DEN Networks: Gearing up for better growth

Recent fund raising move will support its growth plans and add to gains from on-going digitisation process

Multi-System Operator (MSO) company Den Networks’ growth plans should get a big boost following last week’s preferential share allotment of Rs 690 crore to affiliates of Goldman Sachs — 31.7 million shares at Rs 217.50 apiece. The company will use these funds to complete the digitisation roll-out as well as to acquire smaller MSOs and expand services. With 11 million subscriber base, DEN has the largest subscriber base in India amongst MSOs, and these funds should help drive its base bigger. Analysts expect the company's digital subscriber base to grow by two million this financial year.

In this backdrop of growth prospects, analysts are positive on the stock. Out of the six analysts polled by Bloomberg since August 2013, five have Buy recommendation with one Hold recommendation on the DEN scrip. Their average target price stands at Rs 241, translating into upside potential of about 42 per cent from current levels of Rs 169 (PE of 18 based on FY15 estimated earnings).

“Den Networks is the only net profit positive MSO since 2011, and has registered 16.7 per cent CAGR (FY11-13) in net profit to Rs 62.3 crore. 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", says Karan Mittal, analyst at ICICI Securities.

So far, DEN has digitised about five million subscribers in the first two phases and is confident of completing the next two phases of digitisation successfully. Of its presence in 200 plus cities, the company will be covering the remaining 120-odd cities in Phase III and IV, which account for a little over half its subscriber base. The company is also planning to launch its High Definition (HD) operations on a large scale over the next couple of quarters, and is planning to offer broadband services (capex of about Rs 200 crore) by the end of this financial year. Such value-added services should boost DEN’s  average revenue per user (ARPUs) as well as operating margins, in the long run.

From the inorganic growth perspective, the company is also planning to consolidate smaller MSOs to further increase its subscriber base. “As compared to other MSOs, DEN is well capitalised to tap any acquisition opportunity. We see value in the stock from a two-year perspective", says Abneesh Roy, analyst at Edelweiss Securities.

DEN has witnessed strong Ebitda margin expansion from 8.8 per cent in FY11 to 27 per cent in the quarter ending June 2013. While analysts expect its FY14 revenues to grow 48.7 per cent to Rs 1,334 crore, reflecting gains of the digitisation process, the growth in earnings may be slight lower due to the equity dilution. But broadly, analysts expect its revenues and earnings per share to grow by 35-40 per cent annually in FY14 and FY15.

After the recent share allotment, Broad Street Investments (Singapore) Pte will hold 16.18 per cent and MBD Bridge Street 2013 Investments (Singapore) will hold 1.62 per cent stake in DEN Networks. While the issue was approved by the board on June 5 this year, the money was received last week post the go-ahead of Ministry of Information and Broadcasting.

The key risk is a delay in digitisation of the remaining subscriber base as well as aggressive moves by the DTH players; MSOs had corned nearly 70 per cent or 16 million set top boxes out of the 22 million boxes seeded in Phase I and II of digitisation.