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Consolidation on cards in cable TV biz: Angel Broking
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#1

Multiple system operator (MSO) sector has been in the limelight because of the Telecom Regulatory Authority of India’s (TRAI's) recommendation, indicating that the consumers will soon have to move towards a set-top box or digitization of television delivery from the current analog system.

At the moment digitized homes make up about 22 million in India, which is expected to jump four folds, with the entire cable space shift from analog to digitized proposed to happen by December 31, 2013.

This is good business for those who distribute television thorough the digitized format. Companies in focus are Dish TV, WWIL, Hathway Cable and Den Networks, the last two who are distributing currently with the set-top box model.

In an interview with CNBC-TV18, Anand Shah of Angel Broking spoke about the issue and gave an analysis about why you should go for a set-top box.

Q: Of the two categories of TV distribution companies, which ones would you put your bet on right now?

A: With TRAI recommendations coming up, in the distribution play both the cable distribution companies particularly multi-system operators (MSOs) like Hathway and DEN are very strong beneficiaries. Even Dish TV as an operator in the direct-to-home (DTH) space, the only listed player is also a strong beneficiary. Once forced into digitization, the customer will have to choose either going the conditional access system (CAS) way, that is buy a set-top box from your analog cable provider or you either go for the DTH option. Both these players are entrenched and they stand to benefit.

We would rather prefer the MSO space much more say a Hathway or DEN than Dish TV again because of very strong competition in the DTH space. Though Dish TV is a strong player and has the first mover advantage, I guess the earnings improvement potential is very high in the MSOs which one can read from the TRAI recommendations

Q: So what kind of an earnings upgrade are you giving Hathway and DEN? Hathway at the moment is not in profit making mode, but what kind of earnings projections are you giving by 2012 and therefore price projections?

A: We are not covering Hathway or DEN. It is not under our active coverage. I do not have any rating on these stocks. Given several important recommendations that TRAI has come up with, particularly in the income tax break that will be available for all providers who qualify for digitization along with an almost eight year tax holiday similar to telecom companies and even the custom duty waiver for three years.

These could be very strong triggers in terms of earnings upgrades for both these companies. Given they have only 10% off their reach, say a DEN for example reaches 10 million customers and hardly one million is digitized yet. We see that number could go significantly up and if that goes up you are going to see very strong upgrades in both these stocks.

Q: All these things to get implemented would require a lot of funding. How do you expect the environment to pan out for this industry? Do you expect new players to come and do you expect consolidation and if it does happen what do you expect margins to be like now?

A: Certainly consolidation is on the cards and even funding to a certain extent. If you see Hathway and DEN already have done a round of funding through the initial public offerings (IPOs). Once they got listed and got nearly Rs 350 crore of funding. So for the first round they are already are in place. TRAI earlier had recommended increasing the foreign direct investment (FDI) levels to 74% into the distribution space. That should also give them the headroom if they want to take external funding in terms of foreign investment as well.

I don’t think funding should be an issue though there should be fair amount of funding required. That is why TRAI has recommended a lot of tax breaks and even taxes in terms of entertainment and service tax which are implemented in broadcasting industry should also be rationalized. There is a fillip from government as well and funding for these companies is also into place.

Consolidation is already happening, if you see in the past Digicable was recently acquired by Reliance ADAG Group. It is already on the cards. In the long run we do see there will be three-four players both in distribution as well as in DTH which will be entrenched and will be profitable.

Q: Do you cover Dish TV and what is the target price you set on that one then?

A: We are not covering any stocks in the distribution space. In terms of indirect beneficiaries we do see broadcasting as a very significant beneficiary. Once digitization improves, you will see a lot of inflow in terms of subscription revenue for these companies. There we are very positive on SUN TV. Recently the stock has run up a lot but there we are recommending another 10% upside from current levels.

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The Move Is Already Going On... In Belgaum Is Acquiring Whatever Cable Operators Any SIZE In Nearby Taluks And Districts
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