Identifying the Indian Apple-Part 17
The listed Cable and Satellite stocks are seeing their valuations being heavily stretched on market optimism on cable TV digitisation and on optimism on foreign players entering the media distribution market. Digitisation is yet to take off fully while stretched valuations may deter foreign players from acquisitions.
C&S stocks are overvalued with more hype than substance
The performance of cable TV stocks or stocks of MSO (Multi System Operators) over the last one year suggest that the market is enthused on the cable TV digitisation program of the government. However digitisation has been expected for a while and MSO’s as well as DTH (Direct to Home) operators have seen a lot of hype built in the stocks at the time of IPO (Initial Public Offering). The question going forward is whether the digitisation will go through with the timelines or will it flounder?
The three listed companies in the C&S space are Den Networks, Hathway Cables and Dish TV. The first two are MSO’s while Dish TV is a DTH operator. Dish TV has given negative 35% return since its IPO in 2007 while Den NetWorks and Hathway Cables have just about managed to give positive returns since IPO. The last one year has seen the MSO stocks generate over 100% returns largely on the back of the market being enthused by the cable TV digitisation program of the government. Dish TV has largely underperformed the MSO stocks, as market believes that MSO stocks are better positioned to capture the positive effects of digitisation.
Cable TV Digitisation
The government under a bill passed in the Lok Sabha has rolled out a cable TV digitisation plan for the country where all TV users will have to switch to set top boxes within a certain time frame. The first phase of digitisation ends on the 31st of October 2012 where four metros of Mumbai, Delhi, Kolkata and Chennai have to be fully digitised. In the second phase of digitisation all cities with one million plus population will have to be digitised and this phase ends on the 31st of March 2012. The third phase will see all urban areas being digitised by 30th September 2014 and the last phase will see the rest of India being digitised by 31st December 2014.
Digitisation helps MSO’s edge out local cable operators who have been ruling the roost in the cable TV business. MSO’s gain from subscription revenues and also gain from charging carriage fees to broadcasters.
The big question is will digitisation be implemented successfully?
The first phase ending 31st October 2012 is already seeing independent estimates of digitisation being much less than government estimates. Government estimates that 87% digitisation has been achieved in the four metros while independent agencies estimate 59% digitisation has been achieved. There is opposition from the governments of Kolkata and Chennai against compulsory digitisation and this is leading to non cooperation from these cities on digitisation.
The process of digitisation is going to take longer than expected and this will lead to MSO’s seeing prospects of full profitability are stretched. The capex spend is also high as digitisation unfolds as MSO’s have to connect each and every household through cables and set top boxes.
Valuations are stretched
The subscription base and reach look impressive for the three listed entities, Den Networks, Hathway Cables and Dish TV. However only Den Networks is profitable at the bottom line while Hathway and Dish are still making losses. The outlook is not going to improve substantially in fy 2013 even with above average sales and profitability. If the process of digitisation is extended, these companies will have little to show for the valuations.
Den Networks is the only company that is showing positive earnings but the valuations at 49x expected fy 13 earnings is stretched.
Hathway Cables is yet to make profits at the bottom line and the valuations are high given that earnings will not be in positive territory till 2014.
Dish TV is yet to turn earnings positive despite five years since the IPO. The customer base of the company is impressive at 13 million subscribers but competition is heavy in the distribution business with MSOs, local cable TV operators and other DTH operators vying for business. Valuations are not reflecting business realities.
M&A possibilities are keeping valuations high
The size of the media distribution market in a country with 1 billion population is not to be questioned. However if the market is fragmented and organized players are yet to see healthy bottom lines, there is an issue. The valuations of the listed players are factoring in possibilities of foreign players taking a stake in these companies to reach out to the millions of Indians watching TV. Will foreign players pay more than current valuations for a presence in the Indian market? It is a big gamble for investors to bank on M&A for returns.
It is best to avoid Den Networks, Hathway Cables and Dish TV at current valuations. The stocks can be looked at when there is more concrete data on digitisation and when foreign players actually make serious bids to enter the media distribution market.
In the next edition of Identifying the Indian Apple series we will look at the stocks in the media and entertainment sector.