ICRA research

Indian Media & Entertainment Industry

Progress of Digitization in TV Distribution Industry

Analyst Contacts
Subrata Ray
+91 22 2433 1086
subrata@icraindia.com
Anupama Arora
+91 124 4545 303
anupama@icraindia.com
Shruti Zatakia
+91 124 4545 396
shruti.zatakia@icraindia.com

As the Ministry of Information and Broadcasting (MIB) stood by the sunset

1
date for analog cable in Phase III markets of December 31, 2015, the STB
rollout gained momentum in Q3, 2015-16. MIB had earlier extended the
deadline of December 31, 2014 for Phase III and Phase IV markets to
December 31, 2015 and December 31, 2016 citing implementation
challenges faced by players in Phase I and Phase II and the low level of
preparedness (in terms of STB inventory) for addressing the largest
subscriber base in the country. While the deadline was adhered to,
operational challenges in select markets constrained the complete
digitisation in these markets.
Rollout of digitization in Phase III markets marked by interim stay orders
from High Courts

Consequently, industry players remained highly dependent on imported

STBs, primarily from China. However, lower productions levels at China
over the last few months, triggered by the short supply of chipsets and
tuners from European manufacturers, resulted in disruption of supply.
Despite placing orders well in advance, the shortage in STBs impacted
the progress for Phase III, the quantum of such shortage is expected to
be higher for smaller regional MSOs as compared to national MSOs who
were carrying adequate inventory.

Phase III markets included all urban areas of the country not covered under
Phase I (Delhi, Mumbai, Kolkata and Chennai) and Phase II (38 cities with a
total population of more than 10 lakh).

March 2016

While MSOs (and LCOs) and DTH operators focussed on ensuring a

smooth rollout in Phase III markets, the shortage of STBs in certain
markets of Maharashtra, Madhya Pradesh and West Bengal proved to be
a roadblock as the deadline approached. Despite the impetus from the
Make in India campaign launched by the Government, the indigenous
supply of STBs continued to fail to meet the magnum demand triggered
by the rollout of digitization across the country, with Phase III being the
largest addressable market with an original estimated analog subscriber
base of nearly 39 million. Moreover, the contiguous nature of Phase III
and Phase IV markets in certain areas resulted in the simultaneous
digitization of certain Phase IV markets, thereby resulting in incremental
demand for STBs.

ICRA Special Comments

Indian Media & Entertainment Industry- TV Distribution

Basis a shortage in STB supplies, regional associations of LCOs/MSOs as well as standalone MSOs applied for a stay on
the implementation of DAS in Phase III markets with the High Court across several states. While Hyderabad High Court
granted a stay on the implementation of DAS in Phase III markets of both Telengana and Andhra Pradesh by eight
weeks, the Sikkim High Court granted a stay until March 28, 2016, which is the next date of hearing.
At present, the implementation has been stayed for varying periods across Phase III markets of Maharashtra, Andhra
Pradesh, Assam, Orissa, Sikkim, Telengana apart from Tamil Nadu where DAS implementation has been challenged since
Phase I rollout.
As per the data released by the MIB on December 30, 2015, 76% penetration had been achieved in Phase III markets,
which increased to 86.25% if Tamil Nadu (which Table: State-wise impact due to stay order from HC
continues to face legal issues) is excluded. State
No. of Households Duration of Stay from HC
(in Millions)
(from December 31, 2016)
However, there remained 405 zero-seeded areas
Sikkim
0.03
Twelve Weeks
at that point in time. Despite the sunset date for
0.56
Eight Weeks
Phase III markets remaining sacrosanct, industry Assam
0.86
Twelve Weeks
players had anticipated the rollout to continue Telangana
Orissa
0.96
Eight Weeks
through Q4, FY16 with a phased switch-off of
2.06
Twelve Weeks
analog signals in these markets. However, the Andhra Pradesh
Maharashtra
3.50
until
February 1, 2016
stay orders issued from various High Courts
across states acts as a dampener. While a Tamil Nadu
6.61
snowballing effect has already been witnessed Total
14.58
th
across the country, as per the 5 Updated List of Source: ICRA research
Urban Areas to be covered under Phase III,
issued by the MIB, nearly 14.6 million households are expected to be impacted due to the aforementioned stay order,
accounting for nearly 44% of the addressable households in these markets. Although some comfort can be drawn from
the fact that the maximum relief granted in the above mentioned cases is 12 weeks (for Sikkim), any further extension
of the deadline would delay the cash flows from activation revenues, though one time, besides the steady flow of
subscription revenues by few quarters.
Reclassification of areas to Phase IV has reduced the addressable household population in Phase III markets
In addition to the stay orders granted by the High Courts, in view of the low household concentration in certain areas,
MIB remapped such areas from Phase III to Phase IV on the eve of the sunset date. Consequently, nearly 4.9 million
households have further been removed from Phase III bringing down the total addressable population from 38.8 million
households to 33.2 million, with the maximum impact being felt in West Bengal, Kerala, Goa and Jharkhand. While
ambiguity regarding the final implementation date of Phase III could impact the monetization of the digitized universe in
these markets, the reduction in the overall addressable household population is expected to impact the incremental
activation revenues for MSOs from Phase III markets in the current fiscal. However, as data on the level of penetration
already achieved in Phase III is not available yet, it remains difficult to ascertain the impact of the above challenges on
the revenue profile and resultant profitability and credit metrics of industry players in TV distribution space.
Table: State-wise households impact due to remapping to Phase IV markets

Kerala
Goa
West Bengal
Jharkhand
Andaman & Nicobar Islands
Tripura
Assam

No. of Urban
Areas Moved
453
56
755
189
4
25
125

No. of Households moved

to Phase IV (in Millions)
1.83
0.09
0.83
0.32
0.01
0.04
0.11

Total Households
(Originally)
2.98
0.17
2.00
0.86
0.03
0.17
0.67

% of Households
Moved to Phase IV
61%
51%
41%
37%
25%
23%
17%

ICRA Special Comments

Telangana
Pondicherry
Gujarat
Andhra Pradesh
Jammu and Kashmir
Haryana
Odisha
Karnataka
Rajasthan
Madhya Pradesh
Punjab
Himachal Pradesh
Sikkim
Chhattisgarh
Total

Indian Media & Entertainment Industry- TV Distribution

No. of Urban
Areas Moved
94
5
177
91
42
72
114
119
104
98
68
10
2
13
2,616

No. of Households moved

to Phase IV (in Millions)
0.26
0.03
0.27
0.29
0.03
0.13
0.11
0.17
0.13
0.14
0.09
0.01
0.00
0.02
4.89

Total Households
(Originally)
1.78
0.18
1.89
2.35
0.29
1.20
1.00
2.20
1.67
1.96
1.33
0.14
0.03
0.83

% of Households
Moved to Phase IV
15%
14%
14%
12%
12%
11%
10%
8%
8%
7%
7%
6%
4%
2%

Source: ICRA research

Players witness healthy uptick in activation revenues in Q3, 2015-16 mirroring the STB rollout in Phase III markets;
as anticipated STB rollout to continue through Q4, 2015-16
Despite challenges, the STB rollout across Phase III markets witnessed a significant uptick through Q3, FY16 with the
approaching deadline. As per data reported by the top three MSOs- DEN Networks, Hathway Datacom and Siti Cablethe incremental STBs seeded during Q3, FY16 stood at nearly 3.0 million as against 1.3 million STBs seeded by the
players over H1,FY16. DTH players- Airtel, Dish TV and Videocon D2H also reported incremental seeding of nearly 1.3
million STBs in Q3, 2015-16 as against 1.9 million STBs seeded in H1, FY16.
Chart: Quarterly Trend in Incremental STBs Seeded (in Millions)
1.20

1.10
0.95

1.00

0.90

0.80

0.53

0.60

0.35

0.40

0.20

0.39

0.33
0.10

0.20

0.19

0.34 0.32

0.43

0.34
0.16

0.10

0.46

0.20

0.00
DEN

Siti Cable

Hathway

Jun-15

DishTV

Sep-15

Airtel

Videocon

Dec-15

Source: ICRA research

Mirroring the STB rollout in Phase III markets, activation revenues for MSOs have witnessed healthy growth in Q3,
FY16. In addition to healthy volumes of STBs seeded, the revenues have also been supported by the ability of the
players to charge higher activation charges per STB in these markets attributable to lower competitive intensity as
compared to Phase I and Phase II markets.

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ICRA Special Comments

Indian Media & Entertainment Industry- TV Distribution

Although there remains a certain degree of ambiguity regarding the sunset date for Phase III markets, as analog
signals have not yet been turned off in view of stay from various High Courts, seeding of STBs continues at a healthy
pace across markets and nearly complete penetration is expected to be achieved by the end of the current fiscal.
At a time when monetization in Phase I and Phase II markets has remained weak and the resultant growth in
subscription revenues has remained relatively stagnant, the revenue profiles of MSOs are expected to be supported
by such activation income in the current fiscal. Moreover, with the proposed deadline of December 31, 2016 for the
rollout of digitization across Phase IV markets, activation income is expected to remain a key source of revenues for
players over the near term.
Conclusion
While DTH players have been able to leverage their inherent technology advantage in cable dark areas of Phase III
markets, MSOs continued to gain a favourable market share in such areas which remained contiguous to Phase II
markets (such as Gurgaon and Noida in NCR and certain parts of Mumbai). DTH players are expected to take a lead in
Phase IV markets as the catchment area (less than 15,000 households) in these markets remains highly fragmented
and therefore unprofitable for cable operators to penetrate.
In the current fiscal, the revenue growth for MSOs will be driven by activation income. However, over the medium
term, monetization of the digital subscriber universe in Phase III markets offers high subscription revenue growth
potential for players. As per
Chart: Total Digital Subscribers (in Millions)
discussions with industry players, 16.0
14.0
cable ARPUs in Phase III markets
14.0
12.9
have the potential of growing from
11.3
11.1
the existing levels of Rs 10-15 per 12.0
10.2
10.1
9.6
subscriber per month to more than 10.0
8.5
8.5
Rs 50 per subscriber per month.
8.0
7.0
6.8

6.0

5.4

Profitability metrics of players has

4.0
remained restricted over FY15 on
2.0
account of ongoing investments
towards digitization of Phase III and
0.0
DEN
Hathway
Siti Cable
Airtel
DishTV
Videocon
Phase IV markets, significant
Mar-15
Dec-15
investments by MSOs in the
broadband business segment, slow Source: ICRA research
monetization and ARPU growth in Phase I and Phase II markets and significant uptick in content costs due to the
change in nature of deals with broadcasters. While profitability metrics of players are expected to be cushioned by
activation revenues in the current fiscal, benefits of monetization of investments in Phase III markets as well as
growth in ARPUs from Phase I and Phase II markets, renegotiated content cost deals with broadcasters (fixed fee
arrangements) as well as hike in channel package rates are expected to support the profitability metrics over the
medium term.
Over the last few years, market leaders in the cable TV space have adopted an inorganic growth strategy for entering
new geographies and increasing their subscriber universe, consolidation in the cable TV space is expected to continue
as players look at further strengthening their market position in their respective geographies. In line with this, Siti
Cable announced its intention of acquiring a majority stake in several localized MSOs (specifically in Western India) in
January 2016 backed by fresh equity infusion from promoter group.
With significant investments already incurred, incremental capex requirements of MSOs in the cable business are
expected to be lower. Moreover, improvement in profitability metrics is further expected to support the cash flows of
players over the medium term. Correspondingly, some improvement in the credit profile of players is anticipated.
March 2016
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ICRA Special Comments

Indian Media & Entertainment Industry- TV Distribution

Annexure: Trend in Quarterly Revenue Metrics

Table: Trend in Key Revenue Metrics- DEN Networks Limited (Consolidated)

Amount in Rs crore

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Subscription Income

146.0

147.0

115.7

113.3

119.0

115.0

119.0

Carriage and Placement Income

116.0

118.0

115.6

124.4

118.0

111.0

111.0

Activation Income

20.0

17.0

15.0

12.0

15.0

27.0

86.0

Other

3.0

5.0

10.4

14.6

5.1

6.0

6.0

Total

285.0

287.0

256.7

264.3

257.1

259.0

322.0

Table: Trend in Key Revenue Metrics - Siti Cable Network Limited (Consolidated)

Amount in Rs crore

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Subscription Income

118.2

135.0

135.7

142.4

129.0

138.5

145.8

Carriage and Placement Income

61.7

58.7

55.1

73.5

72.9

60.3

60.5

Activation Income

14.6

13.1

13.6

21.1

10.9

19.4

105.0

Broadband

5.5

6.2

7.0

7.9

9.0

9.3

13.9

200.0

213.0

211.4

244.9

221.8

227.5

325.2

Total

Table: Trend in Key Revenue Metrics - Hathway Cable & Datacom Limited (Standalone)

Amount in Rs crore

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Subscription Income

111.0

111.0

99.0

120.9

105.5

107.5

108.0

Carriage and Placement Income

78.2

82.4

75.8

77.5

83.8

84.8

82.2

Activation Income

8.9

22.1

7.2

5.7

5.5

4.7

22.3

Broadband

41.6

45.4

51.3

57.7

65.1

71.9

78.7

Other

10.5

2.7

5.8

8.7

4.6

5.1

9.2

Total

250.2

263.6

239.1

270.5

264.5

274.0

300.4

Table: Trend in Key Revenue Metrics - Ortel Communications Limited (Standalone)

Amount in Rs crore

Q1FY15

Q2FY15

Q3FY15

Q4FY15

Q1FY16

Q2FY16

Q3FY16

Subscription Income

19.7

19.8

19.9

19.6

20.0

20.6

21.2

Carriage and Placement Income

5.6

6.7

6.6

7.4

7.8

9.7

9.8

Activation Income

0.6

1.1

0.7

0.8

0.7

0.7

1.0

Broadband

7.1

7.3

7.1

7.5

7.5

8.1

8.3

Other

0.7

1.9

5.0

9.6

4.6

6.7

7.8

Total

33.7

36.8

39.3

44.9

40.6

45.8

48.1

Source: Company Investor Releases; ICRA research

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ICRA Special Comments

Indian Media & Entertainment Industry- TV Distribution

Annexure: Key Financial Indicators- Aggregate

Annual

Quarterly

Profit & Loss (Rs. Crore)

2013-14

2014-15

Mar-15

Jun-15

Sep-15

Dec-15

Net sales

4,136.1

4,710.4

1,578.6

1,304.9

1,416.8

1,634.4

Other related income

Total revenue
OI Growth (%)
EBITDA
Depreciation
EBIT

1,276.7
5,412.8
25.7%
1,064.2
1,050.7
13.6

1,267.6
5,978.0
10.4%
1,106.3
1,174.2
(68.0)

17.3
1,596.0
9.4%
272.9
309.7
(36.8)

4.4
1,309.2
-18.0%
179.5
163.0
16.5

6.6
1,423.3
8.7%
201.1
169.4
31.7

41.2
1,675.6
17.7%
356.5
178.9
177.7

Interest expenses
Other income/expense
PBT (before extraordinary income)
Extraordinary Gain/Loss
Tax
PAT

457.3
201.3
(242.4)
(14.7)
44.3
(301.4)

508.2
231.9
(344.3)
3.9
51.7
(392.1)

117.9
64.8
(89.9)
(25.1)
27.8
(142.8)

100.6
61.3
(22.8)
0.3
4.6
(27.2)

106.9
51.7
(23.5)
(0.9)
9.4
(33.7)

103.9
33.8
107.6
0.0
13.4
94.2

(2.2)
(4.9)
(34.2)

0.0
(8.5)
(42.1)

0.0
(31.9)
62.4

Extraordinary & Prior Period Items

Minority interest (MI)
PAT (concern share)

(47.5)
(348.9)

(29.6)
(421.7)

0.0
10.3
(132.6)

Key Financial Ratios

2013-14

2014-15

Mar-15

Jun-15

Sep-15

Dec-15

27.4%
3.2%

13.9%
4.0%

9.2%
-0.2%

-17.3%
-34.2%

8.6%
12.0%

15.4%
77.3%

19.7%
0.3%
-5.6%

18.5%
-1.1%
-6.6%

17.1%
-2.3%
-8.9%

13.7%
1.3%
-2.1%

14.1%
2.2%
-2.4%

21.3%
10.6%
5.6%

Growth indicators
Sales Growth (Q-o-Q)
EBITDA Growth (Q-o-Q)
Profitability indicators
EBITDA Margin
EBIT Margin
PAT Margin

Includes Consolidated Financials of Siti Cable Network Limited and Den Networks Limited and Standalone Financials of Hathway
Cable & Datacom Limited, Ortel Communications Limited and Dish TV India Limited
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ICRA Special Comments

Indian Media & Entertainment Industry- TV Distribution

Annexure: Key Takeaways from Discussion with Industry Players

Impact
Decline in STB prices and ability of
players to charge higher activation
revenues remains a positive

Learnings from Phase I and Phase II

Updated technology of STBs to

provide savings in bandwidth costs
to operators

Significant Potential for ARPU

uptick in Phase III markets from
day one

Renegotiated content deals to

support growth in operating
margins in near term

STBs that were earlier sourced at an average of Rs 1,500 to Rs 1,600 by

players have witnessed a decline in prices over the last two years and the
procurement price averaged at nearly Rs 1,100-Rs 1,300 per STB.
On the other hand, lower competitive intensity in Phase III markets (as
against Phase I and Phase II markets) has resulted in higher activation fee
collections by players, averaging at Rs 900 to Rs 1,000 per STB.
While pricing continues to remain heterogeneous across markets and
despite higher discounts offered by market leaders as compared to peers
in certain markets, subsidies on STBs have gone down in Phase III.
For DEN Networks, the subsidy on incremental STB seeding averaged at
around Rs 300- Rs 400 per box, while that for Hathway was less than Rs
200 per box.
None of the large MSOs rolled out pre-activated STBs in Phase III markets
without proper Customer Application Forms (CAFs) and all activation fees
were collected upfront, thereby ensuring proper addressability and better
cash flows for players.
Industry players have been actively migrating to the MPEG4 technology
for STBs. While such STBs cost only marginally higher compared to the
earlier MPEG 2 STBs, they offer nearly 30% savings in bandwidth costs.
Moreover, these STBs also support other value added service features
including Personal Video Recording, etc. which form an essential block for
driving up subscriber ARPUs in digitized markets.
Analog ARPU in Phase III markets has been as low as Rs 15- Rs 20
traditionally. Provided analog signals are switched off in Phase III markets
by the end of the current fiscal, the ARPU is expected to increase to an
average of Rs 50 Rs 75 from April 1, 2016 onwards. Thus, there remains
immense potential of growth in subscription revenues from these
markets.
Cable operators have renegotiated content cost deals with broadcasters in
the current fiscal- some deals being fixed fee arrangement (select players
managed this with retrospective effect) as well as hybrid deals comprising
fixed fee and CPS arrangements. Also, several of these deals are
structured net of carriage income.
For DEN Networks, favourable renegotiations of net (of carriage income)
content deal and a decentralized content deal (with effect from April 1,
2015) with broadcasters is expected to contain any significant increase in
content costs in the near term since these deals are for a two-year time
horizon.
While Hathway Datacom is yet to finalize new content deals with majority
of the broadcasters, fixed fee arrangements are the likely direction in
which new deals are expected to be finalized in line with industry peers.
Also, despite having entered into fixed fee arrangements with
broadcasters, for Siti Cable, content costs are expected to witness an
increase by end of current fiscal primarily due to entry into newer
markets.

Source: Analyst Call Transcripts for Q3, 2015-16, Management Discussions

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