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Digitization- A game changer for TV18?

Government is planning to digitize the whole cable industry till 2014. It'll probably be done till 2016 considering various hindrances.

The basic flow with which cable TV works is:

Broadcaster----> Multi-System Operator (MSO) ----> Local Cable Operator (LCO) ----> Consumers

Pre-digitization:

LCO report to MSO the number of subscribers. General trend found that LCO only report 15-20% of actual subscriber base. So if 100 consumers belonging to a LCO watch CNBC, LCO report the number to be only 15-20. LCO pay fees of only 20 consumers to MSO & pocket that of remaining 80 consumers.

Post-digitization:

Each consumer will view channels through Set-top-box (STB). It'll act as a unique IP for each consumer. So MSO will get accurate report of how many consumers actually view the channels. So role of LCO will now turn into only collection agents for MSO. So now MSO will get fees for actual 100 consumers. This will benefit distributors who were losing on revenues due to under-reporting by LCO.

Nature of Media industry:

Fixed costs form a very large part of total costs. So when revenue increases, profits rise disproportionately. (Economies of scale)

Currently subscription revenues form only 30% of broadcasters revenue while 70% comprises of advertising revenues. With digitization.. this ratio will change to 50-50%.

FMCG sector forms 40% of advertisement volume. With this sector booming, volume will go up. Also advertising rates have been flat. Rate increase will add as a trigger.

Distribution expenses are higher than subscription revenues, so they are making operational losses. Also the carriage fees will reduce due to digitization as carrying capacity will increase due. (Currently TV18 paid 350 cr as carriage fees as opposed to 300 received as subscription revenues)

Before DAS

ARPU (Monthly)

Rs. 160

ARPU (Annual)

Rs. 2000

Number of households

12 crore

Subscription Base

Rs. 24000 crore

Revenues earned by all broadcasters combined

Rs 3600 crore

Carriage fees paid

Rs 1800 crore

Net revenue

Rs 1800 crore

After DAS

Estimated net revenue

Rs. 9500 crore

Thats a 5 times jump without taking into account the increase in ARPU or subscriber base. ARPU may not increase due to fierce competition, but subscriber base will indeed increase.


TV18

Now lets focus on TV18.

Recently made a complex deal. It acquired Eenadu TV (E TV) from Reliance. It financed this deal using rights issue. And Reliance will fund the rights issue.. WTF !!!! Hell of a financial engineering !!!

Lets concentrate on the outcome of the deal.

Bouquet of 49 channels. Formed a JV with Viacom named IndiaCast for distribution of all 49 channels.

Current debt of 700 odd crores & interest outgo of 85 cr.

TV18 planning to bring debt down by 400 cr using proceeds from rights issue. This will add around 48-50 cr to bottomline.

RJ is invested !!

Valuations:

Can't evaluate it on traditional basis of ROE and P/E. It is a bet that government will complete digitization in next 3-4 yrs and meanwhile revenues will start flowing in & will add directly to bottomline as they are incurring very less incremental costs.

Concerns:

Very complex group structure.

Government delaying digitization- This will probably not happen looking at way 4 metros were digitized.

Too much in news- Everyone recommending on Samvat that this sector will produce multibaggers is a bit of concern.

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Thank You Rohit, was wondering what all this hullabulla is about digitisation and multibaggers in the media space is!

Did you look at TV18 alone or are there other candidates aswell. I think SUN will be a good bet aswell as it had corrected significantly due to the political issues. And it will also benefit from the DTH services.

Cheers

Vinod

Rohit,

A good write-up. I would like to understand whether all the gains from the digitisation come to broadcasters.

Wouldn’t the content producers increase their price?

Wouldn’t the advertisers link the price to actual viewership of the channel?

Wouldn’t the LCOs / MCOs fight for a larger pie of the revenue to offset the loss?

Regards

hi Rohit,

Based on your model above, MSO should benefit most. So, Den Networks, Hathway cable should benefit more. How do we value these companies.

Also TV 18 was in news in the past due to accounting gimmicks which raises doubt on mgmt integrity.

I haven’t looked at other candidates yet…

I think Sun is focused to Southern India… TV18 channels are viewed across India…

Also with Ambani backing TV18, I would expect things to go in favor of TV18 as Ambani runs the country :smiley:

Manish ji, I haven’t looked at the revenues that will go to MSO’s. Will have to dig deeper.

Problem for MSO is that they have to pay a lot for infrastructure & for them to earn huge profits… ARPU should go above Rs. 160… (This is from an interview I read… Will have to verify these facts… Any boarder with deep knowledge of media industry can help…)

Zee Entertainment/Zee news are two more media stock name.

Hi Rohit,

Great time to start this thread. The noise about digitization was getting louder with each passing day. So, high time we did some brain storming on this.

One of the interpretation of this could be, there is a chance that advertisement expense fromcorporate’smay get re-distributed among the broadcasters depending on a more accurate measure of their performance ?

Is that correct ?

That scenario will probably play out… But the current focus is on multifold increase in subscriber base with hardly any incremental costs…

fromcorporate’smay

[quote="rohit1889, post:1, topic:394255372"] Rs. 160 ARPU (Annual) | Rs. 2000 Number of households | 12 crore Subscription Base | Rs. 24000 crore Revenues earned by all broadcasters combined | Rs 3600 crore Carriage fees paid | Rs 1800 crore Net revenue | Rs 1800 crore Estimated net revenue | Rs. 9500 crore Thats a 5 times jump without taking into account the increase in ARPU or subscriber base. ARPU may not increase due to fierce competition, but subscriber base will indeed increase. [/quote]

Hi Rohit,


In India there are already 4 crore dth connections and 1 crore people with Set top boxes. Does this 12 crore number includes these households or excludes them.

Before DAS

ARPU (Monthly)

After DAS

Cable reaches 94 million homes with 88 million analog connections and 6 million digital ones, while DTH has commanded 41 million subscribers

So the total connections comes out to be 14 cr. DTH generally have fixed fee deals with broadcasters while LCO’s do a contract on fee per subsciber…

Chk out this… Some good documents available on TRAI website…

http://www.trai.gov.in/Content/search.aspx?q=digitization&cx=013280925726808751639%3Asev-gl3r35o&cof=FORID%3A9

http://www.trai.gov.in/WriteReadData/ConsultationPaper/Document/Digicity.pdf

This is a good questionnaire…

As per it… MSO’s will have to do an investment of 35,000 crore… How will they fund such high investment ?? How many years will it take for profits to flow in ? Picture is unclear…They will not have windfall gains unless ARPU increase…

DTH players- I doubt they will be biggest beneficiary… Indians are buying LCD,LED TV’s. Now I am getting good STB from my LCO at cheap cost… Why I will go for a DTH… I am using STB from my LCO for last 8 months… and I didn’t think about buying a DTH connection…

LCO’s will be killed… And they should be bcz they have operated like mafia… GOI has a loss of $1bn in taxes due tounder-reportingby LCO’s…

So the biggest beneficiary will be broadcasters…

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Here is the gist of what I got from the document that I found by accessing the link provided by you.

"The total revenue of the Indian television industry was estimated

at Rs. 25,700 crore in 2009, of which advertising accounts for

Rs.8,800 crore (34%) and subscription accounts for Rs.16,900

crore (66%) . Based on further analysis conducted during the

course of this exercise, the size of the subscription market for

analogue cable TV services is estimated at Rs.13,500 crore (68
million subscribers x ARPU of Rs.165 per month

). The revenue

from carriage and placement fee is estimated at approximately

Rs.900-1,000 crore(As per MSO Alliance)." Of the 13,500 crore subsription

revenue 80% (10,600 crore) goes to distributor(MSO and LCO) and 20% goes to broadcaster(2,900 crores).

I also believe from above that 3,400 crore of subscriptioin revenue was attributed then to DTH operaotrs who had roughly 18 million subscribors in 2009.

From this following following conclusion can be made:

a. When TRAI says that “Cable reaches 94 million homes with 88 million analog connections and 6 million digital ones, while DTH has commanded 41 million subscriber”, they are actually talking about people who are paying currently. Underreporting could be on top of that. As such the underreporting of cable houses can’t be more than 10-20%.

This also implies that through digitization, the flow of money to Television industry is not going to increase by more than 20%.

Is there something else that that will cause 5 fold increase in the revenues. Are we betting on consolidation of channels?

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12-14 crore is the number of households as per census conducted in 2011. So TRAI expects that revenue collection should be 24,000 crore. These are the actual figures… But the subscription base is not reported by LCO’s. GOI is loosing anually $1 bn in taxes… So considering a 30% tax rate… this transforms to $ 3-3.5 bn. This means 15,000 crore is not reported… Thats why GOI is pushing for digitization…

Just checked how it is in mature markets .In UK sky tv almost have a monopoly .They are thebroadcastersand also provide set top boxes .Actuallythey give Broadband +phone+ TV .By default you get all sky channels(for some you have to pay) and other popular channels.SO sky promotes their channels better.

I can see SunTV having this kind of qualities .

Also look for a company which can give broadband+tv + having own channels to broadcast.As people prefer to have one single vendor to make life easier.

Sun healthy balance sheet.negative is share can crash any time so we will always get opportunities to enter at lower levels( because of this we may never buy this).Only south India play. Donot much about zee.

Pls ignore the previous text Thanks so much for initiating this discussion thread. I agree it is a very timely one. W.r.t. TV18 I had done some back of the envelope analysis a few weeks ago and I thought I would just share my broad thoughts here. Disclosure: As of this writing I do not have a single paisa invested in media stock(s) Since this company does not generate a paisa in profits, the only meaningful way to do a quick and dirty analysis is to look at the EV / Sales multiple. Considering the effects of the Eenadu acquisition and the rights issue, I have incorporated those numbers to reflect the true picture as it stands currently. All numbers are for consolidated financials) Mkt Cap: 5240 Cr. Debt: 895 Cr. (Fy 2012) - 421 Cr. (repayment from rights issue) = 474 Cr. Cash: 82 Cr. (Fy 2012) + 278 Cr. (rights money raised for general corporate purposes) = 360 Cr. Resulting EV: 5354 Cr. Sales: 1495.6 Cr. (FY12) + 285 Cr. (proportionate share of Eenadu group of companies - culled from the Rights Issue Info Memo document) = 1780 Cr. Note: There will be some minority interest… but for the moment lets keep it aside EV / Sales ~ 3 X IMHO, the only comparable peer is Zee. Sun being a dominant regional player, with moat, may not be a fair comparison. Zee’s EV / Sales is ~ 5.3X Now Zee is a much larger player, debt free, has a clear corporate structure and is also immensely profitable (28% OPM). Unless there is a reason to believe that TV18 would benefit more from the digitisation wave than a Zee, the comparison of valuations based on current sales numbers should give a flavour of where TV18 stands. Also let use Munger’s Inversion theory to arrive at what this company needs to earn to justify a market cap of 5240 Cr. Assuming a P/E multiple of 25 (people invested in underwear & pizza companies might scoff at my tight fistedness), TV18 needs to earn ~ 210 Cr. (after minority interest)! Can it earn that kind of amount? How soon? Will the fruits be shared with shareholders? There are also a number of concerns wrt to the company TV18 - 1) Poor governance track record. Raghav Bahal is the Anil Ambani of media. He believes in financial engineering and frequently undertakes group restructuring, issues fancy securities and cuts some nasty deals (Eenadu + Reliance being a case in point). The company had also reduced the strike price of ESOPs last year citing a fall in stock price. 2) The meat of the business viz. General Entertainment Channels is housed in a JV with Viacom. Viacom has a call option in the JV after 14th July 2014. Assuming Viacom exercises the Call option or TV18 exercises its Put option then what? Company gets cash, but loses a valuable franchise or its stake gets diluted. Also, what will TV18 do with cash? Will it reward shareholders? Here is the extract of this item from the Rights Issue info memo - Viacom Inc., has the right, after July 21, 2014, to purchase such number of Viacom18 shares from us at fair market value, or appoint directors so as to establish management control or take any other action, such that Viacom Inc. can consolidate Viacom18âs financial results under US GAAP. In the event Viacom Inc. exercises its call option, we have a put option allowing us to cause Viacom Inc. to purchase our entire shareholding in Viacom18. Upon such exercise of Viacom Incâs call option, we would have a less than 50% interest in Viacom18 and a reduced presence on the Viacom18 board of directors. Each of these consequences could have a material adverse effect on our business, results of operations and financial condition. 3) CNBC brand is also under a license. Furthe,r CNBC’s fortunes depend upon that of the markets. 4) Film business is highly unpredictable. Eros itself trades at single digit P/E multiple. I agree that a company like TV18 has to be looked at in terms of the potential future benefits from digitisation, but an analysis of how things stand currently is also equally important for a value investor. I remember that in 2005 there was lot of hype around how the opening up of trade under WTO rules would prove to be a windfall for textile companies and stock prices were being marked up. Unfortunately, investors who got caught in the hype were left badly bruised. Valuations are clearly paramount. Considering the above, the potential investor has to clearly work out the risk reward equation for himself and see whether there is any margin of safety at the present market price. The future looks great for the sector and there is the potential for wealth creation. But given the facts of the case wrt TV18, will the future profits adequately justify the price that one would pay today? My objective was only to play the devil’s advocate and not to dissuade people who have done their own analysis and have the courage of conviction. Happy Investing :slight_smile: Discl: These are mota-moti thoughts. I reserve the right to be wrong :slight_smile:

TV18 is a littledifficultmodel to judge iwth Call/Put options…is there a simpler model in this space and reliable?

Read this in the latest issue of Capital Market Magazine:

“Consultancy firm KPMG expects the total revenue of Broadcasters to more than double to Rs. 73500 Cr. by calendar year 2016 from CY 2011.”

As explained in my previous post, my concerns on valuation and qualitative aspects of TV18 still remain. Many people are infatuated with TV18 because some celebrity investors have taken heavy positions in the company. But that is never a good reason to invest unless you can “independently” justify the facts of the case.

sir, what is this carriage fees it would be very nice of u if u could explain in detail…thanx

Based on my limited understanding -

Carriage fee is what Broadcasters (NDTV, Zee, etc.) have to pay to MSOs (Hathway, Den, etc.) to carry their channels to the ultimate viewer. The capacity of the analogue system to carry TV channels is limited, hence every broadcaster has to jostle for space. The carriage fee can hence be looked at as a form of “legal bribe” that is paid to occupy that space. Now, with digitisation, the carrying capacity of the system will increase multi fold, hence there is a possibility that carriage fees will come down. However, the flip side is the “placement fees” that broadcasters will need to pay to MSOs / DTH players. Now most viewers indulge in channel surfing… and so if a channel is placed far away, chances are that it will attract fewer eyeballs and consequently lower advertising revenues and ultimately lower subscription revenues as the channel may simply fade away from the viewer’s mind. Theplacement fee, again a kind of legal bribe, is thus paid to ensure that your channel is placed favourably and can be easily located while channel surfing.

The fear is that the benefits from the fall in carriage fees might be lost to placement fees.

This is an interesting dynamic to track.

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thanks maneesh for helping me to understand the point