN Networks (the most aggressive MSO and first to turn profitable).
Positive on the DTH as well as cable platforms, we recommend a basket approach to
the Indian TV distribution space, which would likely offer 50% returns. Applying the
EV/ subscriber methodology, we arrive at a fair value of Rs61 for Dish TV, Rs274 for
Hathway and Rs292for DEN Networks.
Exhibit 72: Indian DTH and cable operators

Player Investment rationale Subscribers - FY10 Subscribers - FY13 Revenues (Rs m) PAT (Rs m)
FY10 FY13E FY10 FY13E

Dish TV • Largest DTH player - 30% market share 5.7m net 8m net 10,853 22,492 (2,612) 1,916
• 22% of the incremental market 6.9m gross 11.3m gross
• Funded balance sheet - raises Rs16bn
• Operating leverage – 32% by FY13E

Hat hway Cable • Largest national MSO in India 1.6m paying 4.1m paying 7,361 17,057 (705) 2,103
• Rs13bn+ fund raise since 2000 1m digital 4.7m digital
• Aggressive on LCO acquisition 0.3m broadband 1.4m broadband

• Credible management
DEN Networks • 2nd largest MSO in 2nd year 1.1m paying 3.8m paying 9,191 19,651 303 2,077
• $75m invested in acquiring 67 MSOs 0.4m digital 3.5m digital
• Raised USD80m through IPO 0.7m broadband
• St ar DEN offers scale

• First MSO to turn profitable
• Aggressive management
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Dish TV – upgrade to Outperformer and valued at Rs61

Using 33 months of ARPU as a parameter to arrive at EV/ subscriber, we have arrived
at Rs67.7bn of enterprise value for Dish TV in FY13. We arrive at an 18-month price
target of Rs61.
Hathway – incumbent leader; fair value of Rs274

Given that Hathway has secondary paying points, primary points and also
broadband subscribers, we value each subscriber class differently. Valuing the 2.1m
secondary subscriber points at 29 months ARPU, 2.0m primary subscriber points at
32 months and 1.4m broadband subscribers at 36 months ARPU, we have arrived at
an 18-month fair price of Rs274 for Hathway.
DEN – the first to turn profitable; fair price of Rs292

Using the valuation parameters similar to that used for Hathway, we have arrived at
an 18-month fair value of Rs292 for DEN – 50% upside from the current price.
Exhibit 73: Current valuations suggest 50% returns from here

Dish TV Hathway DEN Network
Secondary Primary Broadband Secondary Primary Broadband Star DEN
Number of subscribers (m) 8 2.1 2.0 1.4 2.72 1.05 0.7
ARPU (Rs/month) 260 325 300 315 350 300 300

Month of ARPU 32.5 29.0 31.8 36.4 29.0 31.8 36.4
EV / subscriber (Rs) 8,451 9,440 9,530 11,474 10,166 9,530 10,928

Enterprise value (Rs m) 67,607 19,823 18,689 16,265 27,651 10,007 7,649 4,400
Total EV (Rs m) 67,607 54,777 49,707

Less: Debt (Rs m) 3,250 2,500 (2,500)
Equity value (Rs m) 64,357 52,277 52,207

Number of shares (m) 1,065 142.9 131
Per share value (Rs) 61 366 400
Less; Minority stake (%) 25 27
Target price (Rs) 61 274 292
JUNE 2010 52
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Key Risks
Cable industry
Given the high dependence on unorganized LCOs, we believe execution is the
biggest risk faced by the cable industry. Besides this, key risks pertain to faster roll-
out of DTH, entry of new funded players and technological changeover (particularly
broadband).
Execution
Given that cable industry is in the initial phase of digitization, there could be
substantial resistance from LCOs. We believe on-ground execution would be the
biggest challenge to ensure LCOs’ acceptance as also gradually improve declaration
levels without disrupting the trade.
Faster roll-out of DTH

We expect DTH industry to add 8m subscribers in 2010; the technology is
incrementally eating into the subscriber base of cable industry. Any delay in digital
cable roll-out would mean increasing threat from DTH. Also, as DTH eats into the
cable industry’s subscriber base, the economics of primary acquisitions done so far
would be under stress.
Entry of new funded players

Entry of new funded players in the cable space could spell trouble for the cable
industry as it could again start the race for aggressive subscriber acquisition.
However, we do not expect the risk to play out as the sector has always been open to
49% FDI and we do not expect any telecom player to foray in this business.
Technology changeover
Technology upgrade is a constant threat that the cable industry is exposed to. The
current STB installation done by cable operators is the basic and to offer VAS and
two-way interactivity, existing STBs will need to be replaced. For instance,
broadband prospects can be impacted by rapid growth of WiFi and WiMax. Unlike in
USA, where wireless technologies came in after many years of broadband emergence,
WiFi is already there in India and WiMax licenses would be issued soon.
DTH industry
Irrational price wars
While profitability is just round the corner for the DTH industry, irrational price wars
could upset the cart. However, we do not see this happening in the near future as the
likes of Bharti and Reliance ADAG are already facing immense pressure on telecom
business profitability and will not be in position to play irrational price wars. Tata
Sky, positioned at the top end, will rather not dilute its premium positioning.
Technology changeover and demand for high end STBs

Given the rapid volume growth driven by subsidies, DTH operators are seeding basic
STB models that do not support two-way interactivity and DVR facilities. As demand
for value added services increases, these STBs would need to be replaced – resulting
in another round of subsidization or churn.
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Evolution of cable & DTH in the US

With a view to understand evolution of the Indian C&S market, we tried to compare it with global trends. While
China is the largest C&S market with 160m homes, the content is highly regulated. Other Asian markets like Malaysia
are too insignificant in terms of subscriber base and, more importantly, are dominated by a single platform – DTH,
with UK market too mainly on this platform. So far, USA has been the only market characterized by non-regulated
content supply, co-existence of cable and DTH and relevant C&S scale. Besides, USA’s C&S market has other
similarities with the Indian market including a fragmented nature of the cable market in the initial years, growth of
DTH on the back of cable-dark areas and heavy subsidies. Hence, we draw upon USA’s C&S evolution to understand
the Indian C&S market’s evolution. USA currently has a base of 100m C&S homes with 34m DTH and 62m cable
homes. Of the total, 84-85m homes are digitized.
Evolution of cable industry in the US

The 62m homes US cable industry has been stagnant at 1995 levels. Since the advent of DTH, incremental
subscribers have opted only for DTH. Yet, revenues of the cable industry have grown from $27bn in 1995 to $89bn
currently (9.7% CAGR). The evolution of cable industry in the last 15 years can be segregated into consolidation,
digitization, ARPU improvement and subsequently enhanced revenue models.
Exhibit 74: While number of cable homes remains flat… …US cable industry revenues have grown at rapid pace
(m) (US$ bn)
68 100,000
66.9 89,901
65.9 66
65.4 78,824
65 64.9 75,000
64.2 65,678
54,394
62.1 50,000
62 61.6 45,447
37,391
29,802
59 25,000
56 0
1,995 1,997 1,999 2,001 2,003 2,005 2,007 2,009 1997 1999 2001 2003 2005 2007 2009
Consolidation phase: As DTH grew multifold in the late-1990s, smaller cable systems turned economically unviable
due to mass-shifting of consumers to the DTH platform. This led to large-scale consolidation in the market. Comcast,
the largest cable operator today, went on an acquisition spree between 1996 and 2003. Of the total 21m cable
subscribers that Comcast had by 2003, we believe more than half were acquired through the inorganic route
(customers from EW Scripps, Maclean Hunter’s US business, AT&T broadcasting, etc). With 4.28m subscribers in
1996, Comcast was just 7% of the cable industry then and accounts for ~40% of the market now. Consolidation in the
market continues with CableVision buying Bresnan – the 13th largest MSO with 0.3m subscribers. Overall, the
number of cable systems in the US came down from 11,408 in 1998 to 7,677 in 2009. Today, top five cable operators
account for ~73% of the market.
JUNE 2010 54
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Exhibit 75: Comcast – acquisition-led growth… …driving industry consolidation
Subscribers
28
Others
24.1 23.6 26.6% Comcast Corporation
20.3 34.9%
21
17.8
Cablevision Systems
14 Corporation
4.5%
8.5
7 5.7 Charter
Time Warner Cable,
4.4 Communications, Inc.
Cox Inc.
7.2%
Communications, Inc. I 19.1%
7.7%
0
1997 1999 2001 2003 2005 2007 2009
Digitization – early-2000: With DTH driving consumers towards digital technology, emergence of digital cable was a
given (also a compulsion). From a negligible digital home base in 1999, US currently has 42m such homes and Comcast
has 18.4m digital cable homes. In the last five years, Comcast has not been aggressive on expanding the base but is
more focused on digitization and monetization (ditto for Time Warner Cable and Cable Vision).
Monetization – yield and enhanced revenue models: Consolidation of the industry was followed by digitization and
subsequently monetization. While ARPU for basic video has registered 5.5% CAGR since 2000, overall ARPU
improved by 8.8% CAGR to $118 per month on the back of emergence of other streams of revenues like VAS,
advertising, high-speed internet and telephony. Of the $89.9bn cable industry, $36bn is accounted for by non-basic
video streams. Comcast’s revenues have witnessed 13% CAGR since 2004, despite addition of only 2m subscribers.
This is largely driven by scale-up of the digital subscriber base to 18.4m (15.9m internet and 7.6m telephone
subscribers). While basic video revenues registered 9.7% CAGR, internet revenues saw 21% and telephony revenues
39% CAGR over the period.
Exhibit 76: Increasing share of non-video revenues in the US Enhanced revenue model of Comcast
Residential Video All Other Revenue Video High Speed Phone Advertising Other Franchise fees
100,000
40000
75,000
30000
50,000
20000
25,000
10000
0 0
1997 1999 2001 2003 2005 2007 2009 2004 2005 2006 2007 2008 2009
USD165bn of capex in last 15 years

Cable industry in the US has been highly capital intensive with $165bn of investments made so far and current annual
capex of $14bn (<20% of industry revenues). We believe that capital expenditure in the US has been extremely high on
account of the following reasons – high cost of laying fibre optic network, higher STBs (more importantly with
enhanced technology) and continued consolidation.
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Challenges faced by US cable industry today

While US cable industry emerged unscathed from competition in the form of DTH, it is incrementally facing
competition from entry of telecom operators like AT&T and Verizon into the cable business. As triple play offering
helped cable companies emerge as a relevant competition to telecom operators (Comcast is the largest residential
telephony and internet service provider too), telecom operators made a foray into the cable space and now have 5m
subscribers between them. This, we believe, could result in intense competition and risk to cable ARPU. While cable
business makes a logical extension for telecom companies, telcos in India have forayed into DTH given it organized
nature. However, this threat cannot be ruled out in the long run given that fibre networks are owned by telcos.
Evolution of DTH – heavy subsidies and cable-dark areas

USA is currently world’s largest DTH market with 33m subscribers with DirecTV and Dish Network dominating the
space. Commencing operations in 1990s, the platform has scaled up from 13m homes in 2000 to 33m now. Like in
India, DTH industry in the US never enjoyed content exclusivity and hence grew on the back of heavy subsidies. Also,
growth in the initial years came in from cable-dark areas. Besides, DTH industry growth was also propelled by the
emergence of national broadcasters, while cable was focused on local content.
Heavy subsidization: While extremely high customer premise equipment cost ($600 then) had resulted in sluggish
penetration of DTH in the early-1990s, the industry grew manifold once these costs fell led by heavy consumer
subsidies in the wake of increasing competition (launch of Dish Network and Prime Star in 1996). (This is akin to
India, where 10m subscribers were added in the last 15 months – as many as added in the first four years.) Besides
access to a few movie and sports properties, heavy subsidy and better picture quality have been the key factors driving
the shift from analogue cable to DTH. As of today, DTH operators spend $700 (10 months of ARPU) towards SAC.
Little content exclusivity: As in India, the US also operates on ‘must-carry’ rule – which implies no content exclusivity
even as cable industry in the US is more focused on local content than on a national network. This gives some leeway
to DTH players to offer ‘differentiated’ international sports events and movies on pay per view format. Incidentally,
there was then only one movie channel in the US (HBO) against more than 10 channels in India.
Cable-dark areas: In 1990s, 30% of the US market was in cable-dark areas. Thus, DTH industry initially grew by
reaching out to cable-dark areas (a trend also noticed in the Indian DTH market). Notably, since the advent of DTH,
C&S homes in US have grown entirely on the DTH platform with the number of cable homes remaining at 1995 levels.
Allowing local content: A key differentiating factor between the two industries is that there is narrowcasting first in
US and then broadcasting, whereas it has been the other way round in India. Almost 50% of the viewership has been
for local channels. Until two years ago, DTH players were not able to offer local content. However, in the last two
years, local content has been allowed on DTH network. DTH industry has added 5m subscribers in the last two years.
Exhibit 77: DTH driving the growth in the US DirecTV and Dish dominating the space
80 Cable DTH
Other DTH
65.9 66.9 66.0 65.4 64.9 15.9%
64.2 62.1
61.6
60
40 38.9 DirectTV
33.7 47.8%
29.7
24.8
20 20.2
15.0 Dish Network
10.5
6.4 36.2%
0
1,995 1,997 1,999 2,001 2,003 2,005 2,007 2,009
JUNE 2010 56
IDFC Securities
India context
We believe India too will tread a similar trend given the similarities between the two markets. Like in the US, the first
round of digitization in India has been driven by DTH with 18m homes by 2009, though cable would surpass DTH in
the long run. Also we expect Indian cable market to consolidate rapidly, as smaller LCOs and independent operators
find it difficult to fund digitization and customer subsidies.
What is common and what is not between India now and US C&S market then?
Similarities
Like India in 2005, cable industry in the US was well-entrenched before the advent of DTH in 1990s. USA had
nearly 52m cable subscribers at the time of DTH launch, as against 60m+ cable homes in India
USA’s cable distribution market was highly fragmented in 1990s with the largest player having 10% share.
First round of digitization boom in the US was driven by DTH; USA had 14m digital DTH homes by early-2000,
and digitization of cable platform followed
The initial growth in USA’s DTH industry came in from cable-dark areas and on the back of heavy subsidies
Both the countries have over-supply of content. India has +400 channels currently operational
Dissimilarities
In the US, cable companies controlled the last mile, while few MSOs own the last mile in India
While India has been a broadcasting market and regional focus is happening gradually, USA was predominantly a
narrowcasting market (local channels account for >50% of advertising revenues) – and then came in broadcasting.
This helped cable companies maintain supremacy for a longer period given their access to local content
Cable infrastructure, in terms of fibre network, in the US has been owned by cable operators, whereas telecom
operators have done this in India.
DTH market in the US is a duopoly with dominance of DirecTV and Dish Network, whereas Indian DTH market
has six players in the race and the leader accounts for a 30% share of the market.
Cable ARPU in USA was at $30 per month in 1990s as against $4 in India.
JUNE 2010 57
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Companies
JUNE 2010 58
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DEN Networks Rs198

Execution speaks for itself! Mkt Cap: Rs25.8bn; US$556.1m
Reason for report: Initiating coverage OUTPERFORMER

DEN Networks (DEN) has, within two years of operations, emerged as India’s second largest
MSO with an estimated reach of 10m and 1.1m paying subscribers. With aggressive secondary
point acquisitions (67 till date), DEN is well-entrenched in 77 cities across nine states. While DEN
will continue to pursue inorganic growth, it plans to plough Rs1.6bn in digitization over the next
three years. A funded balance sheet (Rs3.6bn of IPO proceeds) and the need to ‘secure’ the
existing base would enable DEN to add 3.1m digital homes and increase its paying base to 3.8m
by FY13E. Improved declaration levels and a stronger revenue model are expected to drive 43%
CAGR in DEN’s cable revenues to Rs13.2bn over FY10-13. Syndication business under Star-DEN
(Rs6bn in FY13E for 50% share) will also add to the scale. DEN’s proven execution capabilities
provide comfort on its ability to emerge as a formidable consolidator in the cable industry. We
initiate coverage on DEN with Outperformer and an 18-month price target of Rs292.
Commendable feat: With limited capital, urgency to scale up and economics supported by better
carriage, DEN has been in an aggressive secondary point acquisition mode in the past two years to
attain a reach of 10m homes and 1.1m paying subscribers. DEN has invested Rs3bn in acquiring
majority stake in 67 MSOs and ISOs across Karnataka, Delhi, NCR, UP, Gujarat, etc. While the cable
business has scaled up to Rs4.5bn as of FY10, Star-DEN (50:50 JV with Star for syndication) offers
scalability with revenues of Rs4.7bn (for 50% stake).
Change in tack towards digitization: Having acquired critical mass, DEN’s focus has shifted to STB
seeding for securing the subscriber base as also improving declaration levels. With Rs1.6bn of funds
earmarked for digitization and increased acceptance from LCOs, we see DEN adding 3.1m STBs to
its existing reach of 0.4m. While ARPU-led growth would happen only gradually, monetization
would happen in the form of higher declaration, digitization revenues, and streams like broadband.
High growth visibility; Outperformer: We see 29% revenue CAGR for DEN over FY10-13 with 60%
CAGR in subscriber revenues, 5% CAGR in carriage revenues and 12% CAGR in Star-DEN JV. As
MSOs retain most of the gains from the initial round of monetization, we expect DEN’s operating
profit to grow 6.5x with PAT of Rs2.1bn in FY13. The management’s aggressive approach to growth
offers added comfort on execution.
Key valuation metrics Price performance

DEN Networks Sensex
Year to 31 Mar FY09 FY10 FY11E FY12E FY13E 110
Net sales (Rs m) 7,122 9,191 11,288 14,316 19,651

Adj. net profit (Rs m) (151) 303 461 908 2,077 100
Shares in issue (m) 18 130 130 130 130

Adj. EPS (Rs) (8.3) 2.3 3.5 7.0 15.9 90
% change (36.9) (127.8) 52.3 96.9 128.9

PE (x) n/a 85.4 56.1 28.5 12.4 80
Price/ Book (x) 1.6 3.4 3.2 2.7 2.1 23-Nov- 23-Dec- 23-Jan- 23-Feb- 23-Mar- 23-Apr- 23-May- 23-Jun-
09 09 10 10 10 10 10 10
EV/ EBITDA (x) 90.1 28.2 17.2 10.3 5.7
RoE (%) (7.1) 6.1 5.9 10.3 19.2 Bloomberg: DEN IN 6m avg daily vol. (m): 0.06
RoCE (%) (4.3) 8.8 9.7 17.1 29.6 1-yr High/ Low (Rs): 220/150 Free Float (%): 46.3

91-22-6622 2567 91-22-6622 2562 91-22-6622 2576
JUNE 2010 59
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EXECUTIVE SUMMARY
¾ Established in 2008, DEN has already emerged as the number two MSO in
India with cable revenues of Rs4.5bn and 1.1m paying subscribers
¾ Secondary point acquisition strategy has worked; next step is to secure the
primary points through seeding of STBs
¾ The course of business could change materially going forward as we expect
DEN to focus on digitization and also remain aggressive on inorganic growth
(including large MSOs)
¾ With Rs3.6bn raised recently, DEN expected to add 3.1m digital subscribers by
FY13 to the 0.4m base; overall paying subscribers to grow to 3.8m
¾ We value the business on EV/ subscriber basis and arrive at a fair value of
Rs292 per share
Strong on execution: Second largest in two years

Rapid scale up in two Promoted by Sameer Manchanda and backed by the TV18 Group, DEN forayed into
years on the back of 67 cable distribution in late-2007. An aggressive management and $65m invested by
acquisitions and
syndication JV IL&FS and EMSAF have helped DEN cover significant ground within this short span
of time via the acquisition route. DEN has emerged as one of the fastest growing
MSOs with reach of ~10m homes and 1.1m paying homes. Following the Comcast
(world’s largest cable operator) model of growth and the only option available then,
DEN has acquired 67+ Independent Cable Operators/ MSOs and LCOs and has
extended its presence across 77 cities of India. A 50:50 JV with Star India for content
syndication has further added to the scale. DEN has clocked revenues of Rs9.2bn,
EBITDA of Rs898m and PAT of Rs303m in FY10.
An impressive paying subscriber base of 1.1m…

Second largest national Within two years of operations, DEN has scaled up its business reach to 10m homes,
MSO with 1.1m paying of which 1.1m are paying subscribers. While 85% of these are secondary points, DEN
subs and Rs4.5bn of cable
revenues also owns 175,000 primary points. In terms of paying subscribers (1.1m), it has as
many paying subscribers as Digicable and in terms of revenues (Rs4.5bn of cable
revenues in FY10), DEN is the second only to Hathway (1.6m paying subscriber base
and Rs7.1bn of revenues). In the digital services space too, which DEN entered in
February 2008, it has already garnered a base of 0.4m subscribers.
Exhibit 1: DEN – second largest in terms of paying subscribers as well as revenues

No. of paying subscribers Revenues
(m) (Rs bn)
1.6
1.6 8.0
7.1
1.2 1.1 1.1 6.0

4.5
0.8 0.7 4.0

3.1 3.0 2.7
0.5
0.4 2.0
0.0 0.0
Hathway DEN Networks Digicable WWIL InCable Hathway DEN Networks Digicable InCable WWIL
JUNE 2010 60
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Secondary subscribers Primary subscribers …driven by aggressive acquisition of MSOs and LCOs
(m)
With limited capital availability and urgency to scale up, DEN decided to be
1.2
0.2
aggressive on secondary point acquisition across India. In the first nine months of
0.9 0.1 operations, DEN had acquired a majority stake in 22 MSOs with 45 MSOs acquired
0.0 subsequently. While DEN has extended its presence across 77 cities in Uttar Pradesh
0.6 (22 acquisitions), Karnataka, Maharashtra, Gujarat (10), Rajasthan, Haryana, Madhya
0.9
0.8
0.7 Pradesh, Kerala and NCR, it has adopted the ‘cluster strategy’ to optimize on the
0.3
carriage and content deals. MSO acquisition has given DEN access to 112 analogue
0.0
Head Ends and 16 Digital Head Ends besides access to the laid-out cable network.
FY08 FY09 FY10E
Apart from secondary acquisitions, DEN also has access to 175,000 primary points.
DEN has invested a cumulative Rs3bn through cash & equity swap in acquiring
majority stakes in these companies with the deals involving asset and business
transfer and entailing a value of Rs5,000-6,000 per paying subscriber.
Exhibit 2: DEN has a reach across 77 cities
Sirsa Delhi Lucknow

Yamunanagar Gurgaon Kanpur
Sonepat Faridabad Allahabad
Palwal Ghaziabad Meerut
Noida Moradabad
Jaipur Budaun
Tonk Aligarh
Kota Shukla Ganj
Udaipur Haryana
Gorakhpur
Jodhpur Jaunpur
Delhi & NCR Unnao
Barelli
Rajkot
Rajasthan
Uttar Pradesh Farukabad
Baroda Jhansi
Jamnagar Varanasi
Surat Mughal Sarai
Firozabad
Nasik Gujarat
Madhya Pradesh Hathras
Navi Mumbai
Pune
Maharashtra Gwalior
Bangalore Bangalore Rural – Amruthahalli

Jabalpur
Tumkur Bagalkot
Gadag Bidar
Cochin
Dharwad Rannebennur
Palakkad
Gulbarga Harihar Karnataka
Alleppy
Kopal Davanagere
Trichur
Bellary Hospet
Aluva
Hubli Bhatkal
Kunnukara
Udupi Chanapattna
Mandya Chanarayapatna
Hassan K.R.Pet
Mysore Birur Kerala
Raichur Chintamani
Shimoga Kumta
Kadur Ramanagara
Source: Company
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Carriage fees justified secondary point acquisition

MSO acquisition costs With new entrants in the cable space as also incumbent Hathway going on an
shot up to 2-2.5 years of acquisition spree, the cost of acquisition shot up to Rs4,500-5,500 per paying
ARPU…
secondary point and Rs7,000 per paying primary point (i.e. 2-2.5 years of ARPU or 8x
EV/ EBITDA). While the costs were not justified on pure economics of subscription
revenues at the time of acquisitions, the strategy nevertheless imparted the ability to
garner higher carriage fees, drive better content deals and potential to improve
declaration levels in the future. As DEN has scaled up in clusters (e.g. reaches out to
70% of the UP market), it is better placed to earn a higher carriage fee. DEN earned
Rs2.2bn in carriage revenues in FY10 for 1.1m paid subscribers – Rs2,000 per paying
subscriber per year as against Rs1,850 for Hathway.
…justified by ability to scale DEN’s carriage revenues are 60-70% higher than the cumulative carriage fees
up carriage collection collected by independent operators prior to being acquired. Also, consolidation of
by 60-70%
cable distribution by DEN has given it more bargaining muscle on content deals in
the capacity of a national MSO. These two aspects immediately change the economics
of the business and thereby justify DEN’s secondary point acquisition strategy –
especially as the effective payback period of acquisitions has come down to three
years as against seven years earlier. Though primary point acquisition strategy offers
better business economics at the onset (100% declaration on day-1), merit of the MSO
acquisition route lies in the potential to improve the declaration levels.
Exhibit 3: Better carriage and lower content cost post acquisition

Time of acquisition Post acquisition
Increasing carriage stream Average ARPU per month 160 160
of revenues justified the Total subscription revenue collection (Rs m) 2.3 2.3
economics of acquisition Carriage revenues - Rs m 1.6 2.3
Total Revenues 3.9 4.6
Content Cost and placement cost - per sub 170 165
Total costs 3.0 3.0
Operating profit / (loss) 0.88 1. 60
Star-DEN JV – adding to scale and stability

With Rs9.5bn of collection, In January 2008, DEN entered into the syndication business through a 50:50 JV with
Star-Den is the largest Star Network. The JV is an aggregator and distributor of 25 channels (Star Network,
syndication bouquet in
select TV18 Group channels and Times group among others) across India, Nepal and
terms of revenues…
Bhutan on analogue cable, digital cable as also the DTH platform. In comparison, Zee
Turner has 33 channels and Sony One Alliance has 20 channels. With revenues of
Rs9.3bn, Star-DEN is the largest syndication bouquet (Zee at Rs7bn and Sony
Rs6.8bn). The cumulative weekly GRPs of the channels distributed through Star-DEN
network are at ~675. Star-Den JV currently clocked revenues of Rs9.3bn (for 100%
entity) and EBITDA of Rs475m in FY10. Being a part of one of the largest MSOs, Star-
JUNE 2010 62
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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.
Exhibit 4: GRPs of various syndication bouquets

795
800 667
600
600
…whereas it is the second
largest in terms of
cumulative weekly GRPs 400
200
0
Sony One Allaince Star DEN Alliance Zee Turner
Source: Industry estimates
As per the deal between Star and DEN, Star has an option to increase its stake by 1%,
which is exercisable in a 30-day period once in a year from January 2010. However, in
that scenario, DEN has a put option on the remaining 49% stake. In case of a default
by DEN, Star can buy the stake from DEN at a price 20% lower than the market
value. However, in case of default by Star, DEN’s stake will have to be bought over
by Star at market value.
Profitable within two years

Business scaled up to Given the pace at which DEN has grown on ground, it has already become a Rs9.2bn
Rs9.2bn - Rs4.5bn from
business (100% of cable business and 50% of Star-DEN JV) in FY10. Of the total
cable and Rs4.7bn from
Star-DEN revenues, subscription-based cable revenues are at Rs2bn. DEN generated Rs2.3bn in
carriage revenues and Rs4.7bn from Star-DEN (50% equivalent) operations in FY10.
Exhibit 5: Rapid revenue scale up Revenue mix

Revenues Other
3% Subscription
(Rs m) 9,191 revenues
10,000 22%
7,122
7,500
5,000
Star DEN
51%
2,500 826 Carriage Fees
24%
0
FY08 FY09 FY10E
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Not only has DEN been the fastest growing MSO in terms of revenues, it is also the
fastest to turn profitable in India. DEN reported EBITDA of Rs898m and PAT of
Rs303m (Rs159m of PAT from Star-DEN) in FY10.
Exhibit 6: DEN – India’s only profitable national MSO

(Rs m)
EBITDA PAT
1,500
1,216
898
800
303
Commendable feat of
100
being the first MSO to turn
profitable
-600
-705 -751
-1,300
-2,000 -1,753
DEN Networks Hathway WWIL
Strong management team – a critical success factor

Management team with DEN is steered by a strong management team with personnel having worked with
vast experience across
industry leaders including SET Discovery, IndusInd Media, Tata Sky, etc and media
cable and DTH platform
business experience for over a decade. Sameer Manchanda, the promoter, has been in
the media business for 25+ years with expertise in broadcasting and distribution
verticals. He is accredited for starting IBN18 – the TV18 group company owning
successful properties like CNN IBN, IBN7 and Colors. As a Joint MD of IBN18, he
played a key role in roping in international partners like CNN and Viacom. The
execution of the past two years is also a testimony of the capability of the
management. S N Sharma, who heads the operations, has been in the business of
handling LCOs for 23 years. Given that cable business is heavy on execution, a strong
management team would be a key differentiating factor in the coming years.
Exhibit 7: DEN’s management team

Name Designation Experience
Sameer Manchanda Promoter 25 years+ of experience in media. Jt MD of IBN18.
Anuj Gandhi CEO 14 years of experience in media industry - SET Discovery, IndusInd Media
S N Sharma President, Operations 23 years of experience in media industry - Hathway, IndusInd Media
Vikas Bali President, Digital Services 14 years of experience in media industry - Tata Sky, Star India
Navroz Behramfram CTO 25 years of experience in media and telecom - Tata Sky, Hathway Cable
Mohammad Azhar President, Strategy and 15 years of experience in strategy and financial planning – Access
Business Development Financial Services
Rajesh Kaushall CFO 13 years of experience - PwC, Lucent Technology, Tekelec Systems
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Changing Tack: Digitization the way forward

Having acquired critical mass (reach of 10m and a 1.1m 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. We expect DEN’s overall paying subscribers to increase from
1.1m now to 3.8m (including 1m primary points) and the overall digital subscriber
base to increase to 3.5m by FY13.
Balance sheet funded for growth

Rs3.6bn of recent fund While Rs2.8bn of funds initially raised from IL&FS and EMSAF have been utilized for
raise through IPO gives subscriber acquisitions, DEN has recently raised Rs3.6bn through public issuance.
DEN adequate capital…
These funds are planned to be largely utilized for upgrading the existing
infrastructure as also towards digitization. Of the total proceeds, Rs1.6bn has been
earmarked for Set Top Boxes and Rs250m for cable broadband infrastructure. DEN is
also expected to meet its capital commitment of Rs600m+ payable on past acquisition.
The low debt component further gears up the healthy balance sheet of DEN, which
has demonstrated best value creation till date as compared to peers.
Exhibit 8: Objects of issue

Rs m
Development of cable infrastructure and services 2,100
Digital STB 1,650
Head Ends - digital and analogue 150
…of which Rs1.6bn would
Coaxial fibre network 150
go in funding digitization
Upgradation cost 150
Cable broadband network 250
Acquisition of content and broadcasting rights 100
Loan repayment 400
General purpose expenditure 525
Total 3,375
Source: Company RHP
Digitization – the only way to secure customer base

As ‘digitization’ becomes DEN had forayed into digital cable in February 2008 through its brand ‘Digitelly’.
the only way to secure
DEN has already digitized 0.4m subscribers so far. Having taken the secondary point
subscriber base…
acquisition route, the biggest challenge for DEN going forward would be to secure
the LCOs under independent operators acquired by DEN. Given the increasing
penetration of DTH as also fear of losing out LCOs to competitors, DEN will step up
its aggression on seeding of STBs. Digitization would make LCO acquisition
expensive for other MSOs as also secure the primary point to avoid switchover to the
alternate digital platform – DTH. With Rs1.6bn lined up for digitization and
increasing acceptance from LCOs, we expect DEN to add digital subscribers at the
pace of 50,000 per month in FY11, further increasing to 125,000 per month by FY13.
We expect DEN to have 3.5m digital subscribers by FY13.
JUNE 2010 65
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Exhibit 9: Digital subscriber base scale-up

Digital subscribers
(m) 3.5
3.5
3.0
2.5
…DEN to scale up to 3.5m 1.9
digital homes by FY13E, 2.0
from 0.4m in FY10
1.5
1.0
1.0
0.4
0.5 0.2 0.2
0.0
FY08 FY09 FY10 FY11E FY12E FY13E
Declaration-led monetization
As MSOs’ focus is on Digitization in the near term may not necessarily translate into monetization, as we
seeding STBs first, ARPU expect little change in declaration levels in the initial stage. To avoid LCO resistance
growth to happen gradually
in seeding Set Top Boxes, DEN is not pushing aggressively on this count. This
implies that while DEN would continue to collect for as many subscribers as earlier
in the near term, digital STBs seeded may be disproportionately higher vis-à-vis the
declared customer base. The monetization would initially happen only in the form of
upfront revenues on seeding of STBs (Rs1,000 per unit at present). Revenues from
rentals on STBs, however, are unlikely to be material in the near term. Nevertheless,
once DEN manages to digitize 25-30% of the households under an LCO and plugs the
option for the LCO to switch to another MSO, it will be in a position to start pushing
for higher declarations. Paying subscribers under a secondary point, we believe,
would increase by just 0.2m in FY11 and gather steam only in the subsequent years.
We expect DEN’s overall paying subscriber base to increase from 1.1m now to 3.8m
by FY13, including 1m primary subscribers. Of the additional 2.7m incremental
paying subscribers, 1m would be through the inorganic route and the remaining on
the back of improved declaration levels.
Exhibit 10: Growing paying subscriber base

Secondary subscribers (m) Primary subscribers (m)
(m)
4.0
1.0
Digitization to enhance 3.0
‘declaration’ to 3.8m by
FY13E 0.5
2.0
0.3 2.7
0.2 1.9
1.0 0.1
0.9 1.1
0.7 0.8
0.0
JUNE 2010 66
IDFC Securities
Acquisition strategy – ‘the Comcast model’

DEN to spend Rs3bn over Consolidation in the cable industry is imminent and the journey of Comcast, world’s
FY10-13E on acquiring largest cable operator, suggests that inorganic growth is an important component of
0.86m primary points and
0.5m secondary points the business strategy. We see the Indian cable industry also moving towards
consolidation, which would throw up significant acquisition opportunities for
leading operators. As digitization accelerates on DTH as well as the cable platform,
smaller cable operators would take a hit. While lack of capital to digitize would result
in shift of subscribers to DTH, independent operators would tend to see pressure on
carriage revenues as well. This would thereby jeopardize business economics of
smaller independent players and trigger consolidation. We expect DEN to spend
Rs3bn on 0.86m primary and 0.5m secondary subscriber acquisitions over the next
three years. Also, given that not all players are adequately funded and threat of DTH
is at the prime, acquisition costs have also come down from the peak of Rs7,000 per
primary point in 2008 to ~Rs5,000 with scope to move further down.
Business Economics Set to Improve Markedly

DEN is the only profitable MSO in India – and that reveals the inherently poor
economics of the business. Though the steep rise in carriage fees witnessed over the
past two years has been a boon for cable operators, we expect a fundamental
improvement in economics driven by better declaration levels and a stronger revenue
model (rental income, broadband income, advertising potential, etc). The entire
benefit of the imminent first round of cable digitization, we believe, will flow to cable
operators. In this backdrop, we expect DEN’s overall revenues to grow to Rs19.6bn,
operating margins to improve to 26% and PAT of Rs2.1bn by FY13.
Declaration and a stronger revenue model in cable business

43% CAGR in cable We expect DEN’s cable business revenues to register 43% CAGR as declared
revenues over FY10-13E
subscriber base increases from 1.1m now to 3.8m by FY13E and with emergence of
to Rs13.2bn
other revenue streams like STB rentals, and digitization and broadband revenues.
Carriage revenues are likely to show a steady 5% CAGR over this period. We expect
DEN’s cable business revenues to grow from Rs4.5bn in FY10 to Rs13.2bn by FY13.
Exhibit 11: 43% revenue CAGR… …with contribution growing faster

Cable business Advertsiing & VAS
(Rs m) 4%
13,150 Broadband
14,000
10%
10,500
8,405
Carriage fees
7,000 5,915 20% Subscription
51%
4,519
3,446
3,500
Digitization fees &

0 rentals
FY09 FY10 FY11E FY12E FY13E 15%
JUNE 2010 67
IDFC Securities
Subscription-led revenues – Basic + Rentals + STB sale

Subscriber led revenues We expect 60% CAGR in DEN’s subscription revenues to Rs8.8bn over FY10-13 with
to grow at 60% CAGR with
51% CAGR in basic cable revenues to Rs6.8bn. Growth in basic cable revenues would
basic pay growing at 51%
CAGR be driven by improved declaration, whereas we expect a limited 5% CAGR in ARPU.
Also, ARPU will increase gradually as the focus would initially be on digitization.
Besides basic video revenues, DEN is expected to garner Rs1.9bn of revenues in STB
rentals and digitization fee by FY13 (Rs168m in FY10). While the industry claims to
be charging rentals on every STB seeded, we believe DEN would be able to collect
rentals from only 40-50% of the homes in the face of LCO resistance. DEN is expected
to generate Rs1.2bn of revenues as one-time digitization fee (the upfront Rs1,000 it
receives per STB at the time of installation). We expect slow pick-up in VAS revenues,
with negligible contribution to overall revenues.
Exhibit 12: 60% CAGR in subscription revenues over FY10-13E

(Rs m)
Subscription revenues STB Rentals Digitization fees VAS
10,000
7,500
5,000
2,500
0
FY10 FY11E FY12E FY13E
Broadband revenues – a gradual pick-up

Broadband revenues at Broadband is typically a key revenue driver for the cable industry globally. Of the
Rs1.3bn by FY13E with total 62m cable subscribers in USA, 42m subscribe to the high-speed internet and
0.7m subscribers
broadband services (i.e. 50% of the total broadband connections are serviced by cable
operators). Comcast, the largest cable operator in the country, is also the largest
broadband player. In contrast, India – while being low on broadband penetration
(just 3%) – has only 10% of the connections being serviced by cable operators. Going
forward, we expect cable operators to play a relevant role in driving broadband
penetration, but we also foresee stiff competition from wireless broadband and
WiMax. DEN has earmarked Rs250m from the IPO proceeds for scaling up the
broadband business and we expect DEN to add 0.7m subscribers (revenues of
Rs1.3bn) by FY13. Scalability of broadband operations is critical to the business given
the high profitability (45-50% operating margin).
JUNE 2010 68
IDFC Securities
Exhibit 13: India too low on penetration… …but set to grow rapidly
Indian Broadband industry
30% Penetration 14.0
(m)
99 70% 12.0
(m)
100 10.3
84 10.5
8.7
75
7.2
7.0
50 5.5
3%
3.5
25
3.0
7 2.2
0 0.0
China US India 2006 2007 2008 2009 2010 2011 2012
Source: IDFC Securities Research, Industry estimates
Carriage fees – growth to be slow but steady

Carriage fees to While DEN has adequately capitalized on the consolidation benefit by garnering high
consolidate with few
large MSOs carriage fees, growth would only be gradual from here. Contrary to general
perception, we believe carriage fees will sustain – though the form may change to
placement or advertising revenue share. While industry carriage revenues may
stagnate, the stream would get concentrated in the hands of a few large MSOs. Post
digitization too, carriage revenues would prevail as broadcasters will have to pay to
be a part of the basic package of cable operators. We expect DEN’s carriage revenues
to grow from Rs2.2bn in FY10 to Rs2.6bn in FY13.
Advertising revenues – potential upside

If Indian cable industry Cable operators in the US are able to generate high revenues through advertising on
tracks global trends, local cable channels as also a share of advertising revenues from broadcasters (in lieu
advertising revenues offer
significant upside of placement fee). In India, advertising forms an insignificant part of operators’
revenues, though we expect this stream to multiply on the back of improved local-
centric businesses like retail and better saliency post consolidation. Having
consolidated 67 operators in the past two years, DEN is well placed to market
advertising slots across its local cable channels. While we are building in only
Rs420m of advertising revenues by FY13E, we see considerable upside risk to these
numbers.
Even a marginal delta in declaration a major boost to profitability

Retention of declaration While declaration levels would improve gradually, even a marginal rise has the
gain – content cost increase
potential for a marked increase in cable operators’ profitability as content cost payout
of 33% CAGR vis-à-vis 51%
CAGR in subscription would lag the growth rate in subscription revenues. We expect content cost increase
revenues for DEN to be at 33% over the next three years as against subscription revenue CAGR
of 51%. This would drive substantial improvement in the company’s cable business
margins. For instance, a shift from 10% declaration levels to 12% in a market of 10,000
subscribers would mean that operating profit would increase from Rs1.36m to
Rs1.7m (up ~30%). Profits would increase by 2.3x if declaration levels double to 20%.
JUNE 2010 69
IDFC Securities
Exhibit 14: Improving economics with better declarations

Declaration levels 10.0% 12.0% 15.0% 18.0% 20.0% 25.0%
Paying subscribers 1,000 1,200 1,500 1,800 2,000 2,500
Average ARPU per month 160 160 160 160 160 160
Subscription revenues (Rs m) 1.9 2.3 2.9 3.5 3.8 4.8
Carriage Revenues - Rs m 1.9 1.9 1.9 1.9 1.9 1.9
Total Revenues 3.8 4.2 4.8 5.4 5.7 6.7
Content Cost and placement cost - per sub 165 138 112 95 88 85
Total content and placement cost 1.98 1.99 2.02 2.05 2.11 2.55
Other operating costs 0.48 0.48 0.50 0.52 0.52 0.53
Total Costs 2.5 2.5 2.5 2.6 2.6 3.1
Operating Profit / (Loss) 1.36 1.73 2.26 2.79 3.11 3.62
Operating leverage at the fore – 36% margins by FY13E

Lower content cost and high With substantial operating leverage gains led by higher declarations, new revenue
margin broadband revenues streams and stable content cost, we expect DEN’s cable business operating margins to
to drive margin improvement
expand from 14.6% in FY10 to 36% in FY13. Three key contributors to operating
leverage gains would be upfront digitization revenues (one-time revenue booking as
against STB amortization over five years), content cost (down from Rs145 per month
to Rs125) and faster growth in the high-margin broadband business. We expect 30%
CAGR in overall operating costs over FY10-13 as against a higher 43% revenue
CAGR in the cable business. This implies operating margin improvement from 14.6%
to 36% by FY13 and overall EBITDA of Rs4.7bn (higher than existing revenues).
Exhibit 15: Sharp improvement in margins… …cost structure

EBITDA margins FY13E
(%) 36.1
Other
35 Bad Debts operational cost
29.0
1.5% 2.9%
Administration
28 cost
21.7
16.1%
21
14.6
Advertising and
selling cost
14 9.0% Content Cost
52.7%
7
Personnel Cost
8.8%
0 Placement Cost
FY10 FY11E FY12E FY13E 9.0%
Star-DEN JV – a steady contributor

Star-DEN business to As on-ground collection improves and India becomes the largest digital homes
register 12% CAGR over
market (86m subscribers by 2015E), pay revenues of broadcasters would improve
FY10-13E and earn 6-8%
margins substantially. However, we maintain that the first round of monetization gain in the
cable business would go to operators and not to broadcasters. Thus, we build in only
12% revenue CAGR for Star-DEN to Rs6bn (50% share of DEN) over FY10-13E. We
expect Star-DEN JV to generate 6.8% margins and PAT of Rs310m by FY13.
JUNE 2010 70
IDFC Securities
Exhibit 16: Star-DEN – sustained 12% revenue CAGR …and sharper profit growth
(Rs m) (Rs m)
Revenues Profit After Tax
7,000 320 311
6,501
5,910
5,373
5,250 240 230
4,672 203
3,676 159
3,500 160
1,750 80
23
0 0
Consolidated revenues of Rs19.6bn and PAT of Rs2.1bn by FY13E

Expect 7x jump in net With 40% CAGR in cable business and 12% CAGR in Star-DEN JV, we expect 29%
profit over FY10-13
CAGR in DEN’s revenues to Rs19.6bn over FY10-13. We believe monetization would
be gradual, and thus estimate a slower 25% CAGR in revenues in the next two years
but a higher 37% revenue growth in FY13. EBITDA margins would improve from
9.8% in FY10 to 26.4% in FY13E. As DEN is expected to invest Rs5.4bn in gross block
addition and be aggressive on digitization, depreciation would increase from Rs329m
in FY10E to Rs1.2bn by FY13E. The recently raised Rs3.6bn of equity and improving
internal cash flows of the business, we believe, will keep interest cost in check. We
expect PAT to grow multifold from Rs303m in FY10 to Rs2.1bn by FY13.
Exhibit 17: 29% revenue CAGR… …and PAT of Rs2.1bn by FY13

(Rs m) (Rs m)
Cable business revenues Star DEN JV PAT
20,000 2100
6,501
15,000 1450
2,077
5,910
10,000 800
5,373
908
4,672 13,150
150 461
5,000 3,676 303
8,405
-151
5,915
4,519
3,446
0 -500
Rs7.7bn of capex on cards…

Funded for growth, and with aggressive digitization and acquisition plans, DEN is
expected to invest Rs7.7bn in gross block addition over FY10-13. Of the total, an
estimated Rs3.9bn would go towards seeding of Set Top Boxes and Rs3bn in MSO
and LCO acquisition.
JUNE 2010 71
IDFC Securities
Exhibit 18 Gross block addition

Headend
Goodwill on 10.6%
acquisition
29.8%
50% of capex towards

digitization and 40%
towards acquisition
Other Corporate
and expenses
1.9%
Set Top Boxes
50.2%
Broadband Capex
7.5%
…DEN funded for the same

Rs3bn of available IPO
DEN is expected to invest Rs7.7bn towards digitization, customer acquisition and
proceeds and Rs7bn of cash broadband and would need ~Rs3bn in incremental working capital – which translates
profit generation sufficient into a total capital requirement of Rs10.7bn. We believe DEN is adequately funded
to fund growth
for the same with Rs3bn of available funds from IPO proceeds and Rs7bn of cash
profit generation. Marginal capital requirement would be funded through debt
(currently at Rs1.7bn). While DEN is unlikely to require incremental capital to fund
the expected growth, it may need to raise money in case of a large MSO acquisition.
We expect DEN to scout for large-size acquisition opportunities as the market starts
consolidating.
Valuations & View

We see DEN not only as a survivor in the cable space, but also as a leading
consolidator in the market. To grow rapidly, DEN could turn aggressive on
acquisition of smaller LCOs/ independent cable operators as also large national/
regional operators. Given DEN’s aggressive approach towards growth and its proven
execution capabilities, we initiate coverage on the stock with Outperformer.
Outperformer with 18- We have valued the cable business on EV/ subscriber basis, which has been arrived at
month target price of on the basis of months of ARPU. Economics of individual subscribers suggest that a
Rs292
secondary point can be valued at 29 months, primary point at 32 months and
broadband subscriber at 36 months of ARPU. As per this method, primary point
subscriber for DEN is valued at US$210 as against Comcast’s valuation of $3,500 per
subscriber as the latter has ARPU 12x that of DEN. Deploying this valuation
methodology on DEN’s 2.7m secondary points, 1.05m primary points and 0.7m
broadband customers in FY13E, we have arrived at an EV of Rs49.7bn and equity
value of Rs52.7bn for DEN. We arrive at an 18-month price target of Rs292 for the
stock.
JUNE 2010 72
IDFC Securities
Exhibit 19: Valuation – target price of Rs292

Secondary Pt Primary Pt Broadband Star DEN Total
Number of subscribers 2.72 1.05 0.7
ARPU 350 300 300
Month of ARPU 29.0 31.8 36.4
EV / subscriber 10,166 9,530 10,928
Enterprise value 27,651 10,007 7,649 4,400 49,707
Less: Debt (2,500)
Equity value 52,707
Number of shares 130.5
Per share value (Rs) 400
Minority stake (%) 27
Target price (Rs) 292
Key Risks
The cable industry is exposed to multiple risks. Risks pertaining to CAS
implementation and funding of players having already played out in the previous
round, execution and monetization remain the key monitorables this time. LCOs
need to be aligned with the digitization theme while competition from DTH is
another threat. In our view, DEN faces the following key risks:
Losing out LCOs to competition

While DEN has so far opted for secondary point (MSO) acquisitions, other MSOs
may poach its LCOs. This, we believe, has the potential to disrupt the business
economics for DEN. However, faster digitization may lead to a disproportionate
increase in LCO acquisition costs – which would diminish the risk of LCO poaching
by other MSOs. This would be a key monitorable for DEN.
Loss of primary points

DTH has made rapid inroads into consumer homes and we see the momentum
sustaining. In this backdrop, cable players may lose subscribers to DTH. This could
will have a material impact on DEN in markets where it owns the primary points.
Entry of new players

While the scramble for subscriber acquisition is bound to abate among incumbents as
they attain critical mass , new (funded) players would look to aggressively acquire
subscribers. Thus, DEN’s existing subscriber base will be vulnerable to acquisition by
a competing player. However, with six big players already in the fray, we rule out
influx of new players in the sector unless it is opened to FDI. Further capitalization
through the PE route is also difficult to come by as, despite committing hefty funds
(e.g. Ashmore has invested $140m), existing such investors have yet to break even.
Entry of telecom players

Entry of telecom players in the cable space is a potential threat for incumbents like
DEN. With existing fibre network provided by telecom players, they are in a position
to offer triple play immediately. While unorganized nature of the business has kept
telecom players away from the cable industry, a consolidated market may beckon
them. A case in point is Comcast, which is feeling the heat of competition post entry
of AT&T and Verizon into cable business in the US.
JUNE 2010 73
IDFC Securities
Income statement Key ratios

Year to Mar 31 (Rs m) FY09 FY10 FY11E FY12E FY13E Year to Mar 31 FY09 FY10 FY11E FY12E FY13E
Net sales 7,122 9,191 11,288 14,316 19,651 EBITDA margin (%) 0.5 9.8 13.7 19.4 26.4
% growth 763 29 23 27 37 EBIT margin (%) (1.7) 6.2 8.5 13.3 20.3
Operating expenses 7,085 8,293 9,736 11,541 14,467 PAT margin (%) (2.1) 3.3 4.1 6.3 10.6
EBITDA 37 898 1,552 2,774 5,184 RoE (%) (7.1) 6.1 5.9 10.3 19.2
% change (116) 2,355 73 79 87 RoCE (%) (4.3) 8.8 9.7 17.1 29.6
Other income 72 65 96 101 115 Gearing (x) 0.5 0.2 0.3 0.3 0.2
Net interest (100) (194) (253) (278) (296)
Depreciation 160 329 595 863 1,195 Valuations
Pre-tax profit (152) 440 800 1,733 3,809
Current tax 20 74 200 461 974 Year to Mar 31 FY09 FY10 FY11E FY12E FY13E
Profit after tax (172) 366 600 1,272 2,834 Reported EPS (Rs) (8.3) 2.3 3.5 7.0 15.9
Minorities 21 (63) (139) (365) (757) Adj. EPS (Rs) (8.3) 2.3 3.5 7.0 15.9
Net profit after PE (x) n/a 85.4 56.1 28.5 12.4
non-recurring items (151) 303 461 908 2,077 Price/ Book (x) 1.6 3.4 3.2 2.7 2.1
% change (36.9) (300.1) 52.3 96.9 128.9 EV/ Net sales (x) 0.5 2.8 2.4 2.0 1.5
EV/ EBITDA (x) 90.1 28.2 17.2 10.3 5.7
EV/ CE (x) 0.9 2.7 2.6 2.4 2.0
Balance sheet
As on Mar 31 (Rs m) FY09 FY10 FY11E FY12E FY13E
Shareholding pattern
Paid-up capital 181 1,305 1,305 1,305 1,305
Preference share capital 40 25 - - - Public &
others Foreign
Reserves & surplus 1,980 6,039 6,500 7,407 9,485
8.5% 18.2%
Total shareholders' equity 2,305 7,555 8,155 9,427 12,261 Institutions
Total current liabilities 3,088 3,660 2,735 2,439 3,040 3.1%
Total debt 1,231 1,721 2,196 2,446 2,696
Deferred tax liabilities - 73 73 73 73
Total liabilities 4,319 5,453 5,004 4,958 5,809
Non-
Total equity & liabilities 6,623 13,008 13,158 14,385 18,071
promoter
Net fixed assets 1,815 5,017 6,377 7,898 10,647 Promoters corporate
Investments 0 917 100 150 200 53.7% holding
Total current assets 4,732 6,918 6,526 6,181 7,068 16.5%
Deferred tax assets 77 156 156 156 156 As of March 2010
Working capital 1,644 3,259 3,791 3,742 4,028
Total assets 6,623 13,008 13,158 14,385 18,071
Cash flow statement

Year to Mar 31 (Rs m) FY09 FY10 FY11E FY12E FY13E
Pre-tax profit (152) 440 800 1,733 3,809
Depreciation 160 329 595 863 1,195
Chg in Working capital (143) (847) (1,279) (1,218) (391)
Total tax paid (20) (74) (200) (461) (974)
Operating cash Inflow (154) (152) (84) 918 3,639
Capital expenditure (1,444) (3,531) (1,954) (2,385) (3,944)
Free cash flow (a+b) (1,599) (3,684) (2,039) (1,467) (305)
Chg in investments 982 (917) 817 (50) (50)
Debt raised/(repaid) 988 505 500 250 250
Capital raised/(repaid) 392 4,867 (25) - -
Misc 86 (3) - - -
Net chg in cash 849 768 (747) (1,267) (105)
JUNE 2010 74
IDFC Securities
Dish TV Rs45
Bottom’line of sight’ Mkt Cap: Rs47.9bn; US$1.03bn
Reason for report: Upgrade to Outperformer OUTPERFORMER

Dish TV has been the pioneer of DTH in India and the industry leader; yet, we have had a
negative bias on the stock for the last three years even as the DTH industry has grown multifold.
Over the period, while intensifying competition and a weak balance sheet have stretched the
gestation period and led to 5x increase in SAC for Dish TV, the stock has underperformed the
broader market by 50%+. However, the competitive landscape is easing and the recent Rs15bn
fund-raise by Dish TV will allow it to embark on a ‘profitable growth’ trajectory. We expect the
5.7m net (6.9m gross) subscriber base to scale up to 8m by FY13. Also, we expect Dish TV finally
turning PAT-positive by Q4FY12 on the back of fixed content-cost deals and with operating
leverage coming into play. We upgrade Dish TV from Neutral to Outperformer with an 18-month
price target of Rs61 per share.
Competitive intensity giving way…: The six-player Indian DTH market is the most competitive in
the world. Dish TV, despite having a head-start and being the leader, has been the most susceptible
to competition due to its weak balance sheet. Profitability has been elusive due to aggressive
consumer subsidies (Rs2,500 per subscriber) and increasing churn rates. However, DTH penetration
has exceeded expectations and growth rates would remain high – this, we believe, will obviate the
need for further price wars to acquire customers.
…volume-led growth ahead though ARPU to remain subdued: Dish TV, with a funded balance
sheet (Rs11bn of rights issue and $100m of private placement), is well placed to sustain aggressive
subscriber acquisition (8m net subscribers by FY13E). However, subsidies for new subscribers and
an inherently price-sensitive subscriber base (cable-dark areas) would keep ARPU under check for
Dish TV (<Rs140 in FY11 and improving only from FY12). Overall, revenues are expected to witness
28% CAGR to Rs22.5bn by FY13.
Operating leverage to drive profitability; PAT-positive in Q4FY12E: As per customer acquisition
cost stabilizes at ~Rs2,500, Dish TV enters into fixed content-cost deals and operating leverage sets
in, we expect Dish TV to turn PAT-positive by Q4FY12. With aggressive scale-up of DTH services,
easing competition and operational turnaround, we recommend Outperformer and assign an 18-
month price target of Rs61.

Dish TV India Sensex
Net sales (Rs m) 7,374.7 10,853.1 13,279.9 17,548.8 22,491.9 120

Adj. net profit (Rs m) (4,893.4) (2,612.3) (2,600.6) (463.1) 1,916.2
105
Shares in issue (m) 948.0 1,065.0 1,065.0 1,065.0 1,065.0
Adj. EPS (Rs) (5.2) (2.5) (2.4) (0.4) 1.8 90
% change n/a n/a n/a n/a n/a

75
PE (x) n/a n/a n/a n/a 25.0
25-Oct-09
25-Jun-09
25-Jun-10
25-Jan-10
25-Aug-09
25-Nov-09
25-Dec-09
25-Feb-10
25-Mar-10
25-Jul-09
25-May-10
25-Sep-09
25-Apr-10
Price/ Book (x) (6.6) 12.2 36.3 56.0 17.3

EV/ EBITDA (x) (28.3) 58.6 28.2 10.8 5.9
RoE (%) 87.5 204.5 (99.3) (42.6) 105.6 Bloomberg: DITV IN 6m avg daily vol. (m): 4.8
RoCE (%) (141.6) (23.6) (18.9) (0.6) 46.4 1-yr High/ Low (Rs): 54/31 Free Float (%): 35.2

91-22-6622 2567 91-22-6622 2562 91-22-6622 2576
JUNE 2010 75
IDFC Securities
INVESTMENT ARGUMENT
¾ Dish TV maintains leadership with its 5.7m net subscriber base (industry
size of 20m homes) by FY10; accounts for 22-23% of incremental market
¾ Six players already in the fray; competitive intensity appears to be past the
peak and irrational price wars unlikely
¾ While ARPU subsidy will persist and churn rate for Dish TV remains high
at 9-10% p.a., scale of operations to help contain subscriber acquisition cost
¾ Balance sheet now funded; Dish TV well placed to stay competitive and
expected to attain base of 8m net subscribers by FY13
¾ Profitability in business to be driven by operating leverage coming into
play with expanding subscriber base; we turn positive on the stock
Pain of the past stretched gestation

While having a positive bias on DTH industry, our negative bias on Dish TV –
industry pioneer – stemmed from the deteriorating economics with entry of funded
players like Airtel Digital, Tata Sky, Sun Direct, Reliance ADAG Big TV and
Videocon d2h. Being the incumbent, Dish TV was most susceptible to these risks,
particularly with an inadequately funded balance sheet in a business driven by heavy
subsidies. Our thesis played out with break-even point getting extended to 5m
subscribers, as against broad estimates of profitability setting in at 3m subscribers.
Also, subscriber acquisition cost jumped by 5x and churn rate increased from 0.5%
per month to 0.9%.
Dish TV – the pioneer of DTH industry

Dish TV has had a head- Dish TV has been a pioneer of DTH industry in India. Having commenced its
start in the DTH industry… operations in 2005, Dish TV had already reached 1.5m subscriber base before onset of
competition from Tata Sky (launched in 2006). And by the time Sun Direct launched
its services, Dish TV had already secured a 2.7m subscriber base.
Exhibit 1: Dish TV at advent of newer competition

(m)
8
6.9
6 Launch of Videocon
5.8
Launch of Airtel
4.7
4 Launch of Reliance ADAG
3.9
Launch of Sun Direct
2.7
2
Launch of Tata Sky
1.5
0
0
Jan-06
Jan-07
Jan-08
Apr-05
Jul-05
Jan-09
Apr-06
Jul-06
Jan-10
Apr-07
Jul-07
Oct-05
Apr-08
Jul-08
Oct-06
Apr-09
Jul-09
Oct-07
Oct-08
Oct-09
JUNE 2010 76
IDFC Securities
Inadequately funded balance sheet in a subsidy-driven industry…

…but lost to competition Unlike most other DTH markets globally where competition is typically confined to a
due to lack of sufficient duopoly, Indian DTH industry is relatively much over-populated with six players in
capital
the fray. Given non-exclusivity of content, aggressive customer subsidy has been the
only way to drive DTH penetration. Our key concern on Dish TV pertained to lack of
capital (Rs1.7bn of net worth and Rs1.9bn of debt in FY07). With entry of deep-
pocketed players like Tata Sky (Tatas and Newscorp), Bharti Airtel and Reliance
ADAG (two of the largest telecom players), the concern took shape of crisis.
…pressure points were evident

Intense competition led to High competition in a non-exclusivity content scenario imminently led to a manifold
Dish TV’s average ARPU rise in subscriber acquisition cost as also the churn rate. Also, with analogue ARPU of
falling from Rs164 to
just US$4, growth has to be subsidy linked. Unlike the broad market estimates of this
Rs135 and churn rate
almost doubling to 0.9% business turning around with a 3m subscriber base, we anticipated a longer gestation
period. On the expected lines, subscriber acquisition cost increased from ~Rs500 at
the time of Tata Sky’s launch to Rs2,500 now. Average ARPU has fallen from Rs164 in
Q4FY08 to Rs135 and churn rate for Dish TV has increased from 0.5% per month
three years ago to 0.9% currently.
Exhibit 2: Subscriber acquisition costs are up 5x over three years

(Rs m)
3,000
2,250
1,500
750
0
Q1FY07 Q1FY08 Q1FY09 Q1FY10
While subscriber base increases to 5.7m, gestation period stretches

Dish TV currently The pace of subscriber addition for the industry as well as Dish TV has surprised us
accounts for one-third of on the positive. With digital cable not making much head-way in the past four years
the 20m subscribers in
DTH industry and $2.5bn of cumulative fund infusion over this period, DTH industry has scaled up
to 20m subscribers. Dish TV too has kept pace with the industry to reach 6.9m gross
and 5.7m net subscribers. Dish TV currently accounts for 33% of the gross subscriber
base and 20% of the incremental market. However, gestation period has extended far
beyond the initial estimates of the management. Unlike expectations of operational
break-even at 3m subscribers, Dish TV achieved operational break-even only on
achieving 6m gross and 5m net subscribers. Notably, the company incurred Rs5.7bn
of cumulative loss and Rs11.4bn of net loss over FY07-09.
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Exhibit 3: Rapidly growing subscribers… …but stretched gestation period

(m) Gross Net (Rs m)
8 EBITDA Net Loss
2,000
6.9
845
6 5.7
0
5.1
4.3
4
(2,000) (1,690)
3.0 (1,884)
2.5 (2,386) (2,128)
(2,612)
1.9 1.7
2
(4,000)
(4,140)
(4,893)
0
(6,000)
FY07 FY08 FY09 FY10
FY07 FY08 FY09 FY10
Source: The Company
Times are ‘changing’

We believe competitive intensity is past its peak in the DTH industry. With addition
of ~8m subscribers annually in the industry, we expect Dish TV to add 2.3m net
subscribers by FY13 as it has a funded balance sheet. However, we expect growth to
be volume-led, while ARPU will remain subdued on account of aggressive subscriber
addition and Dish TV’s existing profile of customer base. We expect 27% CAGR in
Dish TV’s overall revenues to Rs22.5bn over FY10-13.
A funded balance sheet on Rs16bn of fund raise

Balance sheet concerns A strained balance sheet due to heavy subsidies and competition from deep-pocketed
addressed with Rs11bn of players was Dish TV’s biggest competitive disadvantage in the past three years. As of
rights issue and $100m
of GDR end-FY09, Dish TV had Rs6bn of negative net worth and Rs11.5bn of debt (6x higher
than in FY07. However, Dish TV has raised Rs11bn through a rights issue over FY09-
10 (largely promoter-funded) and $100m through GDR issuance to Apollo
Management. Of the Rs16bn raised, Dish TV has already utilized Rs2.4bn towards
repayment of debt from a group company. Dish TV currently has Rs9bn of debt and
Rs6.5bn of cash on books. With a funded balance sheet, Dish TV is back in the
reckoning.
Exhibit 4: Improved balance sheet health post fund raise

(Rs m)
Total Shareholder's Fund Total Debt
15,000
10,000
9,492
5,000 11,492
5,445 3,920
263
0 547 1,930
(568)
(4,710)
(6,475)
(5,000)
(10,000)
FY06 FY07 FY08 FY09 FY10E
JUNE 2010 78
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Expect 4.4m gross and 2.3m net new subscribers by FY13…

Dish to have 8m net As DTH industry adds 19m subscribers over FY11-13 and grows into a 39m homes
subscribers by FY13E market by FY13, Dish TV is expected to add 4.4m subscribers by FY13 to take its
gross tally to 11.3m. We expect Dish TV to add 2.3m net subscribers to a base of 8m
by FY13. Notably, churn rates are at 10% per annum, which we believe are set to
taper to 8.5% in FY11 and 6% by FY13. We conservatively build in gross addition of
2m subscribers in FY11 as against management guidance of 2.5m subscribers.
Exhibit 5: Dish TV’s subscriber growth continues… …as industry adds 19m homes in next three years
(m) Industry size (Rs m - LHS) % market share (RHS)
Gross subscribers Net subscribers 40 40.0
12
11.3
10.3
9 30 30.0
8.8
8.0
7.7
6.9 6.9
6 20 20.0
5.7
5.1
4.3
3 10 10.0
0 0 0.0
…though ARPU growth to be subdued

ARPU to remain stagnant at Given that Dish TV has been the pioneer of DTH in India and had initially targeted
Rs140 in FY11, only to
improve from FY12
cable-dry and rural areas, its blended ARPU of Rs135 per month is the lowest after
onwards Sun Direct. While the renewal ARPU is at Rs160 per month, newly added customers
pay only Rs35 per month for 3-6 months initially. As the industry continues to grow
at the cost of ARPU (subsidization), we do not expect any substantial increase in
blended ARPU. Also, we believe VAS services will pick up only gradually. We expect
ARPU to increase materially only from FY12 (~Rs140 in FY11, Rs162 in FY12 and
Rs200 in FY13). Success of HDTV would also be critical for upside potential to our
ARPU assumptions.
Exhibit 6: ARPU improvement from FY12 onwards

Average ARPU (net sub)
(Rs m) 200
200
162
143 138 140
150
100
50
0
FY09 FY10 FY11E FY12E FY13E
JUNE 2010 79
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We expect 27% revenue CAGR over FY10-13

We expect overall While ARPU growth would be only gradual, Dish TV’s volume-driven growth will
revenues to grow to lead to more than doubling of basic subscription revenues to Rs18.9bn over FY10-13.
Rs22.5bn in FY13
Further, growth would come in from rental revenues accounting with Rs950 per
connection out of the Rs1,590 currently charged at the time of installation
apportioned as rental over 36 months. We expect Dish TV to garner Rs2.6bn of rental
revenues in FY13. We also expect higher advertising revenues of Rs800m in FY13.
With this, we estimate 27% CAGR in overall revenues over FY10-13 to Rs22.5bn. We
believe advertising and VAS revenues can potentially spring a positive surprise.
Globally, players like BSkyB and DirecTV garner 3-5% of revenues from advertising.
Exhibit 7: 29% CAGR in subscriber-based revenues (FY10-13E) Revenue pie (FY13E)

ARPU Rental Advertising and
(Rs m)
Teleport and trading bandwidth
24,000 4%
Rental 1%
2,634
12%
18,000
2,449
12,000 1,870
1,476 18,884
1,002 14,383
6,000 10,862
8,542
6,246
0 ARPU
FY09 FY10E FY11E FY12E FY13E 83%
Operating Leverage: Dish PAT-positive by Q4FY12E

While a six-player race will keep industry ARPU under check, Dish TV is well on
track to turn PAT-positive by Q4FY12 on the back of operating leverage in the
business, stable subscriber acquisition cost, fixed content-cost deals and lower
interest cost burden. We expect Dish TV’s EBITDA to grow 9x over FY10-13 to
Rs7.4bn and PAT of Rs2.1bn in FY13.
Changing economics with fixed content-cost deals

We expect 19% CAGR in Being the largest DTH player and paying Rs3.8bn of content cost (12-13% of the
Dish TV’s content cost subscription revenues collected by the Indian broadcast industry), Dish TV has
against 29% CAGR in
ARPU over FY10-13 leverage to negotiate with broadcasters. In this direction, most broadcasters (barring
Sun TV) have already agreed to enter into fixed content-cost deals (though entailing
annual revisions) with Dish TV. Thus, we expect 19% CAGR in Dish TV’s content
cost (annual revision and addition of new pay channels) against 29% CAGR in ARPU
over FY10-13. Stable content cost, while bringing the component down from 44% of
revenues in FY10 to 35% in FY13E, will also reduce customer acquisition cost (as
ARPU-linked subsidy drops). The lower subsidy, we believe, will allow Dish TV to
go aggressive on subscriber acquisition.
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Exhibit 8: Improving gross margins with fixed content-cost deals

Content cost (Rs m - LHS) % of ARPU revenues (RHS)
7,000 60.0
6,492
52.4
5,250 44.1 5,303 45.0

41.1
36.9
34.4
4,469
3,764
3,500 3,270 30.0
1,750 15.0
0 0.0
FY09 FY10E FY11E FY12E FY13E
Subscriber acquisition cost to stabilize

Economies of scale and While competition will keep advertising spends elevated (Rs1bn in FY11E) and
fixed content-cost deals to ARPU under pressure, we expect subscriber acquisition cost to remain stable at
cap subscriber acquisition
cost Rs2,500 as economies of scale set in. Further, savings would come in from the fixed
content-cost deal structure as subscriber additions do not entail substantial
incremental content cost. As all the six players are already well-entrenched, irrational
pricing wars are unlikely. Given non-exclusivity of content, aggressive price would
only increase the churn and will be detrimental for the entire industry. Also, two of
the key operators – Airtel Digital and Big TV – are facing immense cash flow pressure
in the core telecom business, and would be averse to playing a price war in DTH
business as it would increase the bleed.
Exhibit 9: Stabilizing subscriber acquisition cost

Economics
Basic offer - Rs1,690 Current
Receipts 1,690
Costs
STB, dish and other hardware 2,750
Dealer margin 225
VAT 115
Activation charge 200
Total cost 4,090
Net subsidy (2,400)
EBITDA growth by ~9x over the next three years

Economics of existing Dish TV stands to realize operating leverage gains from here on three counts – (i)
consumer base improving fixed content-cost deals (900bp of savings); (ii) 39% of overheads being nearly fixed in
and losses on new
customer addition nature (transmission cost, transponder cost, advertising cost, and administration &
shrinking personnel cost); and (iii) price-led growth as ARPU increases from Rs135 to Rs200 by
FY13. While economics of the existing consumer base are improving, losses on new
customer addition too are shrinking. We expect EBITDA to grow from Rs845m in
FY10 to Rs7.4bn by FY13 – a 4x margin jump from 7.8% to 32.9%. Profitability could
further improve if the proposed license cost rate changes from 10% to 6%.
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Exhibit 10: Margins to improve multifold… …as operating leverage sets in
EBITDA (Rs m - LHS) EBITDA margins (% - RHS) Content Transmission Others goods & services
8,000 40.0 (Rs m)
Employee & admin Advertisement S&D
160
5,000 22.5
120
2,000 5.0
80
(1,000) (12.5)
40
(4,000) (30.0) 0
FY09 FY10E FY11E FY12E FY13E FY09 FY10E FY11E FY12E FY13E
Exhibit 11: Economics of new and existing subscriber base post fixed content-cost deals
Economics - per month Existing New Blended
Proportion 80% 20%
ARPU 160.0 35.0 135.0
Rentals 26.4 26.4 26.4
Total subscriber based revenues 186.4 61.4 161.4
Content cost 80 0 64.0
Transmission cost 15 0 12.0
Employee cost 10 0 8.0
Advertising cost 12 28 15.2
Selling and distribution cost 63 12.7
Administration cost 10 0 8.0
Total operating costs 127.0 91.3 119.9
EBITDA per subscriber 59.4 (29.9) 41.5
We expect PAT of Rs2.1bn in FY13

Strong EBITDA growth and Improved cash profit generation from the business would result in interest cost
lower interest costs to drive savings. This, coupled with the exponential growth in EBITDA, would make Dish TV
profitability
PAT positive by Q4FY12E. We expect Dish TV to turn PAT positive on full-year basis
in FY13 and report Rs2.1bn of net profit for the year.
Exhibit 12: Dish TV to turn PAT positive in Q4FY12… …and FY13 to be the first full year of net profits
(Rs m) (Rs m)
PAT PAT
1,000 3,000
450 1,000
-100 -1,000
-650 -3,000
-1,200 -5,000
Q3FY09 Q3FY10 Q3FY11E Q3FY12E Q3FY13E FY09 FY10E FY11E FY12E FY13E
JUNE 2010 82
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Valuations & View

A funded balance sheet, easing competitive pressure and visibility on profits – all our
historical concerns pertaining to Dish TV stand addressed. We expect Dish TV to turn
PAT-positive in Q4FY12 and estimate PAT of Rs2.1bn in FY13E. In this light, we
change our call on the stock from Neutral to Outperformer.
We value Dish TV at EV/ Based on the methodology that we have adopted to value C&S businesses, we value
subscriber of Rs8,451… Dish TV at EV/ subscriber of Rs8,451 (33 months of ARPU in FY13E). Using this
valuation matrix on Dish TV’s projected 8m net subscribers by FY13, we arrive at an
18-month price target of Rs61 per share.
Exhibit 13: Fair value of Rs61 based on EV/ subscriber of 33 months ARPU
Valuations
Number of subscribers (m) in FY13 8
ARPU (Rs/ month in FY13) 260
Months of ARPU (as per individual customer economics) 33
…and assign an 18-month EV / subscriber (Rs) 8,451
price target of Rs61 per Enterprise value (Rs m) 67,607
share – ~40% upside from
Less: Debt (Rs m) 3,000
here
Equity Value (Rs m) 64,607
Number of shares (m) 1,065
18-month fair value per share (Rs) 61
Key Risks
Faster-than-expected subscriber addition
We are building in 2m gross subscribers incrementally for FY11E. Faster subscriber
acquisition, though positive in the longer term, will hit near-term profitability.
Irrational pricing by competition

Any further price wars and Any price war in the DTH industry could lead to deterioration of business economics
faster than expected – cost of subscriber acquisition as also the churn rate. However, we do not anticipate
customer acquisition are
key risks to our numbers
aggressive price wars as the market is now fairly well-populated and players
continue to incur huge losses. Also, unlike in telecom where there is no content cost,
DTH industry has a base content cost.
JUNE 2010 83
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Accounting Policy
Revenue Accounting
Of the Rs1590 received upfront at the time of customer activation,

Rs950 is accounted as rental revenue over a period of 3 years
Rs300 is accounted as upfront activation charge forming a part of subscription income
Rs225 is paid as dealer margin, corresponding cost is a part of Commission (selling and distribution cost)
Rs115 is accounted for VAT
Amortization
Hardware – Set top Box and dish cost is amortized over a period of five years
JUNE 2010 84
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JUNE 2010 85
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Net sales 7,375 10,853 13,280 17,549 22,492 EBITDA margin (%) (25.5) 7.8 13.8 26.1 32.9
% growth 79 47 22 32 28 EBIT margin (%) (56.6) (20.3) (15.6) (0.2) 10.1
Operating expenses 9,259 10,008 11,450 12,973 15,093 PAT margin (%) (66.4) (24.1) (19.6) (2.6) 8.5
EBITDA (1,884) 845 1,830 4,575 7,399 RoE (%) 87.5 204.5 (99.3) (42.6) 105.6
% change (11) (145) 116 150 62 RoCE (%) (141.6) (23.6) (18.9) (0.6) 46.4
Other income 14 229 75 60 80 Gearing (x) (1.8) 2.4 5.3 4.7 0.7
Net interest (727) (643) (602) (482) (220)
Depreciation 2,289 3,044 3,903 4,616 5,130 Valuations
Pre-tax profit (4,886) (2,613) (2,601) (463) 2,129
Deferred tax 7 (0) - - - Year to Mar 31 FY09 FY10 FY11E FY12E FY13E
Current tax - - - - 213 Reported EPS (Rs) (5.2) (2.5) (2.4) (0.4) 1.8
Profit after tax (4,893) (2,612) (2,601) (463) 1,916 Adj. EPS (Rs) (5.2) (2.5) (2.4) (0.4) 1.8
Net profit after PE (x) n/a n/a n/a n/a 25.0
non-recurring items (4,893) (2,612) (2,601) (463) 1,916 Price/ Book (x) (6.6) 12.2 36.3 56.0 17.3
% change 18.2 (46.6) (0.4) (82.2) (513.7) EV/ Net sales (x) 7.2 4.6 3.9 2.8 1.9
EV/ EBITDA (x) (28.3) 58.6 28.2 10.8 5.9
EV/ CE (x) 10.5 3.7 6.2 10.0 9.0
Balance sheet
As on Mar 31 (Rs m) FY09 FY10 FY11E FY12E FY13E
Shareholding pattern
Paid-up capital 948 1,065 1,065 1,065 1,065
Reserves & surplus (7,423) 2,855 254 (209) 1,707 Public &
others Foreign
Total shareholders' equity (6,475) 3,920 1,319 856 2,772
7.5% 17.0%
Total current liabilities 16,311 17,965 19,429 20,226 20,462
Institutions
Total debt 11,492 9,492 6,992 3,992 1,992 5.8%
Deferred tax liabilities 6 6 6 6 6
Other non-current liabilities 80 80 80 80 80
Total liabilities 27,889 27,543 26,506 24,304 22,540 Non-promoter
corporate
Total equity & liabilities 21,414 31,463 27,825 25,160 25,312
holding
Net fixed assets 13,345 14,506 14,367 12,195 8,558 4.9%
Investments 0 0 0 0 0 Promoters
Total current assets 8,069 16,957 13,459 12,966 16,755 64.8%
Working capital (8,242) (1,008) (5,970) (7,261) (3,708) As of March 2010

Total assets 21,414 31,463 27,826 25,160 25,312
Cash flow statement

Pre-tax profit (4,886) (2,613) (2,601) (463) 2,129
Depreciation 2,289 3,044 3,903 4,616 5,130
Chg in working capital (240) (163) 416 617 74
Total tax paid - - - - (213)
Operating cash inflow (2,837) 268 1,718 4,770 7,120
Capital expenditure (6,032) (4,205) (3,764) (2,444) (1,493)
Free cash flow (a+b) (8,870) (3,937) (2,046) 2,326 5,627
Debt raised/ (repaid) 6,047 (2,000) (2,500) (3,000) (2,000)
Capital raised/ (repaid) 3,051 13,006 0 0 0
Misc 67 0 (0) 0 -
Net chg in cash 294 7,070 (4,546) (674) 3,627
JUNE 2010 86
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Hathway Rs176
On a new ‘way’! Mkt Cap: Rs25.1bn; US$537.2m
Reason for report: Initiating coverage OUTPERFORMER

Hathway Cable (Hathway) is the largest MSO in India with ~15% share of the paying and 30%+
share of the digital subscriber base. With Concept (last mile consolidation), Capital (USD60m of
initial funding and Rs4.8bn from recent IPO) and Credibility (management bandwidth) in place,
we expect Hathway to capitalize on the ongoing digital boom in India and accrete its digital base
to 4.7m subscribers by FY13E. This, coupled with sustained customer additions (Rs2.4bn
earmarked for acquisitions), would help Hathway attain a 4.1m paying subscriber base (1.6m in
FY10) and 32% revenue CAGR to Rs17.1bn by FY13E. As Hathway retains the gains of improving
declarations in the initial round and higher-margin broadband business registers a strong 49%
CAGR over FY10-13E, we see operating profit growing by 5x and PAT of Rs2.1bn by FY13.
Initiating coverage with Outperformer and an 18-month price target of Rs274.
The right mix of strategy and funding…: In an industry fraught with inefficiencies (revenue
leakage, fragmentation and competition from DTH), Hathway has emerged as the largest MSO with
1.6m paying (including 1m digital) subscribers. Aggressive primary point acquisition (0.5m
subscribers) and timely funding from ChrysCap as also from the recent IPO put Hathway at the
forefront of the digital cable boom.
…to take subscriber base up to 4.1m by FY13E: With digitization now an imperative (4.7m digital
subscribers by FY13E) and as inorganic growth continues, we expect Hathway’s declared subscriber
base to grow to 4.1m by FY13. While initial monetization will be through upfront digitization
revenues and improved declaration levels, ARPU-led growth would only be gradual. This, coupled
with 1.4m broadband subscribers by FY13E, would drive 32% revenue CAGR for Hathway over
FY10-13E to Rs17.1bn.
Profitability in sight; value to follow: We believe the first round of monetization gains would
largely flow to MSOs – and reflect in their lower content cost to subscription revenues. This, coupled
with faster growth of the high-margin broadband business, would drive EBITDA margin expansion
from 17.1% to 37.1% by FY13E. In view of its sustained leadership, improving dynamics of the cable
business and visibility on profitability, we initiate coverage on Hathway with Outperformer and an
18-month price target of Rs274.

Hathway Cables and Datacom Sensex
Net sales (Rs m) 6,634 7,361 8,950 11,956 17,057

105
Adj. net profit (Rs m) (623) (580) 291 871 2,103
Shares in issue (m) 111 143 143 143 143 90
Adj. EPS (Rs) (5.6) (4.1) 2.0 6.1 14.7
% change n/a n/a n/a 199.2 141.4 75
PE (x) n/a n/a n/a n/a 11.9

60
Price/ Book (x) 5.5 3.2 3.0 2.5 1.9 24-Feb-10 24-Mar-10 24-Apr-10 24-May-10 24-Jun-10
EV/ EBITDA (x) 31.8 21.3 11.1 7.6 4.6
RoE (%) (18.1) (10.1) 3.6 9.5 18.3 Bloomberg: HATH IN 6m avg daily vol. (m): -
RoCE (%) (1.4) 0.6 7.4 14.8 26.3 1-yr High/ Low (Rs): 246/175 Free Float (%): 33.5

91-22-6622 2567 91-22-6622 2562 91-22-6622 2576
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INVESTMENT ARGUMENT
¾ Hathway, the largest cable operator in the country with 1.6m paying
subscribers, is well placed to make the most of the imminent digitization drive
¾ Survival in the toughest times on the back of the right strategy, adequate
funding and management bandwidth, reflects Hathway’s forte
¾ With the growth environment becoming more conducive (improving
declarations and picking up digital trend), Hathway is well placed to witness
2.5x growth in paying subscriber base by FY13E
¾ Hathway’s focus on primary point acquisitions and broadband penetration
would translate into a superior margin profile compared to peers
¾ With revenue CAGR pegged at 32% and EBITDA CAGR of 69% over the next
three years, we see value in Hathway
Hathway: The right ‘way’!

The Raheja Group forayed into India’s cable distribution landscape in 1995 through
Hathway. Over the last decade and a half, Hathway has survived the intense
competition in the industry to emerge as the largest cable distribution company in
India. With ~15% share of India’s fragmented paying subscriber base and ~30% share
of digital cable subscriber base (1m subscribers in FY10), Hathway is best placed to
capitalize on the theme of digitization unfolding in the country.
Survival to leadership…
Hathway, the only Among the earlier entrants in the cable industry – Hathway, WWIL and InCable,
incumbent to have
Hathway has displayed strong resilience by way of execution to become the largest
weathered competition
from DEN and Digicable cable distribution company in the country. This is evident in the fact that Hathway
has grown 2x faster than peers and now accounts for 1.2x aggregate revenues of the
two players. While the incumbent leader is now facing competition from new players
such as DEN and Digicable, we believe Hathway’s proven track record demonstrates
the inherent capabilities of a winner.
Exhibit 1: Hathway – far ahead of peers

Revenue CAGR over last 4yrs WWIL Hinduja Ventures Hathway
(Rs m)
(%)
36
40 8,000
30 6,000
20
20 15
4,000
10
2,000
0
WWIL Hinduja Ventures Hathway 0
FY07 FY10E
JUNE 2010 88
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Hathway has a paying subscriber base of 1.6m customers and total reach of ~8m
subscribers, making it the largest MSO in the country. Hathway garners revenues of
Rs7.3bn as against DEN, the second largest MSO with revenues of Rs4.5bn.
Exhibit 2: Leadership in terms of paying subscriber base… …reflecting in revenues

No. of paying subscribers Revenues
(m) (Rs bn)
1.6
1.6 8.0
7.3
1.2 1.1 1.1 6.0

4.5
0.8 0.7 4.0

3.1 3.0 2.7
0.5
0.4 2.0
0.0 0.0
Hathway DEN Networks Digicable WWIL InCable Hathway DEN Networks Digicable InCable WWIL
…with 3Cs at work – Concept, Capital and Credibility

Primary point acquisition, We see merit in Hathway’s execution ability to survive the tough business
timely funding and environment (under-declaration and aggressive acquisitions) to become the largest
management credibility –
right mix for Hathway
player. Hathway is a unique mix of the three Cs – Concept, Capital and Credibility.
While primary point acquisition has helped Hathway garner a higher declared
subscriber base, timely capital from promoters, NewsCorp and ChrysCapital has
supported inorganic growth. Further, we take comfort in the strong management
team and promoter backing in this business.
Exhibit 3: Hathway – a perfect mix of three Cs
Concept
Right strategy –
Last mile
consolidation
C’s
Credibility Capital
Management
Adequately funded
bandwidth
JUNE 2010 89
IDFC Securities
Pan India presence and last mile consolidation

Hathway has 1.6m Of the $4.8bn that the end consumer pays for cable viewing, 80% goes undeclared
subscribers pan India, and is retained by LCOs. With a view to get access to the under-reported revenues,
including 0.5m primary
points Hathway resorted to the primary point acquisition strategy. Primary point
acquisition gives access to the entire revenue base and thereby offers a shorter
payback period. While the upfront capital requirement per primary point acquisition
is substantially higher at Rs5,500-6,000 (Rs7,000 at peak), Hathway was adequately
funded for acquisitions. Hathway has now attained a direct customer base of 0.5m.
Exhibit 4: Primary point acquisition – two sides of the coin
Pros Cons
100% declaration day one Need for higher upfront capital
Access to the entire share of LCO - Risk of DTH – more pinch on the
margins ~50% profits
Higher ability to digitize Higher need to digitize
No scope for further improvement in

Pay back of just over 2 years
declaration levels
With regards the price of acquisition, we believe primary points have been valued at
25-30 months of ARPU. Assuming a locality of 10,000 subscribers at a value of
Rs4,500 per subscriber, Hathway’s payback period would be 2.9 years as against 3.7
years in case of secondary point acquisitions, even at an upfront outlay of 7x.
Exhibit 5: Primary point acquisition offers a shorter payback

Economics Secondary point Primary point
Customer acquisition cost - per sub 600 4,500
Though higher capital
Total subscription revenue collection (Rs m) 2.3 22.8
outlay, primary point
acquisition has a superior Carriage Revenues - Rs m 2.3 5.7
payback period Total Revenues 4.6 28.5
Content Cost and placement cost - per declared sub 165 200
Total content and placement cost (15% declaration) 2.38 4.8
Other operating costs as % of subscription revenues 25% 35%
Total Costs 3.0 12.8
Operating Profit / (Loss) 1.6 15.7
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While the focus remained on primary point acquisition, Hathway also acquired
secondary points through stake purchase in more than 21 MSOs over the last three
years. For instance, Hathway has acquired a 51% stake in the cable TV arm of the
Dainik Bhaskar Group – Bhaskar Multinet – having 0.12m subscribers. Other
acquisitions include a 50% stake in Gujarat Telelinks (the largest MSO in Gujarat with
0.25 subscribers) for an estimated consideration of Rs850m and two large MSOs in
Maharashtra. Secondary point acquisition strategy was to extend the reach and the
economics were justified by the healthy carriage fee revenues. Hathway currently has
0.8m paying secondary point subscribers.
Exhibit 6: Key secondary point acquisitions

Marathwada Cable Network Maharashtra
Hathway also did MSO Rajesh Multichannel Maharashtra
acquisitions in Gujarat Telelink Gujarat
Maharashtra, Gujarat, MP Bhaskar Multinet Madhya Pradesh
Exhibit 7: Paying subscriber base

Paying subscriber base
(m)
Secondary subscribers Primary subscribers
1.8
1.4 0.5
0.4 0.5
0.9
0.2
1.0 1.0 1.1
0.5
0.6
0.0
FY07 FY08 FY09 FY10
Presence across 123 Hathway is estimated to have deployed aggregate cash of ~Rs.4.3bn towards
cities with 71 analog acquisitions. Hathway now reaches 125 cities in India through its cable network (both
head-ends and 19 digital analog and digital). The company has a total reach of ~8m cable homes across India,
head-ends
supported by 71 analog head-ends, 19 digital head-ends and more than 15,000km of
HFC network. Hathway is the leading operator in several key cities such as Mumbai,
Delhi, Bangalore, Ahmedabad, Hyderabad, Jaipur, Indore, Bhopal, Baroda and Surat.
Hathway’s lead in metros imparts the ability to garner a strong stream of carriage
fees. Hathway’s current subscriber base stands at 1.6m paying subscribers including
0.5m primary points.
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Exhibit 8: Hathway – truly a national MSO
Pan India presence with

strong hold in Western and
Southern India
Source: Company
Early on digital roll-out – driving paying subscriber base

1m of the total 1.6m While primary point acquisitions helped consolidate the market and secondary point
subscribers are digital
acquisitions helped expand reach, Hathway has focused on seeding of STBs too. With
1m digital subscribers in FY10, Hathway has the largest digital cable subscriber base
in India. Of these 1m subscribers, 1/4th are in CAS-notified areas and the remaining
under voluntary digitization. While Hathway had net addition of ~60,000 digital
points in FY10, it lost a substantial customer base in Chennai to Sumangali Cable
Vision, part of Sun TV Group – South India’s largest media group. Primary point
acquisition and early digitization have helped Hathway scale up its paying
subscriber base to 1.6m in FY10 from 0.77m in FY07.
Broadband strengthens the business model

Fibre network in place with Broadband business is a major revenue contributor for cable operators
1m two-way enabled
internationally. In the US, 42m of the total 84m broadband subscribers are serviced
homes…
by cable operators. Given the better business economics, a broadband offering
strengthens the business model of a cable operator. Hathway was the first cable
operator in India to have started offering broadband services in 2001, parallel to
when cable operators started this service in the US. The biggest challenge in
broadband internet business is setting up the city level network, which Hathway
already has in place across 17 cities. Hathway has the HFC and optical fibre network
laid out with ~1m two-way enabled homes. Of this, Hathway offers broadband
services to 0.34m subscribers at an average ARPU of Rs320. Hathway accounts for
4.3% of total 7m broadband connections in India (predominantly commercial users)
and >50% share of the broadband market catered to by cable operators. Of the total
revenues of Rs7.3bn in FY10, Rs1.3bn accrued from broadband business.
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Exhibit 9: Broadband network across 17 cities
…across 17 cities
including Mumbai,
Bangalore and NCR…
Source: Company
Exhibit 10: Hathway’s broadband subscriber base

Broadband subscribers
(m) 0.34 0.34
0.35
0.30
0.23
0.25
…catering to 0.34m
subscribers 0.20
0.12
0.15
0.10
0.05
0.00
FY07 FY08 FY09 FY10
Source: Company, IDFC Securities Research
Timely and adequate capital

Multiple rounds of Availability of funds has been a key success factor for Hathway with other early
funding from strategic entrants like WWIL and InCable having struggled on the count. Since its inception in
and financial investors
has helped Hathway’s 1990s, Hathway has seen multiple rounds of funding and is the only cable company
rapid growth in India to have a strategic investor. In 2000, NewsCorp (one of the largest media
conglomerates globally with exposure to television distribution businesses like
DirecTV, BSkyB, etc) acquired a 26% stake in Hathway for US$75m. Incrementally, in
June 2007, ChrysCap invested Rs2.65bn for a 14.63% stake in Hathway. While the
initial round of capital infusion by NewsCorp helped Hathway stay afloat in the
cable industry and add reach as well as a broadband subscriber base, capital infused
by ChrysCap was utilized to acquire subscribers. Further funding came in from
Morgan Stanley, Kaup Capital and Arcadia in the form of convertible debentures. In
addition, Rs4.8bn has been raised recently through a public issue to fund digitization.
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Exhibit 11: Hathway’s multiple round of fund raise

Year Investor Amount invested Equity valuations
(Rs bn) (Rs bn)
2000 Newscorp 3.4 12.9
Rs13bn+ of funds raised in 2007 ChrysCapital 2.7 18.0
the past decade
2009 Morgan Stanley, Kaup Capital, Arcadia 2.4 Convertible debt
2010 IPO 4.8 34.3
Credibility – management bandwidth

Promoters have shown Hathway has been promoted by the Rajan Raheja Group, with interests in various
commitment to keep
businesses such as construction, cement, ceramic tiles, batteries, publishing, apparel
seeding the business
retailing, etc. Group companies include Exide Industries (market capitalization of
Rs102bn), H&R Johnson Tiles, Prism Cements (Rs27bn), RMC Readymix, Globus
Stores and Outlook. Unlike peers WWIL and InCable, promoters of Hathway have
demonstrated the commitment to stay invested and keep seeding the business, even
in the absence of economic returns for >15 years. K Jayraman, the MD and CEO, has
more than 25 years of experience across media, banking and manufacturing
businesses and has been heading Hathway since 1998. The management bandwidth
has been critical for Hathway’s survival and success in the Indian cable industry.
Exhibit 12: Key members of management team

Name Designation Experience
K Jayaraman MD & CEO 25 years including 10+ years in cable industry
Milind Karnik President – Finance and Company secretary 24 years of experience
D Mahadevan VP - Finance 20 years of experience
Jayant Changrani Sr. VP - Broadband 22 years of experience including telecom sector
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Hathway: Riding the digital wave

As the Indian cable industry is at the cusp of changeover on the back of digitization
(from 3.5m digital cable homes in 2009 to 16m by 2012 and 38m by 2015) and
consolidation, Hathway is expected to lead from the front. With Rs4.8bn of recent
fund raise, urgency to digitize to secure the subscriber base, 8m of cable reach and
on-ground infrastructure in place in the cable as well as broadband space, Hathway
is well poised to add 3.7m digital subscribers over FY10-13 (1m currently) and 1m+
broadband homes to its existing base of 0.34m. While digitization would be the focus,
Hathway would continue to spend on secondary and primary point acquisitions.
Hathway – highest ‘ability’ + need to digitize

Access to primary points Digitization, we believe, is not a choice but compulsion for cable operators to secure
means higher ability as their customer base from peer MSOs as well as DTH. The fear of losing subscribers to
well as greater urgency
to digitize DTH (which is already a 20m homes market) is more profound in primary point
economics. While access to last mile enhances Hathway’s ability to digitize, it is also
needed to secure its customer base. Digitization would help secure the end consumer
from switching to DTH and digitization of relevant mass (where Hathway reaches
through LCOs) would ensure that acquisition of the LCO by another MSO becomes
economically unviable. Realizing this urgency, Hathway has started aggressive roll-
out of its digital services. While it went slow on digitization in the past few months,
delivery of new STBs (at ~$30) by end-Q1FY11 will speed up the process of seeding
STBs. We expect Hathway to add 0.8m digital subscribers in FY11 and the
momentum to increase to 1.3m in FY12 and 1.6m in FY13. We see Hathway having a
4.7m digital subscriber base by FY13E (25% of the digital cable market). We believe
that faster the roll-out of DTH, more is the urgency to digitize the cable platform.
Exhibit 13: Acceleration in digital subscriber addition

Digital subscriber base
(m)
5.0 4.7
4.0
3.1
Expect 4.7x growth in digital 3.0
subscriber base
2.0 1.8
1.0 1.0
1.0 0.6
0.0
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Acquisitions to continue – Hathway a market consolidator

Hathway expected to spend As digitization picks up pace and smaller MSOs and LCOs feel the heat of DTH
Rs6bn towards acquiring… ramp-up, the industry is bound to witness consolidation – as seen globally. Not only
smaller players, but we also expect large national and regional MSOs to become
potential acquisition targets. Hathway (along with DEN Networks), being the largest
player and with a strong balance sheet, would be at the forefront of market
consolidation. Hathway would continue to take the inorganic route to growth, with
primary point acquisition remaining the core of the strategy. Against this backdrop of
lower competition, higher acceptance from LCOs and only a handful of funded
players, acquisition values have been trending down. We believe acquisition costs
have come down from the peak of Rs7,000/ primary point in 2008 to ~Rs4,000.
We expect Hathway to add 0.3m paying subscribers (incremental reach of 2.5m-3m)

under the secondary point acquisition route and 1.45m subscribers through primary
points. We expect Hathway to spend Rs6bn on acquisitions over the next three years
– substantially higher than the Rs2.4bn earmarked as part of the IPO proceeds.
Exhibit 14: Additional subscriber acquisitions

Subscriber acquisition
('000s)
Primary subscribers Secondary subscribers
1,000
180
…1.45m primary points and 750
0.3m secondary subscribers
500 90
750
250 500
30
200
0
FY11E FY12E FY13E
Broadband expansion – 1.4m by FY13E

Expect ~1m new broadband With just 7m broadband connections, India is way behind other economies (<10% of
connection over FY10-13 broadband connections in USA). Also, the share of cable industry in overall
broadband connections is likely to move up from 9% currently (50% in the US). While
there is simultaneous competition coming from WiMax and wireless broadband
services offered by telecom companies, we see increasing relevance of cable operators
in ramping up of broadband. We expect overall broadband connections in India to
scale up to 12m by 2012, of which cable operators would reach 2.3m subscribers.
Having laid out the fibre network with ~1m homes with two-way connectivity,
Hathway is well poised to scale up its broadband internet business. We expect
Hathway’s broadband subscriber base to increase from 0.3m now to 1.4m by FY13,
which would entail capex of Rs1.5bn (basic infrastructure already been laid). Of this,
Hathway has earmarked Rs830m towards broadband business from its IPO proceeds.
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Exhibit 15: Rapid scale-up of broadband industry in India … as also in Hathway’s broadband base
(m) Indian Broadband industry (m)
14.0 Broadband subscriber base
1.6
12.0 1.42
10.5 10.3
1.2
8.7
7.2 0.88
7.0 0.8
5.5
0.53
3.5 0.4 0.34 0.34
3.0
2.2
0.0 0.0
2006 2007 2008 2009 2010 2011 2012 FY09 FY10 FY11E FY12E FY13E
With Rs4.8bn of recent fund raise, Hathway funded for growth

If capital has been one of the key differentiators for Hathway in the past, it would
continue to be a driving force going forward as operators would need capital for
digitization and driving consolidation. We believe that Hathway would require
Rs9bn for subscriber acquisition and STB subsidy up to FY13. Recent proceeds from
Rs4.8bn of recent IPO the IPO would fund the initial two years’ capex with internal cash generation taking
would suffice fund the
over in the subsequent period. In February 2010, Hathway raised Rs4.8bn through an
future growth plans
IPO. Of this, as per objects of the issue, Rs2.4bn has been earmarked for customer
acquisition (can fund acquisition of ~0.45m primary points) and Rs1.56bn towards
funding for digitization (can fund 2m STB subsidies). In addition, Hathway proposes
to infuse funds to the tune of Rs830m in its broadband business, and the remaining
Rs967m towards debt repayment.
Exhibit 16: Objects of issue

Particulars (Rs m)
Acquisition of customers 2,436
Digital capex 1,564
Broadband capex 830
Debt repayment 967
Total 5,797
Source: Company RHP
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Monetization and Retention: Time to make profits

Expect 32% revenue CAGR As Hathway turns aggressive on digitization and acquisition, monetization in the
over FY10-13 with 44% business is expected to follow soon. While the initial round of monetization would be
CAGR in subscription
led by upfront fees, rentals and declaration levels, ARPU would increase only in the
revenues
long run. As we expect Hathway’s paying subscriber base to rise to 4.1m by FY13,
subscription based cable revenues would see 44% CAGR to Rs8.8bn. We expect 32%
CAGR in overall revenues to Rs17.1bn. As we expect MSOs to retain the first round
of monetization gains and in line with scale-up of the broadband business, we expect
Hathway’s operating margins to expand from 17% to 37% by FY13.
Declaration-led monetization – 4.1m paying homes by FY13E

More than for monetization, digitization is initially to secure the subscriber base. As
operators are focused on rapid STB installation to prevent the onslaught of digital
services offered by DTH, they need to protect the economics of LCOs, and hence are
unlikely to push for higher declaration in the initial phase. We expect declaration
improvement to happen gradually, depending upon the STBs installed in the area
and bargaining power of MSOs vis-à-vis LCOs. Also, for Hathway, which controls
the last mile to the tune of 0.5m subscribers, seeding of STBs would not make any
difference to the paying subscriber base. Hence, overall digital homes may be higher
than the paying homes for Hathway.
Hathway to push for However, for secondary points, we expect declaration levels to move up as
higher declarations only bargaining power shifts in favour of MSOs. We expect the bargaining power to shift
after achieving critical
mass of STB seeding in favour of MSOs once critical mass (15-20% of subscribers under a particular LCO)
is achieved for digitized customers, thereby leaving alignment with MSO as the only
option for the LCO. We expect paying subscribers from existing base to increase from
1.6m currently to 2.4m by FY13 and the overall paying subscriber base to rise to 4.4m
with the remaining 1.8m coming from new acquisitions.
Exhibit 17: Increasing declaration levels
Primary subscribers Secondary subscribers

(m)
4.5
3.6
Paying subscriber base 2.1
growth from 1.6m now to 2.7
4.1m by FY13E…
1.4
1.8
1.2
1.0 1.1 2.0
0.9
1.2
0.5 0.5 0.7
0.0
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ARPU – only marginal growth expected

…and just 5% CAGR in With DTH industry subsidizing heavily and average ARPU at <Rs200, we do not
ARPU… expect any major increase in cable ARPU in the next one year. Further, cable
operators are also keen to drive digitization. We expect ARPU growth to be only
gradual with 5% CAGR over FY10-13E. While we expect ARPU from secondary
points to grow to Rs180 by FY13, ARPU in primary points would increase to Rs215 a
month. Despite low ARPU growth, we expect 35% CAGR in overall basic
subscription revenues to Rs6.9bn by FY13. However, in the long run, we expect a
substantial increase in ARPU as new channels launch only on pay mode and digital
platform (>10 channels lined up for launch on the digital platform).
Exhibit 18: 35% CAGR in basic subscription revenues

(Rs bn)
Basic Subscription revenues
8.0
6.9
6.0
…would result in 35%
CAGR in basic
4.3
subscription revenues 4.0
3.2
2.8
2.4
2.0
0.0
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Initial monetization through upfront digitization fees and rentals

First round of monetization While declaration levels increase only gradually, the first round of monetization
would be through Rs750 of
upfront charge and Rs20-30 would be on the back of upfront activation fees charged at the time of STB
on monthly rentals installation. Hathway has been charging Rs1,000 per STB so far, but a new
procurement deal of cheaper STB purchase would enhance Hathway’s ability to
subsidize further and bring down the upfront fees to Rs750-800 to boost the pace of
digitization. This will flow down to revenues of Hathway and unlike in the past,
when Hathway was apportioning this amount over a 3-year period, it will now
charge this as revenues in year-one. We expect this stream to contribute Rs1.1bn to
Hathway’s overall revenues by FY13.
Also, while ARPU monetization would happen only gradually, operators are
pushing for additional rentals on STBs (Rs20-30 per subscriber per month). While we
do not see much success ahead on this front for cable operators, Hathway – with
higher primary point access – is better placed to charge rentals. We expect STB
rentals to contribute Rs600m to Hathway’s revenues by FY13.
Carriage revenues – a slow and steady rise

7% CAGR in carriage Hathway garnered carriage fees of Rs3bn in FY10. While incremental growth in
revenues over FY10-13E carriage revenues would taper, we believe this stream would sustain even post
digitization as broadcasters would pay to be on the basic package. Over a period of
time, the overall Rs15bn carriage industry would stagnate but will consolidate in the
hands of a few large MSOs. We expect 7% CAGR in Hathway’s carriage revenues to
Rs3.7bn by FY13.
Broadband internet – expect 49% CAGR over FY10-13

With Hathway’s broadband connection reach increasing from 0.3m currently to an
estimated 1.2m by FY13 and ARPU hovering at Rs325 per month, we expect this
business to contribute Rs3.9bn to overall revenues by FY13. This would imply a 45%
revenue CAGR over FY10-13E.
Exhibit 19: Broadband revenues – Rs4bn by FY13E

Broadband revenues
(Rs m) 4,185
4,200
3,150
49% CAGR in broadband 2,504
revenues over FY10-13E
2,100
1,478
1,271
1,047
1,050
0
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Overall revenues – expect 32% CAGR over FY10-13

We expect Hathway’s overall revenues to grow from Rs7.3bn in FY10 to Rs17.1bn by
FY13, with subscription revenues from cable operations witnessing 44% CAGR to
Rs8.8bn. In FY13, 55% of the revenues would accrue from cable subscription, 22%
from broadband and 21% from carriage fees. We see potential upside risk to our
advertising revenue estimate of Rs370m.
Exhibit 20: We expect 32% revenue CAGR over FY10-13 Segmental revenue contribution trend
(Rs m) (%)
Revenues Subscription fee Carriage fee STB rentals VAS Broadband Advertising
20,000 100
17,057 16 18 16 18 22
15,000 75
11,956
44 42 40 29 21
10,000 50
8,950
7,361
6,634
5,000 25
40 44
37 36 35
0 0
FY08 FY09 FY10 FY11E FY12E FY09 FY10 FY11E FY12E FY13E
MSOs to retain the first round of gains

As Hathway retains the While we expect a 35% CAGR in basic subscription revenues, we do not expect a
gains from better corresponding increase in content cost, as we expect Hathway to retain a large
declaration, content cost
growth slower at 23% portion of the declaration-led gains in the first round. Currently, content cost for
Hathway is at Rs148 per paying subscriber, which is substantially higher than Dish
TV’s Rs75-80. As declaration levels move up, we do not expect a proportionate
increase in content cost (23% CAGR over FY10-13E). Thereby, we expect gross
margin on subscription revenues to improve from a negative 6% to 20% by FY13.
Exhibit 21: Content cost savings to reflect in profitability

Content Cost (Rs m - LHS) % of subscription revenues (RHS) Content cost per paying subscriber
6,000 120.0
160
4,500 105.0
120
3,000 90.0
80
1,500 75.0 40
0 60.0 0
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A highly profitable broadband business

Hathway’s profitability would also improve on the back of rapid growth in
broadband business. As against operating margin of 30% in the cable business,
broadband business operates at 45-50% margins. With 25% of revenues coming from
broadband, it would add an incremental 4% to Hathway’s overall profitability.
Exhibit 22: Scale benefits in broadband business

250 customers 500 customers
Cost of equipment 1,100 1,100
City network 1,500 1,000
Drop it capex 500 500
Total capex 3,100 2,600
Upfront charged 500 500
Net subsidy 2,600 2,100
Total subsidy 650,000 1,050,000
45-55% margins in
broadband business
ARPU 300 300
Broadband revenues 900,000 1,800,000
Bandwidth cost (%) 20% 20%

Bandwidth cost 180,000 360,000
Other cost (%) 35% 25%

Other cost 315,000 450,000
EBITDA 405,000 990,000

EBITDA margin (%) 45 55
Sharp improvement in operating margins ahead

Lower content cost and With gross margins in subscription revenues improving to $25, Rs1.3bn of revenues
faster growth of
broadband to drive coming from STB rentals and Rs3.8bn from carriage fees – which do not have any
margin improvement corresponding costs – and faster growth of broadband business, we expect operating
margin of Hathway to increase from 17% currently to 37% by FY13. We expect
EBITDA to increase from Rs1.3bn in FY10 to Rs6.3bn by FY13.
Exhibit 23: Multifold increase in operating profits

EBITDA (Rs m - LHS) EBITDA margins (% - RHS)
8,000 40.0
6,000 30.0
4,000 20.0
2,000 10.0
0 0.0
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With a marked improvement in operational numbers and stable interest cost (given
the funded balance sheet), we expect overall PAT to grow to Rs2.1bn by FY13 from a
loss of Rs705m in FY10. As growth (STBs and acquisitions) will be funded through
the balance sheet, depreciation will go up from Rs1.25bn in FY10 to Rs2.4bn in FY13E.
Exhibit 24: Cable business finally turning profitable

(Rs m)
PAT
2,500
1,800
Business turning
profitable in FY11 – 1,100
Rs2.1bn of PAT by FY13E 2,103
400 871
(623) (580) 291
-300
-1,000
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Valuations & View

Hathway, India’s largest MSO, is best placed to capitalize upon the emerging cable
distribution opportunity. With profitability finally in sight, digitization a reality and
Hathway’s ability of being a consolidator, we initiate coverage on the stock with
Outperformer.
We have valued Hathway’s business on the basis of EV/ subscriber and arrive at an
EV/ subscriber target on the basis of per subscriber economics. While attaching 32
months of ARPU to arrive at EV/ primary point subscriber, secondary point
subscriber has been valued at 29 months ARPU and broadband subscriber at 36
months ARPU. Using this methodology, we have arrived at a fair price of Rs274 per
share for Hathway.
Exhibit 25: Fair price of Rs274

Secondary pt Primary pt Broadband Total
Number of subs in FY13E (m) 2.1 2.0 1.1
ARPU (Rs / month) 325 300 315
Months of ARPU 29 32 36
Outperformer rating with EV / subscriber (Rs) 9,440 9,530 11,474
an 18-month price target
Enterprise value (Rs m) 19,823 18,689 16,265 54,777
of Rs274
Less: Debt (Rs m) 2,500
Equity Value (Rs m) 52,277
Number of shares (m) 142.9
Per share value (Rs) in FY13E 366
Minority stake (%) 25
Per share value (Rs) 274
Key Risks
While Hathway is well positioned vis-à-vis peers and we like its overall business
model, the following concerns exist:
Primary points – risk of churn

While we see merit in Hathway’s strategy of primary point acquisitions, risk of losing
its primary subscribers to DTH players is a threat. Every subscriber lost under a
primary point would mean loss at the bottom-line, as the cost structure would
remain unchanged. With DTH proliferation happening at a rapid pace, this risk can
subside only on the back of faster digitization.
Entry of new players

While competition from existing MSOs is receding as players focus on digitization
rather than customer acquisition, entry of new funded players could pose a risk. We
do not expect any major new entrant until a large funded corporate acquires an
existing national MSO or FDI opens up in the sector.
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Net sales 6,634 7,361 8,950 11,956 17,057 EBITDA margin (%) 12.7 17.8 28.1 31.8 37.1
% growth 60 11 22 34 43 EBIT margin (%) (1.8) 0.9 10.1 15.7 23.1
Operating expenses 5,789 6,049 6,435 8,151 10,737 PAT margin (%) (9.4) (7.9) 3.3 7.3 12.3
EBITDA 845 1,312 2,515 3,805 6,320 RoE (%) (18.1) (10.1) 3.6 9.5 18.3
% change (4,183) 55 92 51 66 RoCE (%) (1.4) 0.6 7.4 14.8 26.3
Other income 98 15 135 149 163 Gearing (x) 1.9 0.5 0.4 0.3 0.3
Net interest (431) (550) (419) (364) (364)
Depreciation 961 1,245 1,608 1,930 2,381 Valuations
Pre-tax profit (448) (468) 623 1,659 3,738
Deferred tax 29 - - - - Year to Mar 31 FY09 FY10 FY11E FY12E FY13E
Current tax 88 84 93 415 934 Reported EPS (Rs) (5.6) (4.1) 2.0 6.1 14.7
Profit after tax (565) (552) 529 1,244 2,803 Adj. EPS (Rs) (5.6) (4.1) 2.0 6.1 14.7
Preference dividend - - - - - PE (x) n/a n/a 86.1 28.8 11.9
Minorities (58) (28) (238) (373) (701) Price/ Book (x) 5.5 3.2 3.0 2.5 1.9
Net profit after EV/ Net sales (x) 4.0 3.8 3.1 2.4 1.7
non-recurring items (623) (580) 291 871 2,103 EV/ EBITDA (x) 31.8 21.3 11.1 7.6 4.6
% change (4.7) (7.0) (150.2) 199.2 141.4 EV/ CE (x) 2.6 2.3 2.3 2.2 1.8
Balance sheet Shareholding pattern

As on Mar 31 (Rs m) FY09 FY10 FY11E FY12E FY13E Public &
others
Paid-up capital 1,114 1,429 1,429 1,429 1,571
1.8% Foreign
Reserves & surplus 1,475 5,495 5,786 6,657 8,760 19.9%
Total shareholders' equity 3,541 7,903 8,494 9,893 13,060
Total current liabilities 3,245 1,693 1,582 2,029 2,358 Institutions
Total debt 6,813 4,313 3,313 3,313 3,313 9.7%
Deferred tax liabilities 175 175 175 175 175
Total liabilities 10,234 6,182 5,070 5,517 5,847 Non-promoter
Total equity & liabilities 13,775 14,085 13,565 15,410 18,907 corporate
Promoters
Net fixed assets 9,483 8,666 9,358 11,719 14,137 holding
66.5%
Investments 210 210 210 210 210 2.1%
Total current assets 3,952 5,079 3,867 3,352 4,430 As of March 2010
Deferred tax assets 130 130 130 130 130
Working capital 706 3,386 2,285 1,323 2,072
Total assets 13,775 14,085 13,565 15,410 18,907
Cash flow statement

Pre-tax profit (448) (468) 623 1,659 3,738
Depreciation 961 1,245 1,608 1,930 2,381
Chg in Working capital (841) (690) 338 575 (140)
Total tax paid (88) (84) (93) (415) (934)
Operating cash Inflow (417) 3 2,476 3,750 5,045
Capital expenditure (4,149) (428) (2,300) (4,290) (4,799)
Free cash flow (a+b) (4,565) (425) 175 (541) 245
Chg in investments 6 - - - -
Debt raised/(repaid) 3,999 (2,500) (1,000) - -
Capital raised/(repaid) (41) 4,915 - - 143
Misc 777 - 62 154 221
Net chg in cash 176 1,990 (763) (386) 609
JUNE 2010 106

IDFC Securities
Airtel Digital NOT LISTED
Scaling up!
Airtel Digital– part of India’s largest telecom company, Bharti Airtel – has been India’s fastest growing DTH player
with a base of 2.8m net subscribers as of March 2010. Accounting for 25% of the incremental market (Airtel Digital
adds 0.2m subscribers per month), Airtel Digital currently has 12% share of the market. Positioned as relatively
premium services, and with aggressive advertising spends and subscriber acquisition cost at 12-15 months, Airtel
Digital is expected to touch 5m subscribers by FY11 and see operational breakeven as it garners 5.5m subscribers.
Bharti Airtel has so far invested US$425m in the DTH business (3% of its total capital employed) and incurred losses
to the tune of USD250m in FY10. Airtel Digital is likely to be one of the leading players in the DTH space, more so
with its premium positioning. Also, being part of a telecom operator and offering broadband services, Airtel Digital
would be well poised to offer all the three services (synthetic triple play) – television, internet and telephony.
Part of the largest telecom company in India

Bharti Airtel, the flagship company of Bharti Group, is the largest telecom operator in the country and third largest
wireless operator in the world with 130m subscribers and presence in all 22 circles. Bharti Airtel has total capital
employed of USD14bn and market capitalization of over US$22bn. Extending its presence in wireless technology, Bharti
Airtel entered the DTH business in October 2008, a couple of months after the launch of Reliance ADAG’s Big TV.
Deep pockets, aggressive branding and advertising and distribution bandwidth…

Given the deep pockets of the group, Airtel Digital has the wherewithal to become a formidable player in the DTH space.
Airtel Digital has been among the most aggressive advertisers in the DTH space and has roped in actors and cricketers
like Saif Ali Khan, Kareena Kapoor, Gautam Gambhir, etc, besides being associated with major sporting events like IPL.
With strong financial backing of the group, Airtel Digital has invested >US$420m so far in the DTH business and is
spending ~Rs2bn annually on advertising. However, unlike our earlier belief that Airtel Digital – along with Big TV –
would play an aggressive pricing game, Bharti Airtel has priced its offerings in line with peers and has a customer
acquisition cost of Rs2,500-3000 (12-15 months of ARPU).
Besides aggressive spends on advertising and branding, Airtel Digital benefits from the vast distribution of its telecom
operations that have a reach of 1.2m retail outlets. The DTH business piggy-rides upon the wide distribution reach of the
telecom business.
…resulting in 25% share of the incremental market

Driven by aggressive brand spending and deep distribution bandwidth, Airtel Digital has scaled its base up to 2.8m
subscribers as of March 2010 and accounts for 12% of the market. This makes it the fourth largest DTH player after Dish
TV, Tata Sky and Sun Direct. However, Airtel Digital is the fastest growing DTH player in the industry – adding 25% of
the total 2m subscribers added quarterly by the industry. Since the launch of Airtel Digital, it has garnered 2.8x the net
subscriber addition done by the industry leader – Dish TV. We expect Airtel Digital to add 2.2m subscribers in FY11 to
touch a 5m subscriber base. Being a late entrant in the space, Airtel Digital’s churn rate remains low at 0.5% per month.
While Airtel Digital is estimated to have done revenues of US$45m in FY10, it is expected to scale up to $150m in FY11.
JUNE 2010 107

IDFC Securities
Exhibit 1: Bharti – market share

Number of subs (m)
Videocon
0.1%
Sun Direct
Dish TV
24%
30%
Big TV
9%
Airtel Digital
Tata Sky
12%
25%
Better ARPU – led by premium positioning

Like Tata Sky, Airtel Digital has positioned itself in the premium segment and though the basic packages entail pricing
similar to competition, it enjoys better ARPU over Dish TV, Big TV and Sun Direct. Airtel currently has ARPU of Rs190-
200 per month, next only to Tata Sky. While Airtel is now marketing its value-added STB with DVR facilities and also
HDTV services, ARPU growth is expected to be subdued as Airtel would be in an aggressive subscriber acquisition
mode. Also, VAS services would remain an insignificant portion of the revenues.
Exhibit 2: ARPUs
(ARPU / month)
250
200
150
100
50
0
Sun TV Dish TV Big TV Bharti Airtel Tata Sky
JUNE 2010 108

IDFC Securities
Exhibit 3: VAS services
Operational break-even at 5.5m subscribers

With over 2m subscribers to be added annually and customer acquisition cost of Rs2,500-3,000, Airtel Digital is expected
to continue incurring losses at the operating level in FY11 too. In FY10, Airtel is expected to have incurred USD250m of
losses in FY10. However, given the fact that ~60% of the costs in the initial period are fixed in nature, operating leverage
is expected to set in once Airtel garners a base of 5.5m subscribers (Dish TV reported operating profits once its base
crossed 5m subscribers). For Airtel Digital, we believe FY13 would be the first full year of operating profits.
Potential to leverage presence in telecom and broadband

While deep pockets and ability to stay invested make Airtel Digital a force to reckon with in the DTH space, we believe
the ability to bundle voice and data services as well would be the key differentiator in the long run and platform of
competition with digital cable. Bharti Airtel has 130m telephony subscribers in India and a broadband subscriber base of
over 1.2m. It has broadband infrastructure laid out across 89 cities in India. Ability to offer all the three services could be
a key differentiator in the long run.
JUNE 2010 109

IDFC Securities
Sun Direct NOT LISTED
Shining!
Sun Direct, promoted by Sun Networks – South India’s largest media house – and funded by Astro Malaysia, has
achieved a commendable feat of clocking 4.3m net subscribers in just two years of operations. A strong brand (Sun),
an invested book of USD600m and aggressive pricing strategy have helped Sun Direct become the third largest DTH
player in India with a market share of 24%. Sun Direct has incrementally extended its presence across India and
continues to play an aggressive price game. Sun Direct has also recently launched its HDTV services. Sun Direct is
estimated to be incurring Rs6bn of annual losses.
A strong parent in the largest South India-based media house

Sun Direct is a part of the Sun Group, which is the largest media conglomerate in South India with a 20-channel
broadcast business under Sun TV, ~1m paying subscribers under Sumangali Cable Vision and print business under the
brand Dinakaran. Sun Direct is an 80:20 JV between the Maran family and Astro Malaysia (which has DTH business in
Malaysia). While Astro Malaysia brings in the expertise of running DTH operations, Sun Group has a strong brand
franchise in South India. With US$600m invested so far and by leveraging Sun’s equity, Sun Direct was the third player
(services launched in early 2008) to enter the DTH space after Dish TV and Tata Sky.
Exhibit 4: Group structure
Sun Group
Broadcasting Cable distribution DTH Print
Sun TV Network Sumangali Sun Direct Dinakaran
Third largest DTH player…

Within two years of operations, Sun Direct has added as many subscribers as Tata Sky has in the past 3.5 years and 50%
higher subscribers than that added by Dish TV since the launch of Sun Direct. With a base of 4.3m net subscribers, Sun
Direct has emerged as the third largest DTH operator in India in terms of number of subscribers and continues to account
for 20% of the incremental market.
…on the back of Southern dominance and aggressive customer acquisition

While dominance in South India have underpinned growth in subscriber base for Sun Direct, the existing broadcast
vertical has been leveraged to extend aggressive subsidization on packages. With South India being a regional
broadcasting industry and Sun TV Network’s the only pay channels, Sun Direct benefits from optimal content costs.
Thus, Sun Direct aggressively marketed an annual package of Rs99 per subscription, while offering similar subsidies on
STBs as by other DTH players. Thus, Sun Direct has the lowest ARPU in the Indian DTH industry, estimated to be at
Rs75. Sun Direct has backed its aggressive pricing strategy with ample advertising support.
JUNE 2010 110

IDFC Securities
Moving beyond South and launch of HDTV

In the first year of operations, Sun Direct launched its DTH services only in South India. Subsequently, in early 2009,
services were launched in other key markets such as Maharashtra (mainly Mumbai), Punjab, Himachal Pradesh, Haryana
and Jammu & Kashmir. Though South forms a substantial portion of Sun Direct’s subscriber base, it has gained a pan-
India footprint. However, we believe Sun Direct will have to change its pricing strategy in other parts of India. With a
view to up its offering in rest of India, Sun Direct has launched HDTV services. With ~1m of the TV sets sold annually
being HDTV-compatible, we see a faster ramp up of HDTV. Sun Direct has been the first DTH player to show IPL
matches in the high definition format in a tie-up with Set Max for the same.
JUNE 2010 111

IDFC Securities
Tata Sky NOT LISTED
High on value!
Tata Sky, a joint venture between the Tata Group and NewsCorp, has by far created the highest visibility in the DTH
space through its superior brand positioning. While Tata is among the most trusted brands in India, NewsCorp is the
largest DTH player globally with presence in USA (DirecTV), UK (BSkyB), Japan (Sky Perfect), etc. With an estimated
net subscriber base of 4.5m as on December 2009, Tata Sky has a 25% share of the DTH industry. Importantly, Tata
Sky has created a differentiated positioning in the market on the back of its premium value-added offering. While
Tata Sky is the second largest player in terms of number of subscribers, it is arguably the largest player in terms of
revenue base with the highest ARPU in the industry. Tata Sky is estimated to have infused capital to the tune of
US$700m till date and an annual bleed of Rs9bn.
Marriage of two strong brands – Tata and Sky

Tata Sky was incorporated as an 80:20 joint venture between the Tata Group and NewsCorp. It launched DTH services in
2006 and uses the Sky brand owned by NewsCorp. Not only do these two companies have the financial wherewithal to
fund the capital-intensive business (cumulative market capitalization of >USD75bn), they are also two of the strongest
brands. While Tata is considered to be a trustworthy brand in India, NewsCorp is leader in DTH space globally with
DirecTV in USA and Latin America (21m subscribers), BSKYB in UK (9m), Sky Perfect in Japan, etc. In 2008, the
Singapore-based Temasek Holdings acquired a 10% stake in the company, thereby diluting Tata Group’s stake to 70%.
Tata Sky is estimated to have infused capital to the tune of USD700m in the business and has an annual bleed of Rs9bn.
Exhibit 1: Company structure
Tata Sky
70% 20% 10%
Tata Group Star Group Temasek
Sky brand name
Tata Sky – ‘valuable’ subscribers!

Tata Sky has a 25% share in the Indian DTH industry with an estimated base of ~4.5m net and >5m gross subscribers.
While rest of the industry was playing the pricing game, Tata Sky has remained focused on creating premium positioning
by promoting its product on the back of superior viewing quality. Also, while Dish TV – the then-incumbent – was
focusing on cable-dark area for growth, Tata Sky ramped up its operations in metros. Also, ahead of the competition,
Tata Sky launched its VAS-enabled service – Tata Sky+. Though Sky+ has only 0.1m subscribers, it has helped Tata Sky
enhance its product positioning. As a result of these efforts, Tata Sky has the highest ARPU of Rs220 in the industry
(substantially higher than ARPU of Rs135 for industry leader). While the subsidy element on STBs would be similar to
competition, a premium positioning has helped Tata Sky attract customers not as price sensitive in the face of quality.
JUNE 2010 112

IDFC Securities
Exhibit 2: VAS services
Largest in terms of revenues

While Tata Sky may be the second largest player in terms of subscribers, it is the largest in terms of revenues. Tata Sky
ended FY09 with revenues of Rs8bn – Rs6.2bn in subscription revenues and Rs1.8bn from sale of STBs. We estimate
revenues of Rs11bn for Tata Sky in FY10 with 20% of these from sale of STBs. Tata Sky is expected to have incurred losses
of Rs9bn in FY10 and Rs11bn in FY09. We believe that losses for Tata Sky are higher vis-à-vis competition, given the
accounting of STB installation. While Dish TV is giving STBs on rentals and accounting for rentals over a period of three
years and depreciating the STBs over five years, Tata Sky is selling STBs upfront. Of the Rs11bn of losses incurred by Tata
Sky in FY09, Rs4.8bn would be on account of upfront subsidy on STBs.
JUNE 2010 113

IDFC Securities
Digicable NOT LISTED
Funding is critical for growth
Digicable, incorporated in 2007, has been set up by industry veteran Jagjit Singh Kolhi, credited with setting up of the
country’s leading MSOs such as Hathway, Incable and WWIL. Within three years, Digicable has emerged as the third-
largest national MSO with 1.2m paying subscribers and 0.5m digital subscribers. Backed by adequate funding from
Ashmore – a London-based private equity fund, Digicable adopted an aggressive secondary point acquisition strategy
in order to gather critical mass in the fragmented Indian cable industry. With capital infusion of US$140m till date,
Digicable has an estimated reach of >8m subscribers, of which 1.2m are paying and 0.5m digital. With dominance in
Punjab, Digicable has relevant presence in markets like Rajasthan, Madhya Pradesh, Andhra Pradesh, Maharashtra,
etc. Digicable is estimated to have revenues of Rs3bn+ and net loss of ~Rs1bn. While Digicable has demonstrated the
aggression in the first round, funding – critical for digitization of the customer base – emerges as a key monitorable.
Company background
Jagjit Singh Kohli is a veteran in India’s cable distribution space. He has earlier set up and managed MSOs such as
Incable, Hathway and WWIL. In 2007, Jagjit Singh left the control of WWIL (as CEO) and created his own company
Digicable. Further, Ashmore (a US$32bn London-based private equity fund) infused capital into Digicable. Till date,
Ashmore is believed to have invested ~USD140m in Digicable.
Among the top three MSOs…

Funding support of Ashmore and Jagjit Singh Kohli’s know-how about the on-ground dynamics of the cable/ distribution
business have enabled Digicable to go on an aggressive secondary point acquisition spree. Within three years, Digicable
has acquired more than 60 MSOs and a reach of 8m subscribers. Of this, Digicable has 1.2m paying and 0.5m digital
subscribers. While Digicable has more paying subscribers than DEN, it has revenues of just over Rs3bn as against DEN’s
cable business revenues of >Rs4bn. Besides lower revenues, our other concern on Digicable pertains to the aggressive
pricing of acquisition – Digicable is expected to have spent 1.5x that invested by DEN. Digicable also has a base of 0.1m
broadband subscribers.
…with diversified geographical presence

While Digicable started its operations in Punjab and retains dominance in the state with >65% market share, it is also a
relevant player in Rajasthan, Madhya Pradesh, Chhattisgarh, Maharashtra, Andhra Pradesh and West Bengal and has
operations in Uttar Pradesh, Delhi, Haryana and Uttarakhand. Digicable has established infrastructure in these states
with 73 analog and ~30 digital head-ends (more than any other player in the cable space) and has over 28,000km of fibre
network in place.
JUNE 2010 114

IDFC Securities
Exhibit 1: Geographical presence of Digicable
Dominant
Significant
Marginal
No Presence
Capital constraints; a potential buy-out target

Till date, Digicable is estimated to have infused capital to the tune of USD140m, funded by Ashmore. While Digicable has
acquired critical mass, Digicable needs additional capital to digitize its customer base to protect it from poaching. With
operational recovery based on the pace of digitization which, in turn, requires additional capital, we believe Digicable is
caught in a vicious cycle. While Digicable has created a strong business model with reach of 8m subscribers, inability to
fund losses (and thereby run the business) makes Digicable a potential acquisition target.
JUNE 2010 115

IDFC Securities
You Telecom NOT LISTED
Betting on broadband
You Telecom, incorporated in 2001, started operations as a broadband service provider. The company forayed into the
cable distribution space three years ago by acquiring a strategic interest in its associate company – Digital
Outsourcing Pvt Ltd (DOPL). DOPL has an estimated reach of 1.5m secondary (0.15m paying) and 8,000 primary
subscribers. Further, 10% (0.15m) of DOPL’s 1.5m+ subscribers are on the digital platform. Incrementally, You
Telecom has a 32% share of the internet broadband market through cable operators in India with a subscriber base of
0.2m. While the first round of funding in You Tube was done by Citigroup Ventures (CVC), it is now looking at
Rs3.2bn of a fund-raise through the IPO route (DRHP filed). Of the proceeds, Rs1.6bn are proposed to be deployed
for broadband services and Rs980m for cable distribution business.
Company background
You Telecom started operations as a provider of high-speed broadband internet services. While broadband internet
solutions have been the company’s mainstay, You Telecom forayed into the cable distribution industry in 2007 by
acquiring a strategic investment in DOPL – its associate company. You Telecom holds a 36.24% stake in DOPL and
operates cable TV services across 10 cities in the country. In Mumbai, it has presence in cable business through a JV with
Scod18 (formed by 18 different LCOs coming together). You Telecom has been funded by Citigroup Venture Capital
(CVC) to the tune of USD60m.
Cable TV services – small in scale (0.1m digital homes)

You Telecom, through DOPL, currently provides analog cable services across 10 cities in India including Mumbai/ Navi
Mumbai, Bangalore, Vizag and Nagpur, where the service overlaps with the company’s cable broadband services
footprint and network infrastructure. Further, DOPL – like peers – has adopted the acquisition strategy to garner
customers. Over the last three years, DOPL has acquired a strategic interest in five MSOs as also last mile connectivity in
certain cities. DOPL has an estimated reach of 1.5m secondary and 8,000 primary subscribers, of which 0.15m are paying.
You telecom has taken a focused approach in the cable business by going slow on acquisition and first digitizing the
existing base before adding new subscribers. You Telecom has so far seeded STBs in 0.15m homes. The company operates
its digital cable television services under various brands, including “YOU SCOD18 Digivision” and “YOU Digivision”. In
FY09, DOPL made net losses to the tune of Rs481m. However, losses appear to be coming down and were at Rs171m for
H1FY10.
Broadband services – the core

You Telecom provides high-speed broadband cable internet services to residential subscribers, SMEs and large corporate
customers across 11 cities. As of September 2009, You Telecom has a residential broadband internet service subscriber
base of ~0.2m subscribers. Further, the network of You Telecom reaches ~1.5m homes, and the company’s residential
broadband internet service subscriber base represents an estimated penetration of 13.4% of two-way broadband-enabled
homes. As per TRAI reports, You Telecom is estimated to have ~32% share of the cable broadband internet market in
India. While margins in the business are currently low at 25%, they would expand exponentially as broadband achieves
scale and basic infrastructure cost gets distributed across a larger customer base.
JUNE 2010 116

IDFC Securities
Exhibit 1: Geographical presence of broadband services
Capital-raise on the anvil

In order to further scale up its business, You Telecom is looking to raise Rs3.2bn via the primary market and has filed a
DRHP to that effect. The proposed objects of the issue include allocation of Rs1.57bn towards the broadband segment and
an aggregate investment of Rs980m for the cable services business.
Exhibit 2: Objects of the issue

Particulars (Rs m)
Broadband capex 1573.9
Increasing stake in DOPL 128.27
Investment in DOPL 850
Working capital 171
Debt repayment 48.4
Total 2771.57
JUNE 2010 117

IDFC Securities
WWIL UNRATED
Not a ‘hit’!
WWIL, a Zee group company, led the Indian cable industry until 2006 with its overall reach of 6.7m subscribers.
However, intense competition over the last three years (from players such as DEN and Hathway) as also the group’s
focus on the DTH platform proved detrimental and WWIL lost its leadership position. WWIL is estimated to have a
paying subscriber base of 0.7m and revenues of Rs2.7bn in FY10 (same as that in FY08). Further, WWIL was betting
big on HITS in order to provide a differentiated offering; however, lack of regulatory framework has impelled WWIL
to suspend HITS operations. The recent fund raise of Rs4.5bn, we believe, has been utilized towards funding of loss
(Rs1.7bn of net loss in FY10) and repayment of debt to group companies.
Dented by competition…
WWIL was formed in March 2006 by the de-merger of the cable business of Zee Enterprises (Siticable). Through its brand
Siticable, WWIL has been the pioneer in the cable distribution space. At the time of demerger, WWIL claimed a reach of
6.7m (across 107 cities) and paying subscriber base of ~1m. While WWIL went in for acquisitions in Lucknow, Agra,
Indore, Nagpur, etc, competition has managed to eat into its subscriber base. Though WWIL continues to be a strong
player in the East, it has lost its clout in western and northern parts of India due to competition from DEN Networks and
Digicable. This reflects in a drop in the paying subscriber base to ~0.7m, revenues remaining flat at Rs2.7bn and net loss
of Rs1.7bn in FY10. We estimate WWIL’s digital subscriber base at ~0.2m.
…on the back of inadequate capital and promoter’s lack of focus

While the element of competition has weighed heavy on WWIL, we believe the reasons for subdued momentum in
digitization include lack of capital and limited promoter focus. Also, WWIL has been hit by a frequent change in the
management team (two CEOs lost to competition in the past five years). With digitization being voluntary (given the
failure of CAS), subsidization became a pre-requisite. Thus, while competition was able to seed in capital for growth, lack
of capital led to slower pace of digitization for WWIL. In terms of promoter commitment, our sense is that focus of
promoter group has been more on the group’s DTH venture – Dish TV (net base of 5.7m subscribers). While WWIL has
recently raised Rs4.5bn by way of a rights issue, we believe the capital would be primarily used to repay group company
debt.
HITS – the big bet…not a ‘hit’!

In order to provide a differentiated offering, WWIL took an aggressive step towards adoption of HITS (technology. The
technology aided in providing a pseudo-DTH offering, wherein LCOs (and not customers) receive signals through
satellite which can then be remitted to households via cable. This was done with a view to increase reach without having
to set up digital network in multiple cities. WWIL has launched HITS in Lucknow and Bangalore. The license for HITS is
with Dish TV (a promoter group company) and WWIL has signed an agreement with Dish TV to use the HITS services.
However, lack of regulatory guidelines on pricing, content, etc has prompted WWIL to exit from the HITS platform.
WWIL is estimated to have funded losses to the tune of Rs500m towards HITS till date.
We believe that unless WWIL ups its ante on digitization, it would fall prey to increasing
consolidation in the space and the onslaught of DTH.
JUNE 2010 118

IDFC Securities
Reliance Big TV NOT LISTED
Yet to gather scale
Reliance Big TV, part of the Reliance ADAG Group, forayed into the Indian DTH industry in 2008 and is part of
Reliance Communications. Reliance Big TV is estimated to have deployed capital to the tune of $400m and a reach of
~2m subscribers. While Reliance Big TV was expected to play an aggressive pricing game, the way it did in the
telecom space, Big TV’s pricing has been in line with the industry. While current ARPU of Big TV is estimated at
~Rs160 per month, the focus is now on the premium segment through launch of HDTV services and higher-end STBs.
Big TV is estimated to have incurred $125m-150m of losses in FY10. While Big TV’s growth has so far been below
expectations (Bharti, having launched services two months after Big TV, has over 2.5m subscribers). Reliance ADAG’s
presence in telecom, broadband and media business, we believe, could be leveraged to strengthen DTH operations.
Strong corporate backing…

Reliance BIG TV is a part of Reliance ADAG, which has business operations across infrastructure, telecom, power, media,
financial services, etc. Big TV is a subsidiary of Reliance Communications, the second largest telecom company in India
with 105m subscribers. Big TV forayed into the DTH business in 2008 and launched its services on the MPEG4
technology. Reliance Communications is expected to have infused ~$400m into the DTH business since inception and
reach of 1.6m subscribers (<10% market share). With a strong balance sheet and distribution width of the telecom
business, Big TV was anticipated to play an aggressive price game to garner a higher share of the market. However,
aggressive competitive landscape in telecom sector has prompted Big TV to play a rational pricing strategy in this
business.
Plans to play a ‘premium’ strategy…

In order to increase its relevance in the 21m DTH industry, Big TV is betting on product differentiation and value-added
services. Big TV has recently launched an HD DVR set-top box, which is the country’s first product with a dual benefit of
High Definition viewing and Digital Video Recorder in a single Set Top Box. With this, Big TV is also offering a universal
remote control which can manage up to three devices (TV, STB and any other music/ disc player system). Reliance Big TV
plans to roll out its HD DVR STBs across top 100 cities in India at a price point of Rs7,490, and is estimated to spend
~Rs1bn in advertising for the same. With Reliance adopting a strategy to acquire premium customers, ARPUs are at
~Rs160 – 20% higher than industry leader Dish TV.
…and strategic partnership

Reliance BIG TV has recently entered into an agreement with Korean major LG Electronics for bundling DTH connections
with LG colour televisions. As per the agreement, LG colour TV customers would have a choice to avail of a Reliance BIG
TV connection on paying Rs399 as installation charges. The offer, valid till 30 June 2010, would be available across
Karnataka, Rajasthan, Punjab, Bihar, Jammu & Kashmir, Tamil Nadu, Gujarat, Uttar Pradesh, Uttaranchal, Himachal
Pradesh, Chhattisgarh and Haryana.
Capital and ability to leverage the telecom business is key to future success
While ability to stay invested would help Reliance Big TV increase penetration, we believe the ability to bundle voice and
data services will be the key differentiator in the long run. Reliance Communications has 105m telephony subscribers in
India and a strong broadband subscriber base.
JUNE 2010 119

IDFC Securities
InCable (Hinduja Group) NOT LISTED
Betting on regulations to act
IndusInd Media and Communication (IMCL), part of Hinduja Ventures (a Hinduja group company), is a cable
television and internet service provider under the brand InCable. Though among the early entrants in the cable space
with adequate capital post the group’s stake sale in Hutch Telecom India operations, InCable has been conservative
in its approach. InCable has also lost substantial share of subscribers to new entrants like DEN and Digicable, and is
estimated to have a base of <0.5m paying subscribers. InCable has 0.4m digital and broadband services subscribers.
As the management is not keen on digitization in the absence of monetization, it would maintain its conservative
stance. InCable is also expected to scout for a strategic partner or capital raise to fund the future digitization needs.
Backed by the Hinduja Group

IndusInd Media and Communication (IMCL) is a part of the Hinduja Group, which is a diversified conglomerate with
interests across auto (Ashok Leyland – market capitalization of US$1.8bn), financial and oil & gas sectors among others.
IMCL is the merged entity of cable, content (INEL) and broadband internet (In2Cable) services of the Hinduja Group.
With regards the cable business, the company provides analog cable services under Incable brand and digital cable
services under INDIGITAL brand. In FY10, IMCL achieved revenues of Rs3.29bn and net profit of Rs333m.
Analog cable services reach

IMCL has a reach of over 8m cable homes and has 6,500km of hybrid fiber optic cable, of which 80% is two-way enabled.
Further, IMCL has presence across 27 cities which include key regions such as Mumbai, Thane, Delhi, Noida, Bangalore,
Ahmedabad, Vadodra and Belgaum. IMCL’s network comprises >2,400 LCOs.
Exhibit 1: India presence of InCable
JUNE 2010 120

IDFC Securities
Digital cable – slow on rollout

With regards digital cable, IMCL has rolled out its services in Mumbai and Delhi. It is estimated to have installed ~0.4m
STBs. In terms of infrastructure, it has established eight digital head-ends in India, covering 12 cities including key
metros. While adequately capitalized and backed by the Hinduja Group, IMCL has been relatively slow in ramping up its
digital cable services. Our interaction with the management indicates that regulatory action towards mandating
digitization, and thereby improved declarations, will be the key for IMCL to aggressively roll out its digital platform. The
company is estimated to have ramped up its primary points base to over 0.2m by way of acquisitions. While this would
ensure improved ARPU, it would help leverage the subscriber base to offer broadband services as well.
Strategic partnership – on the anvil

In order to compete with industry incumbents in digital cable, we believe IMCL is likely to enter into a strategic tie-up. In
FY10, IMCL achieved revenues of Rs3.29bn and net profit of Rs333m. A large part of the revenues are expected to be
contributed by carriage fees currently, as digitization is yet to pick up for IMCL.
JUNE 2010 121

IDFC Securities
Analyst Sector/Industry/Coverage E-mail Tel. +91-22-6622 2600

Pathik Gandotra Head of Research; Financials, Strategy pathik.gandotra@idfc.com 91-22-662 22525
Shirish Rane Construction, Power, Cement shirish.rane@idfc.com 91-22-662 22575
Nikhil Vora FMCG, Media, Mid Caps, Education, Exchanges nikhil.vora@idfc.com 91-22-662 22567
Ramnath S Automobiles, Auto ancillaries, Real Estate, Oil & Gas ramnath.s@idfc.com 91-22-662 22570
Nitin Agarwal Pharmaceuticals nitin.agarwal@idfc.com 91-22-662 22568
Chirag Shah Metals & Mining,Telecom, Pipes, Textiles chirag.shah@idfc.com 91-22-662 22564
Bhoomika Nair Logistics, Engineering bhoomika.nair@idfc.com 91-22-662 22561
Hitesh Shah, CFA IT Services hitesh.shah@idfc.com 91-22-662 22565
Bhushan Gajaria Retailing, FMCG, Media, Mid Caps bhushan.gajaria@idfc.com 91-22-662 22562
Salil Desai Construction, Power, Cement salil.desai@idfc.com 91-22-662 22573
Ashish Shah Construction, Power, Cement ashish.shah@idfc.com 91-22-662 22560
Probal Sen Oil & Gas probal.sen@idfc.com 91-22-662 22569
Chinmaya Garg Financials chinmaya.garg@idfc.com 91-22-662 22563
Aniket Mhatre Automobiles, Auto ancillaries aniket.mhatre@idfc.com 91-22-662 22559
Abhishek Gupta Telecom abhishek.gupta@idfc.com 91-22-662 22661
Ritesh Shah Pharmaceuticals, IT Services ritesh.shah@idfc.com 91-22-662 22571
Saumil Mehta Metals, Pipes saumil.mehta@idfc.com 91-22-662 22578
Vineet Chandak Real Estate vineet.chandak@idfc.com 91-22-662 22579
Kavita Kejriwal Strategy, Financials kavita.kejriwal@idfc.com 91-22-662 22558
Swati Nangalia Mid Caps, Media, Exchanges swati.nangalia@idfc.com 91-22-662 22576
Sameer Bhise Strategy, Financials sameer.bhise@idfc.com 91-22-662 22574
Nikhil Salvi Construction, Power, Cement nikhil.salvi@idfc.com 91-22-662 22566
Shweta Dewan Mid Caps, Education, FMCG shweta.dewan@idfc.com 91-22-662 22577
Dharmendra Sahu Database Analyst dharmendra.sahu@idfc.com 91-22-662 22580
Rupesh Sonawale Database Analyst rupesh.sonawale@idfc.com 91-22-662 22572
Dharmesh R Bhatt, CMT Technical Analyst dharmesh.bhatt@idfc.com 91-22-662 22534
Equity Sales/Dealing Designation E-mail Tel. +91-22-6622 2500
Naishadh Paleja MD, CEO naishadh.paleja@idfc.com 91-22-6622 2522
Paresh Shah MD, Dealing paresh.shah@idfc.com 91-22-6622 2508
Vishal Purohit MD, Sales vishal.purohit@idfc.com 91-22-6622 2533
Nikhil Gholani MD, Sales nikhil.gholani@idfc.com 91-22-6622 2529
Sanjay Panicker Director, Sales sanjay.panicker@idfc.com 91-22-6622 2530
V Navin Roy Director, Sales navin.roy@idfc.com 91-22-6622 2528
Nirbhay Singh SVP, Sales nirbhay.singh@idfc.com 91-22-6622 2595
Suchit Sehgal AVP, Sales suchit.sehgal@idfc.com 91-22-6622 2532
Pawan Sharma MD, Derivatives pawan.sharma@idfc.com 91-22-6622 2539
Jignesh Shah AVP, Derivatives jignesh.shah@idfc.com 91-22-6622 2536
Suniil Pandit Director, Sales trading suniil.pandit@idfc.com 91-22-6622 2524
Mukesh Chaturvedi SVP, Sales trading mukesh.chaturvedi@idfc.com 91-22-6622 2512
Viren Sompura SVP, Sales trading viren.sompura@idfc.com 91-22-6622 2527
Rajashekhar Hiremath VP, Sales trading rajashekhar.hiremath@idfc.com 91-22-6622 2516
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Television Distribution

June 2010 Nikhil Vora ● Bhushan Gajaria ● Swati Nangalia

Don’t you think we

…but what about the

Better quality, more Yes!!… now

And you will also be able to record

Reason for report: Industry update

Nikhil Vora Bhushan Gajaria Swati Nangalia

*Seize the day

Den Networks ................................................................................................................ 59

Hathway Cable .............................................................................................................. 87

Airtel Digital................................................................................................................. 107

Sun Direct ..................................................................................................................... 110

Tata Sky......................................................................................................................... 112

Digicable ....................................................................................................................... 114

You Telecom................................................................................................................. 116

WWIL ............................................................................................................................ 118

Reliance Big TV............................................................................................................ 119

InCable (Hinduja Group) ........................................................................................... 120

Exhibit 1: Indian TV distribution – redefining the landscape

Total potential 4.9% CAGR

Declared homes 3.9x

Digital homes 22m 86m 4x

ARPU US$3.8 US$6.3 8.9% CAGR

• 50,000+ LCOs, 7,000+ MSOs and • Consolidation with top 5 MSOs

• USD3bn in last 5 years to add 22m • USD5bn of investments need to

• Industry losses of over USD1.5bn • Industry margins to increase to

 India – second largest C&S market with 105m customers…

Exhibit 2: India – world’s second largest C&S market

Source: IDFC Securities Research

 …however, fraught with inefficiencies

Exhibit 3: India – an extremely cluttered cable and DTH market

Broadcasters: 400+ channels

MSOs MSOs MSOs MSOs ISOs

LCO LCO LCO

87m subscribers 18m subscribers

Source: IDFC Securities Research

65.0 MSO and DTH

Source: IDFC Securities Research

 2006-09 – a period high on expectations…

Exhibit 5: C&S industry in 2006 – high on expectations

…with estimates of 22m

Source: IDFC Securities Research

Exhibit 6: While DTH delivered ahead of expectations, cable failed

9 35m additional homes 8 Mandated CAS failed

9 USD2.5bn invested in 8 Cable industry attra cted

9 18m DTH homes 8 3.5m digital cable 3.5

9 Paying subscribers 8 ARPU droppped further

Exhibit 7: Influx of big names in the DTH space

Reliance R-Communications, R-Infra,

Sun Sun TV, Dinakaran, Sumangali Largest media house in South

 …but a ‘miscarriage’ for cable

Exhibit 8: Reasons for failure of cable digitization

Failure of mandated CAS Only 25% of the CAS areas digitized

Entry of new players like

LCO and independent

 The way forward – digital base to jump 4x by 2015E…

Exhibit 9: Rapid scale up of digital subscriber base

 …as DTH sustains momentum; 48m DTH homes by 2015E

Source: IDFC Securities Research

 …and digitization the ‘only’ option for cable

Exhibit 11: Key drivers for cable digitization

Source: IDFC Securities Research

India – second largest C&S market with 105m customers…

…however, fraught with inefficiencies

2006-09 – a period high on expectations…

…but a ‘miscarriage’ for cable

The way forward – digital base to jump 4x by 2015E…

…as DTH sustains momentum; 48m DTH homes by 2015E

…and digitization the ‘only’ option for cable

Declaration-led monetization to begin; 89m paying subs by 2015E

…ARPU gains to be gradual but guaranteed

A Rs480bn industry by 2015E – organized pie growing 6.5x

While MSOs would retain the gains of better collections...

…DTH industry witnessing operating leverage gains

Just $5bn of incremental investments required to turn the tide

Profits in sight; we turn bullish on the distribution space

We value businesses on EV/ subscriber basis; 50% returns

DTH industry has lured deep pocketed players…

Ability to create consumer pull and distribution push…

…and drive voluntary digitization through aggressive subsidies

Broadcasters too are willing to align with DTH

DTH surpasses expectations – 20m homes by FY10…

…on course to grow to 48m subscribers by 2015E