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FDI: Positive, but gains will accrue slowly

While the government's approval for FDI in multi-brand retail and broadcasting has spruced up stocks, analysts believe gains might take time, given the restrictions & implementation issues

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The stocks of retailers, as well as direct-to-home () and multi-system operators (MSOs) in television, reacted positively to the government’s decision on foreign direct investment () in these sectors. While the 51 per cent FDI opening in multi-brand retail will enable companies access to the much-needed funds for growth, it will also provide access to technology and help strengthen their back-end infrastructure.

However, given that the states’ final nod holds key (only 10 are currently in favour) and operations (front-end) will have to be restricted to cities above a million, the immediate gains will be limited, feel analysts. While Edelweiss analysts note that on the whole, this is expected to be a positive for the sector, as it will reduce its piling debt and stimulate investment (especially in logistics and cold chain), believe the impact will be felt at the ground level only beyond 2013-14, for which there would have to be further reforms in areas such as taxation (Goods & Services Tax) and direct agri-sourcing (). Companies might also have to re-look at their corporate structures to meet the stipulated conditions.

For broadcasting companies, FDI has been raised from 49 per cent to 74 per cent. This step will provide impetus to the ongoing mandatory digitisation process (estimated to cost Rs 25,000-30,000 crore). While DTH companies had easier access to funding, most MSOs were looking at raising capital to fund digitisation (phase two onwards). Notably, most MSOs have been unable to meet the earlier FDI limit of 49 per cent, largely due to the issue of under-reporting of end-subscribers. Mandatory digitisation will address this issue and make investing in this sector an attractive option for foreign investors. “We expect the digitisation process to speed up considerably over the coming months, given this step, the government remaining firm on the deadline, regular ads on digitisation (by government, DTH and cable companies) and many inter-connect agreements in place,” believes Abneesh Roy of Edelweiss Securities.


Even as only 28 per cent of Pantaloon’s stores are in cities with a population of above a million and where states are in favour of FDI (key riders of the reform), it will be the biggest beneficiary of FDI in retail due to size (India’s largest retailer) and various formats (departmental stores, hypermarkets, supermarket and discount stores) spanning a total operational space of 16.7 million sq ft. Not surprisingly, its stock jumped almost 30 per cent intra-day before closing with gains of 19 per cent at Rs 187.50 on Monday. The key benefit flowing to the company would be improvement in profitability, hit due to a bloated balance sheet (debt-equity ratio of 2.5 times in FY12) that also affected its expansion prospects. Based on different transaction valuation multiples, MF Global has projected target prices ranging from Rs 115 to Rs 225.


Trent would be the next biggest beneficiary, as it has a tie-up with Tesco for its 15 Star Bazaar stores. However, only six such stores are in cities with a population of over a million and in states favouring FDI. Also, the store expansion pipeline is skewed towards Gujarat and Tamil Nadu, not in favour of FDI. Nevertheless, analysts feel Tesco’s presence would benefit immensely after the reform. Says Abhishek Ranganathan, analyst, MF Global, “There is scope for margin improvement from Trent, thanks to sourcing capabilities of foreign retailers.” The company’s plan to bring Inditex’s (Zara) Massimo Dutti to India also gets a leg-up after relaxation of brand ownership rules in single-brand retail.

HOW THEY STACK UP
In Rs crore Dish TV Hathway Pantaloon Retail * Trent
FY12 FY13E FY12 FY13E FY12 FY13E FY12 FY13E FY12 FY13E
Revenues 1,958 2,267 1,002 1,140 692 866 11,793 11,162 1,742 2,292
% change y-o-y 36.3 15.8 13.5 13.8 17.1 25.1 7.1 -5.4 21 31.6
Operating profit 498 657 178 216 111 144 1,039 988 -168 29
% change y-o-y 108.7 31.8 18.8 21.2 22.8 29.3 8.5 -4.9 NA LTP
Net profit/(loss) -108 33 -10 -0.3 49 52 62 93 -38 28
% change y-o-y -45.2 LTP -69.3 -96.9 33.9 5.9 -67 48.9 PTL LTP
E: Estimates                                              * For Pantaloon, the figures pertain to core retail business; its year ending is June
NA: Not Applicable; LTP is Loss to Profit; PTL is Profit to Loss
     Source: Companies, Capitaline, Bloomberg, Analyst reports


The key concern about CESC was diversion of strong cash flows from the power business to the loss-making 94 per cent retail subsidiary, Spencer’s. This has been eliminated due to announcement of FDI in multi-brand retail, improving prospects for a re-rating. The induction of a foreign partner will not only help in funding but also in back-end operations. Spencer is largely present in bigger cities (population of over one million) and 47 per cent of the total retail space (around a million sq ft) of its 163 stores is in states favouring FDI, says Shankar K, analyst, Edelweiss Securities.

Dish TV
Dish TV, India’s leading DTH player, will be a key beneficiary of FDI in broadcasting. It has also recently addressed a key concern, namely, its ability to improve average revenue per user (ARPU) by increasing rates across all schemes. “With Cable ARPU likely to trend up post digitalisation, we believe ARPUs will see sustained increase over the next three to four years, impacting margins positively. We forecast ARPU to expand by six per cent (FY12-14) to Rs 168,” says Pratish Krishnan of Antique Stock Broking. Analysts expect Dish TV to report annual growth in subscriber, revenue and Ebitda (earnings before interest, taxes, depreciation and amortisation) of 14 per cent, 19 per cent and 29 per cent, respectively, led by mandatory digitisation and rate increases during FY12-15. However, subscriber churn to other DTH players and/or MSOs remains a key risk.

Den Networks
Den, the market leader in the organised MSO segment with a share of 12 per cent, is the only profit making listed one. The company has about Rs 330 crore of cash on its books, of which Rs 270 crore will be spent in Phase-I digitisation. It has Rs 258 crore debt on its books. A large part of Den’s subscribers (65 per cent) are in tier-II and tier-III locations, implying the positive impact of FDI on its financials will be gradual (depending on the implementation of digitisation in smaller cities). Analysts expect its top line to grow 40 per cent over FY12-14, led by a three-time jump in subscriber revenues, and margins to expand by 450-500 basis points in FY13 due to digitisation and higher operational efficiencies.


Hathway Cable & Datacom, a leading MSO, will also gain substantially after mandatory digitisation. The company has been digitising its consumers rapidly and with about 50 per cent of its phase-I of digitisation done, the company has started deploying set-top boxes in tier-II cities. As against the company’s estimates of a 50 per cent cut in carriage revenues after digitisation, the metric has fallen just 15-20 per cent, thereby easing concerns on the margin front. Further, it has implemented rises in activation fees in the June quarter, which reduced its subscriber acquisition charges by 20 per cent, in addition to putting a check on customer churn.

However, higher interest cost (up 39 per cent year-on-year) on the net debt of about Rs 300 crore added to net losses in the June quarter. The company has close to Rs 80 crore of cash on its books and access to capital in the form of higher FDI will reflect positively on its balance sheet and boost growth. In addition to the digitisation benefits, the strong broadband subscriber base will fuel further growth. Analysts remain bullish on the company and expect upsides of 20-25 per cent from current levels.

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