Time to switch over: India's television market

India's television market is at an inflection point. The nationwide transition from analog to digital began this year it will have wide-ranging ramifications for the incumbents. They require capital expenditure in order to realize the windfall promised by digitization, and private equity firms appear happy to oblige. 

Last week Goldman Sachs completed a $110 million investment in cable TV distributor DEN Networks. Since 2009, the likes of Apollo Global Management, Macquarie, Providence Equity Partners, Softbank, India Capital and IL&FS Investment Managers have all entered the space. Their common thesis is predicated on the television industry ballooning to INR848 billion by 2017 on the back of five years of 18% compound annual growth, according to the Federation of Indian Chambers of Commerce and Industry (FICCI) and KPMG.

"This entire opportunity is a mirror of the great Indian consumption story," says Jagat Dave, director at Ambit Corporate Finance. "Earlier people took a leap of faith, saying ‘We want to come in early and play out this consumption theme,' but the structure was not amenable. Now investors can take an informed view that regulations are headed this way. The roadmap is here and there is certainty."

The transition will see a largely unregulated analog cable industry transform into a more ordered government-mandated digital access system of set-top boxes. The TV multi-system operators (MSOs) and local cable operators (LCOs) that survive the move will need to spend billions upgrading their back-end infrastructure.

The pay-off is that the operators will actually start receiving the subscription payments they are due. The MSOs generate about INR58 million ($1 million) in subscriber revenues, with only a small percentage of households accounted for by local distributors. Money just disappears from the system. The stat that underpins the FICCI-KPMG projection is a jump in the number of paying households from 121 million to 173 million by 2017, covering 91% of actual subscribers.

"Digitization has been talked about for a number of years but it never happened for various reasons. We were evaluating it but we finally got comfortable in the beginning of 2012 after parliament passed the law mandating digitization" says Biswajit Subramanian, managing director at Providence. The PE firm bought a 9.9% stake in Hathway Cable for INR2.05 billion.

Goldman's new portfolio company DEN Networks is considered a real prize - and a likely consolidation play. It is one of the biggest MSOs, serving an estimated 11 million households in more than 150 cities. IL&FS Investment Managers invested INR234.7 million in DEN in 2011, three years after the company began to combine subscribers from smaller MSOs and LCOs.

"Besides a couple of large players there really wasn't anyone looking at all the small scattered unorganized players who controlled the last mile linkages and when the proposal came to us, DEN had already emulated the consolidation model to bring in 3 million subscribers, which was a huge number to being with," says Archana Hingorani, CEO at IL&FS. "That was the thesis as to why we invested at that point in time."

IL&FS' investment is currently valued at 1.3x, but it is what happens after the digital roll-out that the private equity firm has been waiting more than two years for.

Spanner in the works?

However, the analog cable players' passage to greater profitability might not as smooth as hoped. First of all, they face a challenge from the satellite direct-to-home (DTH) TV providers, who have typically done better in remote areas and difficult terrains where cable infrastructure is harder to lay.

"Right now there is a bit of a land grab," says Nikhil Raghavan, principal at Bain Capital. "Competition has become a little saner over the last few months but last year all the DTH guys were offering subsidized set top boxes and equipment. Customers were switching for a few months of free service and then switching again. When you have those dynamics, it's hard to know what your steady state level of customers and customer profitability will be."

Another risk is the changing nature of the business itself, where volatility in revenue profiles and economics. The industry view is that pricing will have to pick up for the companies to generate the cash and by extension the dividends that their investors are expecting. Raghavan notes that pricing could easily rise by 10% but the emergence of hyper-competitive situations could bring it all the way down again.

PE backers might be able to withstand the turmoil, provided they are comfortable with a 6-7 year investment horizon. But what about after?

The shelf life of TV infrastructure as we know it is about 15 years, beyond which there is likely to be a convergence between IPTV and satellite. According to industry insiders the longer term issue is how much to invest, because the invesment has to deliver value over a 10 year period. The investments are likely to become worthless beyond that timeframe.

 

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• Topics
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• India Venture Advisors
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