Den Networks IPO Review

Incorporated in July 2007, Den Networks is promoted by Sameer Manchanda, a veteran in the television industry. It is one of the largest national cable television companies in India, distributing analog and digital cable television services as per the MPA Report 2009. The company has analog cable presence in 76 cities across India and digital services in 37 cities across India. Den Networks currently provides cable television services in the National Capital Region of Delhi and Uttar Pradesh, Rajasthan, Maharashtra, Gujarat, Karnataka, Haryana, Madhya Pradesh and Kerala. The company has obtained an all-India Internet services provider (ISP) license and recently commenced a limited roll-out of broadband internet services in select areas, which it intends to expand in all of the other cities in which it operates. As per the MPA Report 2009, the company's reach is approximately 10 million analog homes and 3,00,000 digital homes.

Den Networks has been increasing its reach through acquisition of multi-system operators (MSO). The company has majority interest in 62 MSOs. It uses local cable operators (LCOs) to provide the "last mile" cable link to reach its subscribers. Den Network currently offers up to 180 channels through its digital cable television service compared with up to 100 channels through its analog cable television service. The company plans to commence offering digital cable subscribers additional value-added services such as pay-per-view services, interactive educational programmes, personal video recording and mosaic viewing. It also operates between one to three own brand television channels from each of its head-ends, which are telecast exclusively on its cable distribution network.

In January 2008, Den Networks entered into a 50:50 joint venture agreement with Star. Star-Den will act as content aggregator and currently has the exclusive right to distribute 23 television channels, including the entire Star group of channels, the entire Disney group of channels, select Network18 channels, the entire Times Group of channels, and MGM to providers of various television distribution platforms such as cable television, DTH satellite television and IPTV in India, Bhutan and Nepal. The company's share of revenue in the joint venture (JV) was Rs 364.85 crore and profit after tax (PAT) Rs 2.32 crore in the fiscal ended March 2009 (FY 2009). Revenue was Rs 107.64 crore and PAT Rs 2.65 crore in the quarter ended June 2009.

The net proceeds of the issue are to be utilized for development of cable television infrastructure & services, for development of cable broadband services in Kanpur Delhi, NCR and Bangalore, repayment of debt, and acquisition of content.

Strengths

* As per the FICCI KPMG Report 2009, the media & entertainment industry is projected to grow at a CAGR of 12.5% to Rs 1052 billion by end of calendar year (CY) 2013 from CY 2009. The television industry is expected to grow at CAGR of 14.5% to Rs 472.6 billion. As per PWC's India Entertainment & Media Outlook 2009 Report, the TV distribution segment grew at CAGR of 18.8% to Rs 150 billion over CY 2004-2008, contributing to 60% of the total television industry revenues of Rs 244.7 billion in CY2008. The television industry expected to grow at CAGR of 11.4% to Rs 420 billion over CY 2009-13. The distribution pie is expected to grow at CAGR of 10.8% to Rs 250 billion by end CY 2013.

* The number of TV owning households would grow to 149 million by end CY2013. The cable households will increase from 72 million in CY 2008 to 90 million in CY 2013. Of this, the number of digital cable homes will increase from 2 million in CY 2008 to 35 million in CY 2013. The increased adoption of digitization will mean higher declaration leading to higher revenue.

* There were 623,000 cable broadband Internet subscribers, or 11.3% of total Indian broadband Internet subscribers, in India in 2008. The MPA Report 2009 predicts that the number of cable broadband Internet subscribers will increase to approximately 2.30 million, or 16.5% of all Indian broadband Internet subscribers, by CY2013.

Weaknesses

* The television distribution is highly competitive and is often subject to rapid and significant changes in the marketplace, technology and regulatory and legislative environments. The market is very fragmented with approximately 50,000 LCOs and 1,000 MSOs. Also, with increased adoption of direct-to-home (DTH), the DTH subscriber base is expected to grow from 10 million in CY 2008 to 28 million in CY 2013.

* The cable distribution industry is prone to under-reporting by LCOs the number of subscribers, thereby impacting revenue.

* LCOs are the last-mile link that connects the company's cable lines to the homes of the subscribers. The affiliation agreements are typically valid for one year. However, an LCO may terminate the agreement on 30 days' notice. Also, the service quality of LCOs will impact subscriber preference.

Valuation

The promoters of Den Networks had entered into an agreement with the IL&FS Investors not to price the IPO below the conversion price of cumulative convertible preference shares (CCPS) issued to the latter on 21 January 2008 and 17 February 2009. The conversion price of the CCPS was Rs 146.94–161.47 per share. These were converted on 27 July 2009. On being asked the basis of arriving at the issue price of Rs 195 – Rs 205, the lead manager was prompt is saying the company has issued shares at Rs 190 to other investors on 29 July 2009.

At the issue price of Rs 195– Rs 205, EV/sales comes to 3.1– 3.3 times. However, excluding the share of revenue of the Star–Den JV, thereby keeping just the cable distribution revenue, the EV/sales comes to 6.4 – 6.8 times. Wire & Wireless India is trading at EV/sales of 4.2 times.