Den Networks IPO Analysis

Investors can avoid the initial public offering of Den Networks considering the inherent challenges that the cable distribution industry faces in driving revenues and competition from alternative platforms such as DTH, that are making rapid strides.

The valuation that the offer demands is also quite steep. At the upper end of the price band (Rs 205) and on a post-offer diluted equity base, the EV/Sales (enterprise value to sales) multiple works out to 3.8, while the EV/EBITDA multiple is 255 (the company is only marginally profitable at the operating level), both based on Den’s FY’09 numbers.

The EV/Sales multiple is at a premium to Wire and Wireless, the only other listed peer, while the EV/EBITDA multiple is at a discount.

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

Den is a cable network operator with a limited two year operational history. Its 2008-09 revenues stood at Rs 719.3 crore, with wafer thin operating margins, from just Rs 81 crore the previous year. This growth, especially over the last one year has been possible due to the inorganic route that it took.

The company acquired majority interest in as many as 65 MSOs (multi-system operators) to expand its footprint across nine States last year. A Media Partners Asia report states that the company provides cable television services to 10 million homes.

Though the telecom regulator mandating conditional access in 55 cities across the country by 2011 is a positive for the company, there may still be limited scope for growth in subscribers.
Industry challenges

Many of the challenges that Den would face affect the entire cable distribution industry. A recent report from PricewaterhouseCoopers indicates that the number of TV households would grow at just 2.7 per cent annually over 2009-13 to 135 million. Further, the report states that the number of cable households would grow from 71 million in 2008 at just 2.4 per cent annually from 2009 to 80 million by 2013.

A FICCI-KPMG report predicts a higher 5.7 per cent annual growth rate. This means that the TV household universe and within that cable television do not enjoy very rosy growth prospects.

Den is also conspicuous by its absence in lucrative markets such as Tamil Nadu, Andhra Pradesh and West Bengal, which have high number of TV and cable TV households.

Till such time Den is able to completely convert its entire network to a digital one, it may also have to grapple with the menace of local cable operators under-reporting revenues.

Even after full digitisation of its cable network is achieved, Den still faces the challenge of getting its viewers to subscribe to pay channels, which is the key revenue driver.

Empirical data suggest that the adoption of conditional access even in the metros has been slow, with most of the households content with free-to-air channels.

A report from TRAI gives out the fact that only a little over eight lakh set-top boxes have been installed in the four metros put together as of June 2009.

Even after digitising, a viewer has the option of not taking a set-top box and view only free-to-air channels. Regulatory controls on pricing also pose a threat with the regulator in fact mandating a Rs 77 package with 30 free-to-air channels. Den would thus face considerable challenge in getting households to adopt set-top boxes to drive the revenues per user.

DTH (direct-to-home) players, all backed by some of the largest conglomerates in India, are also turning the heat on cable operators by rapid subscriber addition. There are now five DTH players in the country, and all of them have fairly deep pockets. The number of DTH subscribers has already touched 16 million, which is quite large given that most of the new DTH players started operation only over the last 12-18 months.

With its reach and simplicity in delivering the last mile connectivity, DTH may be the real growth driver even if there is a trend towards digital television.

With tailor-made packages, capability to deliver both free and pay channels, and ability to drive value-added services, DTH ARPU (average revenue per user), which is in the Rs 150-160 range, could grow over the next few years.

Evidence to this fact is that latest hit-movies are being made available to DTH viewers with 2-3 weeks of their release for a fee that is much cheaper than going to a cinema hall or multiplex.

The PwC report states that DTH households are likely to increase to 35 million by 2013. Cable TV homes represent 89 per cent of the 80 million pay TV homes in 2008. This is projected to come down to 70 per cent by 2013, largely due to the share gains for DTH.

via BL