(10 March 2007 7:00 pm)

NEW DELHI: Kotak Institutional Equities has projected the growth of the DTH market by 2012 to hit a massive $5 billion, and holds the inherent advantages the rival cable industry ought to enjoy can only be ensured if MSOs control the last mile business.

The report says that the DTH market at the moment is 2.3 mn households (minus the government DTH service) and is going to shoot to an astronomical 25 million HHs by 2012, in a five-player situation.

By the same year, C&S households would stand at 112 mn, the report projects.

The "explosive growth in revenue" would be helped by the government's digitalisation programme, and would see a much faster growth if Cas is made mandatory, as people would have to choose within a limited timeframe, the report says. It adds though, that mandatory Cas would also benefit cable industry, but says it does not see mandatory Cas happening.

It preliminary valuation of Dish TV is $1.1 bn, or Rs 115 per share, and the report says it would fine tune its valuation once Dish TV gets listed, which it says is likely over the next few weeks.

Kotak expects the DTH revenues to grow to Rs 93 bn, from a modest Rs 2.6 bn at the moment, and bases its assumption on factors like growth in the number of subscribers (to 25 mn) and expansion in ARPU (Rs 341 per month), with a modest EBITDA marging at 25 to 28 per cent.

The number of players is important, suggests the report, as it will likely determine the amount of competition and key variables such as pricing (ARPU), STB subsidy and fixed costs.

Kotak assumes a WACC at 12.5 per cent and growth to perpetuity to 5.5 per cent, "which translates into exit FCF multiple of 14.3X and an exit EBITDA multiple of 9.5X.

One of the factors driving the growth of the digital, addressable systems would be the growth of household income, and the report says that the proprietary household income distribution model shows that HHs with an average monthly income of Rs 8,000 would go up from 19 mn in 2006 to 48 mn by 2012E and to 65 mn by 2017E.

Interestingly, the report says that it uses Rs 8,000 pm as the threshold level based on an ARPU of Rs 300 per month, but says that it is possible that operators may offer lower ARPU in order to segment the market and drive penetration.

"However, in HHs with very low incomes (Rs 4,000 pm) we see the cost of prices of consumer premises equipment as an issue, but expect reduction in the cost of CPE and subsidy on CPE to increase affordability over a period of time," the report projects.

The report notes that due to easy introductory offers made by the two DTH players at the moment, the ARPU is extremely low at the present moment, but might shoot up to Rs 350 per month, as initial subscribers convert to paying subscribers as their free subscription period ends in a few months.

The report says Kotak would review their ARPU assumptions over the next few months.

The report comments that a consolidation in the industry will allow finfncially strong MSOs such as WWIL, Hathway, Hinduja TMT, etc., to drive digitalisation of the cable industry.

Vis-à-vis the DTH, the cable industry has some inherent advantages, especially the sorter time it takes to seed a cable STB, and the fact that these could be used with the same wiring as in the old system, whereas DTH may need fresh wiring etc., but notes that currently the cable industry does not enjoy any such advantage due to various factors.

The foremost is the fragmented nature of the last mile business, which will make it difficult for the MSOs to drive penetration in the short run.

There are other factors as well, however, the report says, the key challenge for the cable industry would be control of the last mile, either through ownership of LM or working out JVs with the LCOs.

The report says that LCOs are hugely profitable business, and will become even more so under Cas, and hence, LCOs may want to sell their operations to MSOs at prices not acceptable to the latter.

The report says that one hope is that the growth of TH may push the cable industry towards consolidation as a cable operator would have to balance his net present value of cash flow from a dwindling subscriber base poached by DTH, versus a one-time offer being made by an MSO.

Government regulation and policies on distribution and content would also play a key role in the pace of penetration of DTH (and addressable systems) in the country, says the report.

In their opinion, avers Kotak, the government would do better in the interest of digitalisation if it offers certain fiscal and non-fiscal incentives for the conversion from the present analogue to the digital delivery system.