The DTH industry has grown to ~35m TV HHs (households) in merely 6 years; there has been double digit YOY growth. The gross DTH subscribers are likely to grow to ~90m TV HHs by FY 2016.
In my opinion based on conservative estimates such as: 2% growth in ARPU’s YOY and a 70% active DTH subscriber base, the industry is likely to be a ~$3 billion industry by FY 16 from ~$0.9 billion in FY11, ~ 4x increase in 5 years.
Margin pressures for the DTH industry are likely to intensify; investment and innovation key for the long-term health of the industry. The industry will continue to suck in cash for existing players, owing to the constant need for investment in technology and customer acquisition. The industry needs to continuously invest in distribution (enabling proximity between the subscriber, box sales and recharge) and new technology (3D). Structural shift toward digitization will drive DTH. DTH is the fastest growing segment in the cable and satellite (C & S) space. The digital policy set by the government augurs favorably for the industry growth as subscribers continue to grow.
Phases likely to be witnessed by the industry in my view:
1. Growing the subscriber base
2. HD, 3D, VAS to drive ARPU’s
3. Triple play (television, internet and telephony)
The industry currently is somewhere in the middle of Phase 1 and 2, where the subscriber base has grown and the wave of HD/VAS has begun and is growing. Triple play will be a game changer. Cash flow streams: Consumer subscriptions and advertising revenues (home shopping could emerge as well). The industry is likely to witness consolidation in the next few years with strong players emerging as it will be difficult to sustain the high number of operators based on cost structures.
The key risks continue to remain the regulatory uncertainty on taxes and restrictions on pricing (steep taxation and license fees), shortage of infrastructure (transponders), high cost of content, intensifying DTH competition, improving financial health of cable companies, consolidation in the cable space and competition from cable operators (where compliance is still poor and under-declaration high).
The drivers continue to be large number of households (HHs) with low TV penetration (Indian TV market is the second-largest in the world with ~120m pay TV HHs), rising disposable incomes, shift in consumption habits, increasing urbanization (urban population in India is expected to grow to 650m by 2035 from 350m in 2010), favorable regulatory changes and YOY growth in sale of LCD TV, Plasma TV, LED TV, 3D (India sells around 13 to 14 million televisions per year).
ARPU’s will continue to rise on the HD/3D/VAS wave that gains traction, operating expense will continue to pressurize margins (owing to ongoing investment needs), operators will start to witness breakevens on a EBITDA/FCF/PAT level and the larger market players will witness modest to growing ROE over the coming years.
SAC/ARPUs have stabilized at 8-10x for global companies while it remains high at ~16x for Dish TV. SAC/ARPU expense will gradually decline to the global average in India (owing to an increase in ARPU’s, SAC is likely to remain at the same level) over the coming years. Infrastructure sharing (to draw a parallel; passive infrastructure sharing in telecom) may become a key theme going forward. While HD/3D/VAS is likely to boost ARPU’s, future growth also hinges on continued improvement in ground-level execution, talent and regulation.
Cues from the global DTH markets
Asia is already the world’s biggest pay-TV region – with almost 363 million homes connected, Asia is racing ahead of the world’s other major regions (Closest follower is North America, with about 121 million homes). Most global DTH markets (USA, UK, Singapore, Japan, Korea, Australia, Malaysia and Hongkong) have a monopoly or duopoly market structure, given the heavy investments that the business requires.
India is the only market in the world with ‘content in-exclusivity’ and a six-player market; making it unique. Investment in content is at its optimal in markets such as Australia, Japan and Singapore, and growing in markets such as Malaysia and Korea, where pay-TV operators are investing in self-produced content and relevant turnaround channels to retain competitive advantage. However, content investment is poor in the largest markets, China and India. Currently in Indonesia, DTH platforms are helping boost pay-TV penetration from a very low base and in Korea, Japan and Singapore; IPTV platforms have contributed new growth to saturated marketplaces.
Developing market DTH operators trade at EV/EBITDA of 14 - 18x while developed market DTH operators trade at EV/EBITDA of 7 - 10x.
