Den Networks - Den at its inflection point... - ICICIdirect

We met the management of Den Networks to understand the progress of digitisation and the company's prospects, going ahead. Den has successfully digitised around 5 million subscribers in Phase I and II out of its total universe of 11 million. The management is confident of successfully digitising the remaining 6 million subscribers in the next two phases, though it may entail a slight delay. Den Networks is the only PAT positive MSO since 2011, and has registered 16.7% CAGR (FY11-13) in PAT to | 62.3 crore. The company has also secured an equity infusion of $110 million from Goldman Sachs. We believe Den would emerge as a major beneficiary of the digitisation process.

Digitisation: A complete game changer for MSOs

The digital addressable system (DAS) mandate brought cheer to MSOs as it would finally plug revenue leakages in the system, as the industry gradually moves to gross billing. In phases I and II, MSOs cornered about 70% of the market seeding ~16 million set top boxes out of the 22 million boxes seeded. They are all geared up to digitise the remaining subscribers in Phases III and IV. In addition, an uptick in HD and value added services would further enhance ARPU and EBTIDA margins.

Den to emerge as key beneficiary of Phase III and IV markets

Den has a presence in 13 states across 200+ cities. About 120+ cities and towns and around 55% of its subscriber base fall in Phase III and IV. The company has an edge over its peers, owing to its largest subscriber universe in the next two phases. Complete digitisation of this base is expected to make a significant impact on Den's financials.

Consolidation and broadband key strategy now

Apart from the existing 11 million, Den also plans to consolidate the smaller MSOs, which stand at ~7000+ and increase its subscriber base further. Moreover, the company is exploring opportunities to bundle broadband services along with cable services.

Financials and valuation

The company has demonstrated a strong operating performance with the EBITDA margin expanding from 8.8% in FY11 to ~22% in FY13, while in Q1FY14 it reported an EBITDA margin of 27%, boosted by higher activation income. Adjusted revenues and PAT have grown at 17% and 28.8% CAGR, respectively, over FY11-13. The company is currently trading at an EV/EBITDA multiple of ~13.3x FY13 EBITDA while its peer Hathway trades at 16.8x.

Source : Equity Bulls

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