Den Networks - Beneficiary of digitization; initiate with BUY - Religare

We initiate coverage on DEN with a BUY and a Sep'13 TP of Rs 225/sh. Our positive view is premised on: (a) Den's strong presence in metros and tier I cities (~5.3mn subscribers), (b) a pick-up in STB seeding as digitization gathers pace and (c) an improvement in ARPUs once channel packaging is enforced and billing commences. Expect DEN to benefit from consolidation in the cable TV space post the recent FDI relaxation and see its Cable business revenues/EBITDA growing at a 32%/77% CAGR (FY12?FY15E).

- Digitization campaign gathers pace - STB seeding seen picking up: We remain positive on the digitization opportunity given the strong government initiatives - from license cancellation of non-compliant MSOs to raising FDI caps in broadcast carriage services. Expecting DEN to seed ~1.8mn boxes in FY13 (~400K done in 1Q and expecting ~350K in 2QFY13) and another 1.6mn in FY14.

- ARPU improvement expected post-digitization: Interactions with players across the value chain suggest that ARPUs are slated to increase to Rs 200+ over the next 12?18 months. Also, DEN's channel packages suggest that its ARPUs would touch Rs 180+ by FY13 itself. We conservatively build in its FY14 ARPUs at ~Rs 180.

- Carriage fees to drop gradually; margins to improve: DEN's carriage fees would decline only gradually as a considerable portion of its subscriber base would fall under digitization phase 3/4, which would kick in beginning FY15, leading to EBITDA margin expansion in FY14/15. We build in a 20% drop in carriage fees for FY13/14.

- Likely beneficiary of consolidation in the cable TV space: As fresh capital would be available from foreign players post relaxation of FDI norms, consolidation in the MSO-LCO space is likely to progress at a faster pace than expected earlier, with major MSOs like DEN as focal points. Initiate coverage with BUY and a Sep'13 DCF-based TP of Rs 225/sh with a WACC of 12.9% and terminal growth of 2%.

Source : Equity Bulls

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