Management Meet Update September 20, 2016

Rating matrix Rating : Unrated | 35 Target : NA (SITCAB) Target Period : NA Potential Upside : NA Expanding Network Plans… Key financials | Crore FY13FY14FY15FY16We met V.D. Wadhwa, CEO and Executive director of Siti Networks (Siti), Sales 470 697 906 1,189 to understand the digitisation status and company’s prospects, going EBITDA 72 113 137 297 ahead. Siti is among the top 3 MSO’s in India with subscriber base of Net Profit (64) (94) (109) (2) ~12.2 million of which ~68% has been digitised. Siti also has ~1.67 EPS (|) (0.8) (1.2) (1.4) (0.0)

broadband subscribers majorily in the Delhi and Kolkata markets, of which ~38,000 are on Docsis 2/3 platform and the balance on EoC Valuation summary (Ethernet on Cable). (x) FY15 FY16 FY17E FY18E Poised to benefit from Phase III Digitisation & subsequent monetisation P/E NA NA NA NA Siti is expected to be the biggest beneficiary of the Phase II digitisation as EV / EBITDA 49.3 32.7 27.3 12.2 out of its 3.9 million analog subscriber base, ~2.2-2.7 million belongs to P/BV NA 16.1 13.0 4.3 Phase III. Furthermore, ~70% of its Phase IV subscribers (~1.2-1.5 RoNW (%) NA NA NA NA million) are the ones which are contiguous to Phase III and as such should RoCE (%) 3.2 2.9 2.1 7.2 see quicker digitisation. It expects the Phase II digitisation for the industry

to pick up pace once the legal case is resolved by the current year end. Stock data Once fully digitised, the company expects a net realisations of ~| Particular Amount 60/subscribers in Phase III. The company expects the current realisations Market Capitalization (| Crore) 2,785.8 of | 100 and | 75 from to Phase I & II to go up to | 110 and | 90 Total Debt (FY16) (| Crore) 1,211.3 respectively by FY17E end. Cash (FY16) (| Crore) 372.8 Targeting 2 millions broadband subscribers base in 5 years EV (| crore) 3,624.3 52 week H/L 42/ 30 Broadband is now the core focus area, as per the management. It has set Equity capital | 79.5 crore a target of 2 million broadband customers (vs. current base of ~1.67 Face value | 1 broadband subscribers) in next 5 years. For the same, it is likely to incur capex of ~| 350-400 crore per annum in the above mentioned period.

Price Chart The company plans be a dominant player in key territories across NCR, Kolkata, Haryana and select cities of Central India primarily using Docsis 2/3 technology. While huge expansion plans in lucrative Broadband 9,500 50 business bodes well for the company, there remains a risk of disruption 8,500 40 by which is likely to offer its FTTH Broadband services by FY17 end. 30 7,500 Huge plans ahead, Jio disruption risk remain 20 We note that Siti is poised to be beneficiary of the Phase II digitisation as 6,500 10 out of its 3.9 million analog subscriber base, ~2.2-2.7 million belongs to 5,500 0 Phase III. Furthermore, ~70% of its Phase IV subscribers (~1.2-1.5 million) are the ones which are contiguous to Phase III and as such should Jan-16 Jan-15 Jan-14 Sep-16 Sep-15 Sep-14 Sep-13 see quicker digitisation. Furthermore, the company also has strong May-16 May-15 May-14 Nifty (L.H.S) Price (R.H.S) promoter base in the form of which had infused ~| 530 crore as equity (as first trance of announced | 680 crore equity infusion). Research Analysts However, we also highlight that Jio launch of FTTH later in FY17 and Bhupendra Tiwary possible foray in cable business (it has received pan India MSO licence) [email protected] remains a risk. At the CMP, it is trading at 12.2x FY16 EV/EBITDA. Sneha Agarwal Exhibit 1: Key Financials [email protected] | crore FY12 FY13 FY14 FY15 FY16

Net Sales 342.8 469.6 697.2 905.9 1,188.9

EBITDA (26.3) 72.4 112.9 137.4 296.7 PAT -91.3 -64.1 -94.1 -109.1 -1.7 EPS (|) (1.2) (0.8) (1.2) (1.4) (0.0) P/E (x) NANANANANA Price / Book (x) NA NA 16.1 13.0 4.3 EV/EBITDA (x) NA 49.3 32.7 27.3 12.2 RoCE (%) (9.3) 3.2 2.9 2.1 7.2 RoE (%) NANANANANA

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Cable Business • Siti is among the top 3 MSO’s in India with subscriber base of ~12.2 million of which ~68% has been digitised. As per the company, it is expected to be the biggest beneficiary of the Phase II digitisation as out of its 3.9 million analog subscriber base, ~2.2-2.7 million belongs to Phase III. Furthermore, ~70% of its Phase IV subscribers (~1.2-1.5 million) are the ones which are contiguous to Phase III and as such should see quicker digitisation. • The company indicated the while for the Phase I, the digitisation share of the company was in line with the leading MSOs, it lagged behind in the Phase II of the digitisation. This was mainly because the company did not seed pre-activated Set Top Boxes (STB) seeded keeping in mind the delays that the industry had faced in monetisation.

Exhibit 2: Subscriber Universe

Analog 3.9 mn (of which Phase I, 2.2 mn ~1.2-1.5 mn is in Phase IV)

Phase II, 1.5 mn

Phase III, 4.6 mn

Source: Company, ICICIdirect.com Research

Exhibit 3: Siti vs. Peers Cable Universe Siti Den Phase I 2.2 2.4 2.2 Phase II 1.5 4.2 2.8 Phase III/IV 4.6 4.0 4.4 Total Digital 8.3 10.6 9.4 Analog 3.9 1.7 3.6 Total universe 12.2 12.3 13.0 Source: Company, ICICIdirect.com Research

• As per the management, they would focus on West Bengal, AP, Haryana and Delhi/NCR, which has ~10m digital subscriber opportunity, as the key leadership markets. Market leadership in a concentrated region ensures a higher bargaining power with the broadcasters and superior fixed cost absorption. • As far as Phase III digitisation is concerned, as per the company, ~15% of the universe is yet to be digitised and faces delays owing to court cases filed in various states (now clubbed). It expects the Phase II digitisation for the industry to pick up pace once the legal case is resolved by the current year end. Once fully digitised, the company expects a net realisations of ~| 60/subscribers in Phase III.

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Exhibit 4: Size of Digitisation opportunity Regulatory date for shutdown No. of subscribers (mn) No-digitised (mn) Digitised (mn) Phase I June-12 13.0 1.2 100% excl Chennai Phase II March-13 25.0 1.2 >95% Phase III December-15 41.0 10.0 ~75% Phase IV December-16 81.0 52.0 ~35% Total universe 160 64 ~60% Source: KPMG FICCI Report 2016, Company, ICICIdirect.com Research

• For Phase I & II, the company has indicated that it is started the initiative on package wise billing which will largely driver the ARPU increase going ahead. The company expects the current realisations of | 100 and | 75 from to Phase I & II to go up to | 110 and | 90 respectively by FY17E end. Post the completion of digitisation, the current base of subscribers is likely result in doubling of subscription revenues from the FY16 levels of | 561 crore. • The company also indicated that the Interconnect revenue sharing agreements with most of the LCOs are in place, which should ensure strict revenue collection policies from the LCO.

Exhibit 5: Current status of MSO Realisation Current Status of MSO Realisation (|/Month/Subscriber) Phase 1 Phase 2 Phase 3 Phase 4 ~| 150-175 <| 150 (all Consumer ARPU, Paid to LCO | 225+Tax | 200+Tax (all inclusive) inclusive) LCO to MSO* 100-130 90 Fixed Payout MSO Net Realisations |96-105 |72-86 |5-50 |5-10

Source: Company, ICICIdirect.com Research

• The company already has an inventory of ~2.5 million set top boxes and thus, is poised to capitalise on quick digitisation once the regulatory hurdles eases. • In terms of content cost, the company incurred a net cost of ~| 7/subscriber in FY16. The content deals for phase I & II cities (mix of fixed fee and cost per subscriber basis) already in place. Siti has also entered into fixed fee content deals for phase III expansion with most of the broadcasters, which should be in place for ~2 years. Going ahead, post the complete digitisation, the company expects the content deals to eventually move to the cost per subscriber basis and thus it expects its net content cost of ~| 30/subscribers, with carriage revenues remaining stable. • The company also indicated that with digitisation setting in, large MSOs, who enjoy the benefit of content at a lower price and higher carriage and placement (C&P) fee from broadcasters, are in a position to offer better revenue share terms to the LCOs. This advantage is likely to lead to consolidation in the MSO space with leading MSO likely to garner majority of the subscriber market share. • The company also indicated that it has been a pioneer in B2B billing and implementation of subscriber management system. It has “Own Your Customer” (in-house subscriber management system) in Phase I & II cities which authorises its LCOs to update a common database online.

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Exhibit 6: How does Siti stack up against its Peers in digitisation race Hathway FY14 FY15 FY16 Subscriber base (mn) 8.8 11.8 12.3 Digitised 8.0 8.5 10.6

Subscription Revenues 598 731 816

Content Cost 668.0 813.1 821.6 Carriage Revenues 575 627 599 Net Content Cost 93 186 223 Net content cost/subscriber/month 9 13 15

Den Network Subscriber base 8.8 13.0 13.0 Digitised 6.1 7.0 9.4

Subscription Revenues 368 459 457

Content Cost 372 465 510 Carriage Revenues 465 474 435 Net Content Cost -93 -9 75 Net content cost/subscriber/month -9 -1 5

Siti Networks Subscriber base 10.0 10.5 12.2 Digitised 4.0 5.4 7.9

Subscription Revenues 340 531 561

Content Cost 233 289 359 Carriage Revenues 227 249 257 Net Content Cost 6 40 102

Net content cost/subscriber/month 0 3 7 Source: Company, ICICIdirect.com Research

Exhibit 7: Subscription Revenues Trend

561.2 600.0 531.3 500.0

400.0 339.5

300.0 (| crore) 200.0 120.7 91.0 100.0

0.0 FY12 FY13 FY14 FY15 FY16

Subscription Revenues

Source: Company, ICICIdirect.com Research

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Broadband Business

• Siti is relatively a newer player in the Broadband space which started its broadband offerings in FY13. Siti currently has ~1.67 broadband subscribers majorily in the Delhi and Kolkata markets, of which ~38,000 are on Docsis 2/3 platform and the balance on EoC (Ethernet on Cable). The company had a revenue of ~| 49 crore from the broadband segment in FY16. • Going ahead, the company plans to focus on high-speed broadband offerings through DOCSIS 2 & 3 technology while the offering through EOC technology (~1 lakh subs) is likely to be restricted. • As per the company, Broadband is now the core focus area, with plans to transition into a complete broadband service provider. The company has set a target of 2 million broadband customers in next 5 years. For the same, it is likely to incur capex of ~| 350-400 crore per annum in the above mentioned period. • The company plans be a dominant player in key territories across NCR, Kolkata, Haryana and select cities of Central India primarily using Docsis 2/3 technology. • Alternatively, the company is also considering expanding its Broadband plans. It intends to partner with group company Essel Infra (for new capacity layout) and use BSNL fibre network (commercial agreement yet to be signed) to offer the broadband services. This strategy, if undertaken, is likely to result in a overall capex requirement of ~USD 1 billion with a target subscriber base of 8 million in the next 5-6 years. Such a strategy is also likely to entail further equity from promoters as well some strategic investment partner. We note that Jio’s disruption risk looms large on Broadband segment. However, as per company, the broadband segment is likely to increase to 100 mn in next 5-6 years vs. ~15 mn currently. Consequently, management indicated that its target of ~8 million (on a bull cases) would be merely ~8% of the expanded market.

Exhibit 8: Broadband revenues trend

60 48.6 50 40 30 26.5

(| crore) 17.5 20 8.0 10 0 FY12 FY13 FY14 FY15 FY16

Broadband Revenues

Source: Company, ICICIdirect.com Research

Exhibit 9: How are the other listed peers stacked up in Broadband space Siti Hathway Den Broadband Subs 167000 627000 95000 No. of home passes (mn) 1.2 3.3 0.08 Broadband ARPU (Exit) 600 670 850 Source: Company, ICICIdirect.com Research

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Key Financials The company has demonstrated strong topline performance over the past 4 years, with the revenues growing at ~36% CAGR over FY12-16 to | 1189 crore from | 343 crore in FY12. Out of the total topline of ~| 1189 crore, ~47% or | 561 crore pertain to cable subscription, while carriage and activation revenues formed ~22% and ~18% of the total topline respectively. Broadband revenues at ~49 crore was, merely, 4% of the topline.

Exhibit 10: Revenues grown at a ~36% CAGR in FY12-16 Exhibit 11: Topline bifurcation

1400 1200 109 1188.9 49 1200 1000 37 27 214 905.9 800 33 62 1000 18 249 257 600 14 81 800 697.2 (| crore) 400 8 227 28 123 600 469.6 204 531 561 (| crore) 200 224 340 342.8 121 400 0 91 200 FY12 FY13 FY14 FY15 FY16 0 Subscription Revenues Carriage Revenues Activation Revenues FY12 FY13 FY14 FY15 FY16 Broadband Revenues Others

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

FY16 margins boosted by activation income

During FY16, the company reported an all time high EBITDA Margin of ~25% aided mainly by the higher activation income. Going ahead, with most the content deals in place, the management expect the incremental monetisation of Phase II to flow to the EBITDA levels and boost the margins.

Exhibit 12: EBITDA and Margins Trend Exhibit 13: Ex- Activation EBITDA

350 30.0 296.7 100 83.2 20.0 72.4 75.0 300 25.0 80 15.0 250 20.0 60 10.0 200 15.0 32.3 137.4 40 5.0 150 112.9 10.0 (%) (%) 20 (| crore) (| crore) 72.4 100 5.0 0.0 0 50 0.0 -20 FY12 FY13 FY14 FY15 FY16 -5.0 0 -5.0 -40 -26.3 -10.0 -50 -26.3FY12 FY13 FY14 FY15 FY16 -10.0 EBITDA Margin (RHS) Ex activation EBITDA Ex activation EBITDA margin (RHS)

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

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Financial summary

Profit and loss statement | Crore Cash flow statement | Crore | crore FY13 FY14 FY15 FY16 | crore FY13 FY14 FY15 FY16 Total operating Income 469.6 697.2 905.9 1,188.9 Net Cash from Operations -83.0 163.7 121.7 705.8 Growth (%) 37.0 48.5 29.9 31.2 Net Cash Used in Investing -407.7 -461.3 -292.7 (932.3) EBITDA 72.4 112.9 137.4 296.7 Net Cash Used in Financing 469.5 522.9 249.2 164.6 Growth (%) NM 55.9 21.7 116.0 Net Inc/(Dec) in Cash -21.2 225.2 78.1 -62.0 Depreciation 56.3 83.8 132.8 163.2 Opening Cash 147.7 126.4 351.7 429.8 Interest 86.4 119.1 120.9 137.8 Closing Cash 126.4 351.7 429.8 367.8

Other Income 14.0 13.1 31.1 24.2 Source: Company, ICICIdirect.com Research PBT -56.3 -76.9 -85.2 19.9 Total Tax 4.6 6.4 16.7 13.1 Minority Interest 3.2 10.7 7.2 8.6 PAT -64.1 -94.1 -109.1 -1.7 Growth (%) NANANANA EPS (|) -0.8-1.2-1.40.0

Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios | crore FY13 FY14 FY15 FY16 FY13 FY14 FY15 FY16 Liabilities Per share data (|) Equity Capital 45.3 52.1 67.8 79.5 EPS -0.8 -1.2 -1.4 0.0 Reserve and Surplus -192.3 -158.3 115.1 512.0 BV -1.5 2.2 2.7 8.1 Share Warrants 81.0 187.0 - 50.0 DPS 0.0 0.0 0.0 0.0 Total Shareholders funds -66.0 113.3 183.0 641.4 Operating Ratios (%) Total Debt 909.5 1,262.3 1,394.9 1,211.3 EBITDA Margin 15.4 16.2 15.2 25.0 Minority Interest 13.2 26.1 67.8 80.5 EBIT / Total Operating income 3.4 4.2 0.5 11.2 Deferred Tax Liabilities 6.9 10.7 23.5 43.2 PAT Margin -13.5 -13.3 -12.0 0.0 Other Liabilities 86.1 40.5 83.7 231.6 Inventory days 6.1 5.1 5.6 5.9 Total Liabilities 949.7 1,453.0 1,752.8 2,208.1 Debtor days 75.2 102.3 132.3 111.9 Assets Creditor days 194.0 194.7 198.9 252.4 Gross Block 725.3 1,127.3 1,393.0 2,011.3 Return Ratios (%) Less: Acc Depreciation 274.1 359.4 497.8 666.4 RoE NANANANA Net Block 451.2 767.9 895.2 1,345.0 RoCE 3.2 2.9 2.1 7.2 Capital WIP 69.1 170.2 199.0 531.1 RoIC 2.2 3.2 0.4 10.5 Total Fixed Assets 520.4 938.1 1,094.2 1,876.1 Valuation Ratios (x) Investments 1.7 1.7 1.7 1.7 P/E NANANANA Inventory 7.9 9.7 14.0 19.2 EV / EBITDA 49.3 32.7 27.3 12.2 Debtors 96.8 195.4 328.4 364.3 EV / Net Sales 1.7 1.3 1.1 0.7 Loans and Advances 80.0 214.1 261.0 260.8 Market Cap / Sales 5.9 4.0 3.1 2.3 Other Current Assets 359.6 111.2 103.5 114.9 Price to Book Value NA 16.1 13.0 4.3 Cash 129.4 352.9 433.7 372.8 Solvency Ratios (x) Total Current Assets 673.7 883.2 1,140.5 1,132.0 Net Debt/EBITDA 10.8 8.1 7.0 2.8 Creditors 249.5 371.9 493.6 822.0 Net Debt / Equity -11.8 8.0 5.3 1.3 Provisions 0.5 6.5 3.4 7.1 Current Ratio 2.2 1.4 1.4 0.9 Total Current Liabilities 250.0 378.4 497.0 829.2 Quick Ratio 2.1 1.4 1.4 0.9

Net Current Assets 423.7 504.8 643.5 302.8 Source: Company, ICICIdirect.com Research Deferred Tax Assets 4.0 8.4 13.4 27.5 Application of Funds 949.7 1,453.0 1,752.8 2,208.1

Source: Company, ICICIdirect.com Research

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Top 10 Shareholders Shareholding Pattern

Rank Investor NameLatest Filing Date % O/S Positionsition Change (in %) Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 1 Essel Group 30-Jun-16 29.57 234.85M 0.0 Promoter 66.00 66.00 66.00 70.99 70.99 2 Direct Media Solutions Pvt. Ltd. 30-Jun-16 17.63 140.00M 0.0 FII 12.73 13.88 14.39 13.10 13.03

3 Direct Media & Cable Pvt. Ltd. 30-Jun-16 10.79 85.71M 0.0 DII 7.82 7.59 7.42 6.21 6.20

4 Bioscope Cinemas Pvt. Ltd. 13-Jun-16 9.17 72.85M +22.18M Others 13.45 12.53 12.19 9.70 9.78 5 Digital Satellite Holding Pvt. Ltd. 30-Jun-16 8.99 71.37M 0.0 6 HDFC Asset Management Co., Ltd. 30-Jun-16 4.14 32.91M 0.0

7 Digital Satellite Media & Broadband Pvt. Ltd. 30-Jun-16 3.88 30.80M 0.0 8 Bank One, Ltd. 30-Jun-16 1.94 15.40M +0.45M 9 UBS Asset Management (Singapore) Ltd. 30-Jun-16 1.60 12.71M 0.0

10 DSP BlackRock Investment Managers Pvt. Ltd. 30-Jun-16 1.48 11.75M 0.0

Source: Reuters, ICICIdirect.com Research

Recent Activity Buys Sells

Investor Name Value Shares Investor Name Value Shares Bioscope Cinemas Pvt. Ltd. +12.70M +22.18M Goldman Sachs Asset Management (India) Private Ltd. -0.00M -0.00M Bank One, Ltd. +0.26M +0.45M

Dimensional Fund Advisors, L.P. +0.09M +0.16M Dimensional Fund Advisors, Ltd. +0.01M +0.03M

Source: Reuters, ICICIdirect.com Research

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RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) – 400 093 [email protected]

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