Sector update | 10 October 2012 Media Motilal Oswal Media Sector Conference 2012 Serious intent from government/regulator driving digitization progress; continued friction among participants a risk factor
Key takeaways: Serious intent of government and regulator remains the We believe execution is the biggest challenge due to most important factor driving the progress on mandatory continued friction among various participants - digitization. broadcasters, MSOs and LCOs. While the transition to mandatory digitization could be In our view, LCOs remain the weak link in the digitization relatively smooth in Mumbai/Delhi, Chennai/Kolkata process. Lack of adequate incentive for LCOs can hamper remain uncertain due to the slow progress at Arasu/ progress as customer ownership solely rests with them. political issues. On the advertising front, ad growth in first half was likely Industry structure is far from settled; 30 new MSOs have restricted to 7-8% YoY. Ad environment continues to be surfaced in Delhi over the past few months, thus disrupting challenging, with lower-than-expected activity considering large MSOs' plans. the upcoming festive season.
Valuation and view: While digitization remains a 'game- are better placed to benefit from the digitization, given changer' event for TV broadcasting/distribution sector, expected improvement in subscription revenues, we believe valuations are largely full. This leaves little without any incremental investments. We have a margin of safety in case of any disappointments. We Neutral rating on Zee and Dish TV and a Buy rating on believe broadcasters (Zee Entertainment and Sun TV) Sun TV.
Comparative valuations: Broadcasting Rating CMP Mcap EV P/E (x) EV/EBITDA (x) EV/Sales (x) RoE (%) (INR) (USDb) (USDb) FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E FY12 FY13E FY14E ZEEL Neutral 195 3.5 3.4 33.0 27.8 23.0 23.7 19.7 16.1 5.8 4.9 4.3 17.5 18.3 19.3 Sun TV Buy 352 2.6 2.5 20.0 19.3 17.5 9.7 9.2 7.9 7.7 7.1 6.1 26.3 24.7 25.1 Dish TV Neutral 83 1.7 1.8 NA NA 265.9 19.0 15.0 11.5 4.8 4.2 3.4 NA NA NA
Report dated 10 Sep 2012 Presenting … Run-up To Digitization
Digitization is a 'game-changing' event for the entire pay-TV value chain. In our note "All eyes on digitization; positive across value chain" dated September 10, we had presented key takeaways from three major parts of the value chain - Broadcaster (Zee Entertainment), DTH operator (Dish TV), and Content provider (Balaji Telefilms) - based on presentations and management interactions at Motilal Oswal 8th Annual Global Investor Conference, 2012. In the following note "Digitization: An LCO perspective" dated September 20 we focused on the local cable operator's perspective on digitization based on our interactions with Cable Operators Federation and several LCOs across metros.
In this note, we present takeaways from Motilal Oswal Media Sector Conference attended by a diverse group of participants: Balaji Telefilms (leading content provider), Cable Operators Federation of India-COFI (LCO Association), Hinduja Ventures (National MSO), Network 18 group (leading TV broadcaster), OMD (communications agency with global operations) and Reliance Broadcast Network (national FM radio and niche TV network). Report dated 20 Sep 2012
Shobhit Khare ([email protected]); +91 22 3982 5428 1 Investors are advised to refer through disclosures made at the end of the Research Report. Media Sector Conference 2012
Balaji Telefilms
Key Takeaways Company Represented By: Mr Tanuj Garg, CEO Digitization to increase bargaining power: Balaji commands a premium over Motion Pictures other content providers given its established track record. Company’s revenue per hour of commissioned programming stands at INR2m. Digitization holds Balaji Telefilms Ltd occupies the potential to strengthen the bargaining power of stronger production houses a dominant space in the vis-à-vis broadcasters, as content would be the key differentiator in a highly television content creation space, with the No.1 show competitive digitized environment which will support transmission of 500 on Indian television to its channels. credit and all its shows Plan to increase shows to 7 from present 5: Balaji presently has five shows on being among the top 50 on air in the Hindi speaking markets - Pavitra Rishta (Zee TV), Bade Achee Lagte television. From a Ho (Sony TV), Parichay (Colors TV), Kya Hua Tera Vada (Sony TV) and Gumrah television content provider, Season II (Channel V). Company plans to air more shows, including a historical Balaji has diversified into on a top Hindi GEC. fields like motion pictures, internet and mobile Movie business capital employed to be within INR1.5b: Efforts in the movie applications. business would be a mix of development of concepts for in-house productions (e.g. Once Upon a time in Mumbai Again), co-productions (e.g. Shootout at Wadala, Lootera) and signing of key talent i.e. directors and writers. In the movie business, strategy is to remain involved in the creative process with in- house productions. The capital employed for this business has been fixed by the board at INR1.5b. Balaji Motion Pictures released Kya Super Kool Hain Hum in 2QFY13 on July 27, 2012 and is expected to release at least one more major film in 2012-13 and four films in 2013-14.
Balaji Telefilms: Trend in commissioned programming hours and rates
Valuation summary Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/ End (INR m) (INR m) (INR) Gr. (%) (X) (X) (%) (%) Sales EBITDA 3/09A 3,375 5 0.1 - 0.1 -1.3 3/10A 1,592 63 1.0 NM - - 1.7 -3.4 - - 3/11A 1,922 -11 -0.2 NM - - -0.3 -1.8 - - 3/12A 1,878 204 3.1 NM 17.6 0.9 5.2 -1.0 0.8 NM
10 October 2012 2 Media Sector Conference 2012
Cable Operators Federation of India (COFI)
Key Takeaways Company Represented By: Ms Roop Sharma, President Digitization success in Chennai/Kolkata remains uncertain given the slow progress at Arasu/political issues: There are risks to achievement of optimum digitization level before the deadline in Chennai and Kolkata. While the state- COFI is a national level, run Arasu cable has been facing procedural delays, political issues remain at registered, non-profit the forefront in Kolkata given likely lack of support from the state government. organization, with its head office in New Delhi and LCO business model faces threat in digitized environment: MSOs and executive members spread broadcasters continue to enter fixed-fee deals even in a digitized environment, across India. It enjoys the while LCOs would be required to pay on per subscriber basis under DAS (Digital membership of more than Addressable System). Hence, the LCO business model is threatened as there 23,000 cable operators would be inadequate incentive for LCOs to run their business at a 35% revenue (>1,200 in Delhi). COFI share. This is not an ideal situation for the cable TV value chain as LCOs manage represents the interest of the critical last-mile. LCOs as a member of the government's task force on Questions on level of ‘under reporting’: The almost 50% downward revision in digitization. metro analog subscriber estimates by the government led to a much higher estimate of achieved seeding v/s earlier. However, this also indicates that the ‘under reporting’ by LCOs is substantially lower than generally perceived by industry participants.
Significant change in govt est of analog cable homes (m)… Revised Estimate Earlier estimate % Change Mumbai 3.6 1.9 -48.3 Kolkata 3.6 2.0 -45.2 Delhi 4.2 2.5 -41.4 Chennai 2.0 0.5 -74.6 Total 13.4 6.8 -49.2 Source: Company, MOSL
…results in much better achievement for Phase I digitization status (September 2012) House TV TV DTH Cable 20% Cable STB STB Holds penet- HHs subs TV pro- TV insta- seeding (m) ration (m) (m) HHs vision subs lled achieved (%) (m) for 2nd (m) (m) (%) TV Mumbai 2.7 85 2.3 0.7 1.6 0.3 1.9 1.8 95 Kolkata 3.3 61 2.0 0.3 1.6 0.3 2.0 1.3 67 Delhi 3.3 88 2.9 0.9 2.1 0.4 2.5 1.3 53 Chennai 1.1 95 1.1 0.6 0.4 0.1 0.5 0.3 49 Total 10.4 80 8.2 2.6 5.7 1.1 6.8 4.7 68 Source: Company, MOSL
10 October 2012 3 Media Sector Conference 2012
Hinduja Ventures
Key Takeaways Company Represented By: Mr Ashok Mansukhani, Expect smooth transition in Delhi/Mumbai; possible hiccups in Chennai/ Director Kolkata: The company believes that the transition to mandatory digitization in Mr Subhashish Mazumdar, phase I is likely to be smooth in Delhi and Mumbai. However, it acknowledged SVP - Marketing & Customer that there could be hiccups in the Chennai and Kolkata markets. None of the Relations, IMCL national MSO has a presence in the Chennai market. MSOs adequately funded for phase I; might require funding for phase II and Hinduja Ventures is a part of the Hinduja group which beyond: National MSOs are largely interested in phase I and II (~25m subs) and provides a wide range of partly in phase III. While MSOs are well funded for phase I due to lower products and services in subscriber base and incremental nature of investments, external funding would over 50 countries across be required for phase II and beyond. three core areas: Global Industry structure far from settled: The cable industry is undergoing rapid investments, investment transformation led by mandatory digitization resulting in attempts by several banking and international trading. Hinduja Ventures' players to realign. Around 30 new MSOs seem to have sprung up in Delhi over subsidiary IndusInd Media the past 6 months, thus disrupting large MSOs’ plans. and Communications Ltd Expect ~25% ARPU hike, post digitization: Current ARPU in Mumbai is estimated (IMCL) is one of the top 3 at ~INR180 which is expected to increase to INR220-230 (after tax) post MSOs in India with an digitization. The industry is considering various collection models, including estimated subscriber reach pre-paid. of 8.5m across 34 cities. Apart from media segment, Estimated per sub valuation for listed MSOs the company has real Hinduja Ventures Hathway Siti Cable Den Networks estate and treasury CMP (INR) 476 224.3 21 170 operations. Shares o/s (m) 20.6 142.9 453 130 Mcap (INRb) 9.8 32.1 9.7 22.1 Net Debt (INRb) -1.6 1.82 2.8 -1.1 EV (INRb) 8.2 33.9 12.5 21.0 Subscriber reach (m) 8.5 8.7 10 11 EV/subscriber (INR) 968 3,893 1,249 1,908 Source: Company, MOSL
Valuation summary Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/ End (INR m) (INR m) (INR) Gr. (%) (X) (X) (%) (%) Sales EBITDA 3/09A 2,789 468 22.8 - 7.6 0.6 3/10A 3,054 606 29.5 29 - - 9.8 -1.1 - - 3/11A 4,336 866 42.1 43 - - 12.9 9.7 - - 3/12A 5,385 1,005 48.9 16 9.7 1.3 13.7 14.1 1.5 4.2
10 October 2012 4 Media Sector Conference 2012
OMD
Key Takeaways Company Represented By: Ms Samhita Bakre, Ad environment continues to be challenging: 2012 is turning out to be a Vice President relatively sluggish year. Despite the onset of festive season, there has been no meaningful increase in the ad rates this season, as of now. In a normal year, Optimum Media Direction there is ~15% upswing in ad rates 6 weeks prior to Diwali. (OMD) is an integrated Second quarter has been challenging for ad spends: After a sluggish July and communications agency delivering media and August (which displayed weak seasonality for the first time in the past 3-4 marketing solutions years), there was some improvement in spends during September, but it was globally. The company was less-than-expected. Industry also witnessed pronounced seasonal weakness launched in France with this year due to lower spends by sectors like telecom which have been the unification of BBDO, generally immune to seasonal factors. DDB and TBWA media Advertisers spending cautiously: While the ad spends continue to grow, operations in 1996. OMD advertisers have improved their focus on ‘RoI’ and are spending judiciously to India began operations in 2007 and has offices in maximize value. Mumbai, Delhi, Bangalore, Chennai and Ahmedabad. India TV ad growth (% YoY)
TV ad revenue (INR b)
Source: Company, MOSL
10 October 2012 5 Media Sector Conference 2012
Reliance Broadcast Network
Key Takeaways Company Represented By: Mr Tarun Katial, CEO Several structural improvements in radio business: There have been several Mr Asheesh Chatterjee, CFO structural improvements in radio business like multiple frequencies for one operator, policy to allow hub-and-spoke model, music royalty issue getting Reliance Broadcast Network sorted out, Government allowing telecast of news and current affairs on private Ltd (RBNL) is a multimedia FM channels and expected increase in FM radio reach, post the phase III entertainment conglomerate with play auctions. across radio, television, Lower carriage fee to aid margins: Big-CBS channels target a niche audience intellectual property, out- with focus on the top 6 metros where the carriage fee has been high. However, of-home and television the company is witnessing significant decline in carriage fee which would aid production. It is part of the profitability of this business. RBNL’s regional Hindi offerings have thick local Reliance group and flavor with original programming hours of ~10/week and focus on local specializes in creating and advertising that contributes ~40% of the ad revenue for these channels. executing integrated media solutions for brands. Revenue growth to be strong; external debt at INR1.5b: Top line growth is expected to remain strong across segments. Total debt on books is INR3b, of which external debt is INR1.5b, while balance INR1.5b is quasi-equity from promoters. The company may need to raise funds for phase III expansion.
Reliance Broadcast buiness mix
Source: Company
Valuation summary Year Net Sales PAT EPS EPS P/E P/BV RoE RoCE EV/ EV/ End (INR m) (INR m) (INR) Gr. (%) (X) (X) (%) (%) Sales EBITDA 3/10A 1,807 -761 -16.5 - NM NM 9/10A 1,084 -294 -3.7 NM - - NM NM - - 3/11A 1,371 -245 -3.1 NM - - NM NM - - 3/12A 3,000 -1,130 -14.2 NM NM 3.5 NM NM 1.8 NM
10 October 2012 6 Media Sector Conference 2012
TV 18 Broadcast
Key Takeaways Company Represented By: Mr Raghav Bahl, Founder Net rights issue proceeds to be utilized for ETV acquisition and retiring debt: and Editor, Network 18 Total proceeds from the rights issue would be INR26.25b (net) which will be utilized for ETV’s acquisition (INR19.25b) and retiring debt. Current consolidated Mr B. Saikumar, Group CEO, Network 18 debt is ~INR11b, which includes standalone debt of ~INR8b and share of debt in Viacom 18 at ~INR3b. The company would be repaying ~INR7b debt at the Mr Sarbvir Singh, Head- standalone level. Investments, Network 18 Digitization to drive the swing in net subscription revenue: Net subscription revenue (subscription revenue less carriage and placement fee) remains the TV 18 Broadcast is a leading largest swing factor for profitability improvement. During FY12, company had television network in India negative net subscription revenue with estimated overall subscription revenue with presence across news, of ~INR3b and carriage and placement fee at ~INR4b. Company is expected to entertainment (Viacom 18), filmed entertainment break-even in net subscription revenue in the current fiscal. (Viacom18 Motion Pictures) Advertising trends remain sluggish: Industry growth in the first half was and factual entertainment restricted to 7-8% YoY implying one of the worst growth rates in recent years. (AETN-18). Through its Advertising is likely at its lowest ebb and can only improve incrementally. rights issue, the company is raising funds to 1) Network18 Group Structure acquire 100% stake in ETV regional news channels, Network18 Media & 50% stake in ETV non- Investments Limited Telugu GECs and 24.5% stake in ETV Telugu channels and 2) deleverage the balance sheet. TV 18 and Viacom18 have also launched a strategic joint venture called IndiaCast, a multi- platform 'content asset monetization' entity mandated to drive domestic and international channel distribution, placement services and content syndication for the bouquet of channels from TV 18,Viacom 18 and other broadcasters.
Source: Company
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