Phase-II roll-out to be easier, with better revenue per user
Findings in the AlphaWise survey bode well for Phase-II of DAS: Our survey of 1,800 respondents in Mumbai, Delhi and Kolkata revealed the following: (i) there is a high level of DAS (digital addressable cable TV system) awareness; (ii) the benefits of digitisation are well known; (iii) the average time spent by households on watching TV is in excess of six hours per day, much higher than the national average of 2.5 hours and 5.3 hours in the US; and (iv) 11% of the analog subscribers we interviewed spend more than R249/month on TV entertainment, while 39% of DTH subscribers and 26% of digital cable subscribers are spending in excess of R249/month.
Phase-II cities stack up well on household income: Only five cities within the Phase-II bucket have household incomes less than that in Kolkata (which is the lowest amongst the Phase-I cities). Hence, given the importance attached to TV entertainment and the means to achieve it, we believe Phase-II cities should give a reasonable fillip to the overall DAS process.
Where we could be wrong: Any slowdown in the digitisation process could hurt sentiment. Also, INR depreciation against the USD could increase capex on STBs (set-top boxes), since these costs are USD-denominated.
Phase-I of the DAS process has been a reasonable success so far with the cities of Mumbai and Delhi almost fully digitised. Kolkata and Chennai have witnessed delays, but these are more due to state-specific issues. We understand that momentum has picked up in Kolkata and digitisation should be completed in the next few months. Chennai is a regional market and hence does not have a significant bearing on pan-India players such as Hathway, Dish TV and Zee.
We conducted an AlphaWise survey of 1,800 respondents in Mumbai, Delhi and Kolkata around the Phase-I deadline (October 2012) to try and gain an understanding of consumer trends and behaviour around the digitisation process and our findings bode well for Phase-II implementation of DAS as well. Key findings are:
1. High level of awareness amongst Phase-I subscribers. We believe this should apply to Phase II subscribers as well, which includes reasonably big cities such as Bangalore, Pune, Hyderabad and Ahmedabad.
2. The benefits of digitisation are well known and hence we believe there should be little push-back from Phase-II consumers.
3. The average time spent per day by households on watching TV is in excess of six hours, with Mumbai respondents watching close to eight hours. We believe the trends could be similar in Phase-II cities. ARPUs have potential to improve due to digitisation, as analog subscribers switch to digital and start paying more. Also, the quarterly household income of Phase-II cities compares well with Phase-1 cities. As soon as the process starts, we believe momentum will drive digitisation to a great extent. Further, both MSOs (multiple system operators) and DTH (direct-to-home) companies have gained more confidence in the DAS process and hence, we believe they will push through Phase-II with added intensity.
In our discussions with the Hathway management, we understand that the STB seeding process in Kolkata and Phase-II cities has been promising?almost 10-15K boxes are being seeded in Kolkata every day which means that their subscribers in the city could turn digital by end-March. The company is also witnessing promising trends in the cities of Pune, Aurangabad, Nashik, Vadodra, Ahmedabad, Surat and Rajkot which augurs well for the roll-out of DAS.
What does it mean for stocks?
We maintain our Attractive industry view as we believe DAS roll-out is happening faster than we had expected. We remain Overweight on Hathway and Zee. We also upgrade Dish TV to Overweight for the following reasons:
Likelihood of better subscriber additions in FY2014 due to Phase II: Phase II is likely to include 18-20m households, of which about 40% may already be digital (both cable and DTH), thus leaving about 11-12m to be digitised. This would provide enough opportunity for DTH companies, more so Dish TV, which is a serious player in the business. Hence, we have raised our F2014 gross subscriber addition estimate from 2.5m earlier to 2.75m now.
Potential for FY2014 ARPUs to be better than our earlier expectation: On our estimates, Dish TV is likely to exit FY2013 with an ARPU of R162. While price hikes cannot be completely ruled out in FY2014, we believe the probability is low given acute competition around the Phase-II process. However, ARPUs could still head higher due to package upgrades by existing subscribers, increasing HD penetration and better customer retention.
We have increased our FY2014 ARPU estimate from R158 earlier to R164 now.
Valuations look reasonable: The stock has underperformed the Sensex by 19% and Hathway by 23% since October 2012. The stock is trading at more than 1 SD (standard deviation) below mean partly due to the fact that the last two quarters have reported flat to negative sequential Ebitda growth. However, we now expect 5% q-o-q Ebitda growth in Q4FY13 and 6-16% q-o-q growth in each of the four quarters in FY2014.
?Morgan Stanley
