IPO Analysis - Den Networks

Den Networks is a cable distribution entity with a pan-India footprint. The company is into distribution of analogue and digital cable television services. The New Delhi-based company currently provides cable television services in Delhi, Uttar Pradesh, Rajasthan, Maharashtra, Gujarat, Karnataka, Haryana, Madhya Pradesh and Kerala. The issue comprises 15.2% of the company’s post IPO paid-up equity capital. The promoter’s holding will decline to 59.68% (including locked-in shares) based on post-IPO equity dilution.

BUSINESS:

It was incorporated in July 2007 by Sameer Manchanda a Delhi based media professional and entrepreneur. Other key investors in the company includes TV18, which hold 7% stake, ILFS Group with 10.1% and Mauritius based EMSAF with 3%. All these holdings are based on post-IPO equity. The company began its operations by providing analogue cable services and is currently present in 77 cities. In the recent months, however, the company is aggressively betting on digital cable services, which it launched in February 2009 under the brand ‘Digitelly.’

In last 18 months, it has expanded its digital coverage to 37 cities and expects it to grow faster than the analogue service in the future. Den Networks growth strategy is to acquire Multi-system Operators (MSOs) and then integrate latter’s cable network into its own system. Digitalisation helps the company to effectively track the usage patterns of its subscribers, which in turn helps its to negotiate better carriage charges from pay-channels. In last two years the company has acquired 65 MSOs across the country. It earns revenues in two ways: one it gets a cut from the subscribers’ fee charged by pay channels and other content providers and second its charges fee from mini-MSOs and franchises involved providing the last mile connectivity.

The company thus acts as intermediary and is akin to a power transmission company which mediates between the generator and the power distributor. In January 2008, the company set up a 50:50 joint venture with STAR network – STAR-DEN. The JV has the exclusive rights to distribute 23 channels that the Star bouquet including channels from Disney group, Times group and MGM among others. In addition to this, the company also offers Internet broadband facility like any other cable operator.

OBJECTIVES:

Considering its price band of Rs 190-205, the company would raise around Rs 390-410 crore. Of the total issue proceeds, it plans to use around Rs 210 crore for the expansion of its cable television infrastructure and a further Rs 25 crore for growing its cable broadband business.

VALUATION:

For the quarter ended June, the company reported revenues of Rs 99 crore from its cable business and a further Rs 109 crore came from its STAR-DEN operations during the same period. The company’s main strategy is to digitise its analogue subscribers. For this the company would be purchasing 7,17,500 set-top boxes. For the quarter ended on June, the company posted a profit of Rs 3.2 crore, while for the year ended on March 2009; the company posted a loss Rs 15 crore. Considering the loss, it would be meaningless to use price to earnings multiple as the valuation tool.

Instead we have used price/book ratio and market cap to revenues to assess its valuation. The IPO is priced at around 4.5 times its book value (based on post IPO networth), which compares favourably with Wire & Wireless (5x) and Dish TV (6x), its two key listed peers. It is available around 3 times its annualised revenues during FY09, which is lower than the corresponding ratio for its key peers. As the stock is likely to attract premium over its peers, given its bigger size, we advise our readers to subscribe to the issue at the upper price band.

IPO details

Price Band:

Rs 190-205

Net issue size:

Rs 390-410 crore

Date:

October 28 – 30

via Economic Times