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A CAS for bullishness?
N Mahalakshmi & Arun Rajendran | June 16, 2003
Media stocks have been rallying on the bourses in the past few trading sessions. Zee Telefilms, Hinduja TMT, Television Eighteen and Sri Adhikari Brothers have gained anywhere between 15 per cent to 40 per cent in the last two weeks.
And it's not just because of the general upbeat sentiment in the market.
The main reason is that the conditional access system for cable looks closer to becoming a reality.
CAS promises to change the face of the electronic media industry by eliminating the endemic problem of under-declaration of viewers by cable operators, apart from empowering the customer to pay only for the channel he desires to subscribe to.
In theory, broadcasters and multi-system operators are likely to be the biggest beneficiaries in the long-term as they will see a significant improvement in subscription revenues under the CAS regime.
However, there could be many a slip between the cup and the lip. The main uncertainties revolve around a few questions: will the overall monthly cable bills, including the cost of set-top boxes, free-to-air channels and the top pay channels be affordable to the average customer?
How soon will customers switch to STBs? Will the top three broadcasters (Star, Sony and Zee) remain pay channels? If they don't, how badly will the MSOs be affected given that they have already committed resources to get ready for CAS?
Will viewership for pay channels drop if subscription rates are too high? Or will the rise in subscriptions offset drops in ad revenues?
Needless to say, many of these issues will have a direct bearing on the financial health of the broadcasters and MSOs. Given so many ifs and buts, analysts are not quite sure whether the rise in media stocks is sustainable in the coming few months.
While most of them do appear bullish on Zee Telefilms, the fully integrated media company available on the bourses, and TV Eighteen because of its niche focus, they are not quite sure about smaller players like Shri Adhikari Brothers and Hinduja TMT, which operate the InCablenet cable service. Their prognosis: Wait and watch till the dust settles.
From all indications, CAS looks set to become a reality from July 14, some of the major concerns being dealt with.
Two steps, in particular, have helped. The first was the slashing of the import duty on STBs from 50.8 per cent to 5 per cent. The second was the issue of a directive to broadcasters asking them to furnish the pricing and content details of each channel, FTA as well as pay.
After the duty cut, a digital STB is likely to cost around Rs 3,500. Not a small sum, but when converted to a long-term rental scheme, the cost bite gets small. At current personal loan rates, a four-year loan will call for a monthly instalment of around Rs 94. The alternatives options are even cheaper - rentals with security deposits.
For instance, Hathway and IndusInd Media and Communications, which forms a part of Hinduja TMT, offer STBs for rent of Re 1 per day and a refundable deposit of Rs 999. There is also a regular scheme, with a refundable deposit of Rs 2,600, and a rental of 60 paise a day.
These schemes make STBs affordable for consumers, but the issue really is one of funding the purchase of STBs. Some analysts question the ability of MSOs to commit large sums to purchase STBs.
To achieve 100 per cent penetration in the metros - which command nearly 6.7 cable and satellite homes -- MSOs will have to spend about Rs 2,345 crore (Rs 23.45 billion) at the prevailing rates for STBs. A pretty large sum considering the size and financial strength of the MSOs. This itself may pose limitations on the rollout.
Besides, there is a possibility, though only remote, that pay channels may go FTA. Thus MSOs are nervous about ordering STBs in huge numbers. Broadcasters, on the other hand, fear a loss in ad revenues in the first few months as advertisers may switch to FTA channels in case pay channels do not reach a sizeable number of homes.
Analysts feel that the period of confusion immediately following the July 14 deadline will be crucial. Says Ramchandra Hegde, media analyst of Enam Securities: "The flux period just after implementation is crucial. The benefits to media players depend on the factor that there are no impediments to CAS implementation."
Analysts point out that subscription rates under the CAS system may still be expensive. The government has already suggested a price of Rs 72 for FTA channels.
Inclusive of the services tax of 8 per cent and entertainment tax, the cost of FTA channels will add up to marginally above Rs 100. The prevailing rates for the top three bouquets rates add up to Rs 170 currently.
Add the cost of STBs, and the total monthly bill will be upwards of Rs 300, higher than the current national average of subscription rates of Rs 157. Analysts point out that this escalation in rates may not be affordable for a whole lot of consumers, given their income profile.
About 61 per cent of cable TV households have a monthly income of less than Rs 8,000. More importantly, currently cable operators charge differential rates for consumers depending on locality.
In the CAS regime, this will not be possible. There will only be two rates -- FTA rate and FTA plus the relevant pay rate. This means that pay channels will have to invariably contend with fewer subscribers, and that will mean a sharp fall in ad revenues which may be difficult to cope with.
According to Media Partners Asia, a Hong Kong-based media consultant, Indian broadcasters are vulnerable to an erratic income stream because of their high dependence on advertising. Ad revenues account for nearly 75 per cent of total revenues.
In developed markets, the ratio is 50:50. As of now, Zee has maintained that it will not cut rates even after the implementation of CAS. Both Star and Sony have been non-committal in this respect.
However, the decision to remain a pay channel is like a prisoner's dilemma for broadcasters. If any one of the three flagship general entertainment channels decide to go FTA for the sake of better reach and enhanced advertisement revenues, it will force all of them to follow suit. Thus, effectively it will spoil the subscription revenue stream for all the broadcasters.
Considering that for all the three main channels pay revenue is a significant portion of total revenues, and continues to grow at a healthy rate, none of them may opt for FTA. However, if the STB offtake is not satisfactory, pay channels may see a fall in their viewership hampering ad revenues. That might actually compel them to go FTA.
Even if pay channels do not go FTA, there is a definite possibility that subscription rates for pay channels will come down. The Star bouquet has already announced that it will charge a lower rate to cable operators if the declaration is higher. But this is a chicken-and-egg situation -- lower prices will lead to a rise in the number of subscriber and a rise in subscription will lead to a drop in prices.
Broadcasters have been relieved a bit following the government's decision to allow discounts on the purchase of more channels. Earlier, it had announced that no bundling of channels would be allowed under CAS.
However, by allowing discounts, broadcasters may still be able to push weaker channels along with stronger channels. A broadcaster can always offer some channels (the weaker ones) free on purchase of some others (stronger ones).
Despite the glitches, MSOs are hopeful that CAS will be implemented on the due date. Hathway and Hinduja TMT have earmarked about Rs 150 crore (Rs 1.5 billion) each for the implementation of CAS.
"We expect consumers to sit on the fence for a week from the implementation guideline, but we are positive they would take the plunge soon enough" says Ashok Mansukhani, executive vice-president , Hinduja TMT. The company has issued letter of intent for 300,000 STBs.
Hathway also claims to have a comparable number of STBs ready. "We are all set for CAS and our encoders are in place one month in advance," says Neeraj Bhatia, vice-president, Hathway Cable & Datacon.
If CAS does get implemented smoothly, the long-term benefits to broadcasters and MSOs will be sizeable. Presently, the cable operator is the uncrowned king with a hefty chunk of the subscription pie in his pocket.
It is estimated that only 7-8 per cent of the total cable subscription revenues trickle down to broadcasters. In March 2003, of Rs 9,500 crore (Rs 95 billion) cable revenues, only Rs 700-750 crore (Rs 7-7.5 billion) went into the broadcasters' kitty.
However, with the implementation of CAS, broadcasters would witness a sea change in their revenue structure. "The broadcasters would see subscription revenues flowing in and would be less reliant on advertising revenues," says Nikhil Vora, media analyst, ASK Raymond James.
MSOs could also benefit by providing value added services. Hinduja TMT plans value additions in the form of live services wherein single events like concerts, sporting events and special events which would be pay per view.
Another revenue stream would store content like the latest movies, which would be arranged by tie-ups with movie production houses on a pay-per-view basis. "We will also have arrangements with producers about inserting advertisements in the movie.
"The revenues could be shared evenly," says Mansukhani. Also in the pipeline is the nostalgia segment which would feature parceled digitalised content for a niche audience.
Among the listed companies, analysts are upbeat on the prospects of players like Zee Telefilms, TV18, Hinduja TMT and Hathway over the long-term.
In the short to medium-term, however, Zee could suffer because of lower ad revenues. Hinduja TMT and Hathway are also at risk given the uncertainties about the financing of set-top boxes.
Analysts view Zee Telefilms as the biggest beneficiary of CAS among listed companies. The company's broadcasting business as well as its MSO business (Siticable) will gain over the long-term on account of strong growth in subscription revenues as declarations improve post-CAS.
In the last fiscal, Zee's pay revenues amounted to Rs 131.8 crore (Rs 1.32 billion). This came on a subscriber base of about 4.6 million homes. Now, even if one assumes that one half of all the C&S homes choose to subscribe to Zee once CAS is implemented across the country, it could see at least a four-fold increase in its subscriber base.
This will obviously mean a disproportionate jump in pay revenues which will directly add to the bottomline.
However, the immediate quarters may be adversely affected due to a fall in both subscription and advertising revenues. Though it may not be unreasonable to assume that about seven per cent of total cable households (that's what broadcasters get paid for on an average) will buy STBs and subscribe to pay channels, pricing pressure will hit the bottomline.
Even while remaining pay, broadcasters will have to keep prices attractive to retain and attract customers. Ad revenues will be hit sharply due to lower overall reach.
Analysts are generally bullish on Zee as it has been able to beef up its programming capabilties in the past one year. Consequently, its TRP ratings have been improving.
At the current price of Rs 92, the stock is trading at 13 times FY04 earnings. "Zee deserves to be rated on a par with its Asian peers which trade at around 16 times earnings," says an analyst.
Risk factor: Ad revenues could see a dip in the coming quarters.
Presently, the company earns around 90 per cent of revenues from its business process outsourcing sector. It has a sizeable presence in Mumbai cable operations, which are currently loss-making. Analysts say that the stock would benefit from the CAS revenue stream as carriage fees from broadcasters.
Company officials seem pretty upbeat about revenue-earning prospects from value-added services and the fixed percentage margins made on subscription revenues when declarations improve post-CAS.
However, any tangible benefits would accrue only over the slightly longer term if a sizeable amount of customers go in for the pay-per-view and other special services, feel analysts. The growing importance of MSOs to broadcasters also augurs well for the scrip.
However, the flipside is the huge investment that the MSO has undertaken to enable CAS implementation. The stock trades at Rs 247 on the BSE.
Risk factor: Delays in CAS implementation will mean the investments made for preparation will not yield retuns or even turn into losses.
'The dark horse, Hathway Bhawani came into existence when the Rajan Raheja group bought BiTV of the Business India group in 1998. While initially the company was only into cable TV operations, it decided to cash in on the convergence of technologies, leveraging its large household connectivity to become an internet service provider.
The company got a large cash infusion last year when Star TV acquired a 26 per cent stake in Hathway for $75 million. The Rahejas are also present in the Kerala cable TV industry, acquiring the business from Asianet group. Hathway has a coverage of around 50 per cent in the Mumbai cable market. The company also has presence in the VOIP business.
The company has earmarked Rs 150 crore (Rs 1.5 billion) for CAS implementation and company officials are upbeat on the future earnings potential. The company commands a market-cap of barely Rs 12 crore (Rs 120 million) and has been showing losses in the last two quarters.
However, analysts say that there is a pretty good chance of the company turning around in the coming quarter. The aggregeate non-promoter holding in the company is around 27 per cent and the floating stock is just about 25 lakh (2.5 million) shares.
The stock trades at Rs 15.60 on the BSE and has spurted up recently amid rumours of Star hiking its stake in the company to gain a greater foothold into the MSO business.
Risk factor: Delays in CAS implementation will mean investments made for preparation will not yield quick returns or even turn into losses.
The company presently earns 70 per cent of its revenues from advertising. The recent results have been good, with the company bouncing back into the black with a Rs 3.02 crore (Rs 30.2 million) profit for the quarter ended March 2003 from a Rs 4.6 crore loss in the same quarter in the preceding year.
Analysts say that the recent government policy of limiting foreign holdings in news channels to 26 per cent would be favourable for TV 18, which is negotiating with CNBC Asia for hiking its holding in CNBC India from 49 per cent to over 74 per cent.
The company also earns a minimum guarantee payment from the Zee-Turner bouquet, which has increased after April 1. Analysts say that CNBC India's high quality programming has a niche audience who would not hesitate to pay for the service.
The infusion of subscription revenue would really help to boost revenue flow and thereby improve content further, feel analysts. The stock quotes at Rs 95.65 on the BSE at a P/E of 39.04x.
Risk factor: No significant negative.
Sri Adhikari Brothers
Analysts are divided on the scrip, with one section anticipating advertising revenues to flow into the company because of its free-to-air status and audience reach increasing its attractiveness to advertisers.
Presently, the company earns around Rs 16 crore (Rs 160 million) from advertising revenues and Rs 43.04 crore (RS 430.4 million) from sponsored programming. However, an important caveat is that the channel is not currently a part of any broadcaster's bouquet and may not feature in the 30-and-odd free channels that most MSOs would provide to customers.
The company has no plans to go pay for at least two more years. "Although we believe that there is great potential in pay channels, we intend to remain free-to-air for another two years at least," says Markand Adhikari of SAB TV.
The company is expecting higher advertising revenues this fiscal, especially in the period following the CAS implementation. The scrip trades at Rs 76.60 on the BSE.
Risk factor: If MSOs do not offer SAB as part of FTA channels, ad revenues will be hit.
Under the present structure, an MSO is typically in the middle of the cable TV pyramid. At the top of the pyramid are the satellite channels from whom the MSOs receive broadcast signals for a fee that is based on its subscriber base.
The MSO in turn relays the feed to its franchisee-cable operators for a fee that is based on the number of homes the latter has connected. The main MSOs in Mumbai include the big three -- the Raheja-owned Hathway Cable, the Hindujas' InCable and Zee's Siticable.
While the business model seems fine outwardly, the rampant under-declaration of subscriber base by local cable operators is what is hurting MSOs. While MSOs tried to do the same with the pay channels, they couldn't continue with this as the latter started cutting off their signal feeds.
The MSOs, on the other hand, are not able to do the same with their cable operators fearing desertions. Even the franchisee agreements are non-exclusive and there are operators who offer more than one MSOs connection.
Therefore, it is not surprising when MSOs like Hinduja TMT and Hathway claim that the present revenue flows are negligible. However, all that is expected to change after CAS.
Analysts opine that the transparency and organisation that CAS will bring to the cable industry will curb under-declaration and give a much needed revenue boost to MSOs. The importance of MSOs to broadcasters would also increase as they would handle the encryption of signals and STBs, along with the software recording the consumer preferences.
Analysts feel that MSOs would shift towards the US model wherein they would have content of their own due to bulk buying from broadcasters.
"The interim period in CAS implementation will see a downswing in their revenues. However, it will pick up after that", adds Ramchandra Hegde of Enam Securities.
What awaits them
Technical analyst Sumeet Rohra charts out the technical potential of CAS-related media stocks.
Friday closing (Rs) 246.90
Daily average volume (Lakh shares) 4.87
Daily average volume (Rs lakh) 1081.32
Market Cap (Rs crore) 878.47
One of the major beneficiaries of CAS, Hinduja TMT has crossed a crucial resistance at Rs 235, which has put the stock into a long-term uptrend.
This breakout has happened with a massive increase in volumes. The weekly oscillators like RSI and MACD have turned positive as well.
On daily charts, it seems to have broken an upward sloping channel, which is considered very bullish. It does seem that the stock is now headed for levels of Rs 310 which, once surpassed, could take the stock to levels of Rs 400.
Friday closing (Rs) 90.40
Daily average volume (Lakh shares) 28.95
Daily average volume (Rs lakh) 2443.94
Market Cap (Rs core) 3,729.00
Zee Telefilms has crossed a very crucial resistance of Rs 86-87, which has put it into a long-term uptrend. The weekly oscillators like RSI and MACD have turned positive. Zee is now headed towards Rs 105-107 levels.
Friday closing (Rs) 96.00
Daily average volume (Lakh shares) 0.63
Daily average volume (Rs lakh) 55.70
Market Cap (Rs crore) 105.02
TV 18 has shown a very good breakout above levels of Rs 88. This puts the stock into a target of Rs 120 in the medium term. The fact that the breakout has come with a surge in volumes augurs well for the scrip.
Friday closing (Rs) 15.36
Daily average volume (Lakh shares) 0.61
Daily average volume (Rs lakh) 8.22
Market Cap (Rs crore) 12.29
Like Hinduja TMT, Hathway Bhawani MSO could be a major beneficiary of CAS. The stock has seen good buying in the last few sessions. It has run up from the Rs 8 level to the Rs 16 level in the last 10 days.
The volumes in the counter have also increased significantly, which shows good buying. It has broken a falling trendline, which thereby projects a target of Rs 23 in the medium term. It has got excellent support around the Rs 12 level.
Friday closing (Rs) 76.60
Daily average volume (Lakh shares) 0.70
Daily average volume (Rs lakh) 50.11
Market Cap (Rs crore) 65.65
Sri Adhikari has seen a siginficant run up in the last few weeks. However, there seems to be a siginificant amount of resistance around the Rs 88-90. So, at current levels, it seems investors could probably wait and watch. The stock seems to be best left alone for now.