Decoding how digitisation is a positive for cable TV
Mandatory digitisation would better equip the industry to compete with the direct-to-home companies at competitive prices.
Shares of broadcasting companies and cable service providers rose over 5 percent on the bourses today after the Lok Sabha passed a Bill on Tuesday aimed at digitisation of cable TV. The move would benefit cable TV operators in the long-term and bring India on par with other countries like the US, UK, Korea and Taiwan.
Industry stocks gave a positive response to the move. Shares of Dish TV surged 5.44 percent to an early high of Rs 63.90, while Hathway Cable rose by 3.44 percent to an early peak of Rs 117.20.
Low penetration of television in India and digitisation of the cable industry are the two main reasons why Dish TV can have a 35 percent upside form here on. Credit Suisse initiated coverage on the company with a Buy rating with a target price of Rs 82 as it expects 75 percent of India's cable and satellite subscriber additions in next five years to go to direct-to-home. The stock is trading at Rs 63 now.
According to a study by Media Partners Asia, digitisation will increase subscription revenue and reduce advertising spend for broadcasters. Carriage and placement fees are predicted to fall between 20 and 50 percent in certain markets and moderate in others, said the study.
National Sample Survey, only 1 percent of consumer spending in India goes for entertainment, compared to 5 percent in developed countries. The penetration of television at 60 percent is also among the lowest in the world.
The cable industry is operated by multi system operators (MSOs) and local cable operators (LCOs). Digitisation means LCO will be ceding partial control over the last mile to the MSO. Conflicts are bound to arise as there is no clarity on revenue sharing between LCO and MSO; Direct to home (DTH) is expected to benefit from the conflict. According to credit rating agency Fitch, digitisation would result in transparency through accurate reporting of subscriber base. This in turn would provide greater comfort to investors to pump in capital into the sector.
On 13 December, The Lok Sabha passed the Cable Television Networks Amendment Bill, 2011 by which the entire country will be digitised in four phases before December 2014. But digitising the entire country could take longer than that. Given the sheer size of the country, India will have to go the wireless way as laying wire cables would be really difficult. Moreover, significant capital expenditure will be required to develop digital infrastructure. This will involve investments in digital set-top boxes, based on the total estimated analog subscriber base of 68 to 67 million.
Though digitisation will take more time than anticipated, the Credit Suisse report has considered only the first two phases till now.
The report expects Dish's subscriber base to grow from 8 million to over 17 million over the next five years and could even be higher. Over this period, average revenue per user is likely to grow from Rs 142 to Rs 237 due to various factors such as migration of customers to higher packs, a drop in share of new customers, an increase in HD penetration and likelihood of cable rates going up, allowing the DTH industry to increase prices.
As a result, revenues should grow at a compound annual rate (CAGR) of 23 percent and operating profits could grow at 40 percent (CAGR).
Therefore, Credit Suisse calculates the target price at Rs 82 which is almost a 35 percent upside from here.
MSOs' ability to offer additional services, like internet broadband services, using a common infrastructure will improve their operational leverage and help generate additional cash flows for cable TV operators.
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