Den Networks: Investing in new growth avenues

Its tie-up with Snapdeal to launch a shopping TV channel looks like a win-win deal

Last week, Den Networks (Den) announced a joint venture with leading e-commerce company Snapdeal to launch a home-shopping TV channel at an investment of about Rs 6 crore by each company. The win-win and synergistic deal has enthused analysts. And, gains from further digitisation have made them bullish on Den.

The channel will be launched in the next three-six months and analysts expect it to break-even within 9-12 months of the launch. The deal will enable Den to strengthen its brand at a national level, say analysts. The channel will be launched on Den’s platform and will be free of carriage charges.

While there will be some costs pertaining to carriage Den might have to incur, these are unlikely to be significant, as the company already has the required infrastructure in place. The revenue and profit from the channel will be shared equally between the two companies. Den will leverage Snapdeal’s strong brand and tie-up with about 30,000 vendors. The e-commerce major will also provide call centre support to the channel. Through the channel, Snapdeal will be able to reach out to Den’s 13 million subscribers.

“The joint venture will be a low-cost marketing initiative for Den, enhancing its B2C (business-to-consumer) presence. Globally, many home-shopping channels have been successful. Indian channels such as HomeShop18 and StarCJ are clocking good growth, with annual revenue of Rs 1,000-1,200 crore each (according to industry sources),” says Abneesh Roy of Edelweiss Securities.

While the Den scrip gained up to 6.8 per cent after the announcement of the deal (September 4, after market hours), it has pared some gains to trade four per cent higher than the September 4 closing price of Rs 162.5. This could partly be attributed to the fact that gains from this deal will take at least a year to fructify; also, these will be gradual. Competition from leading home-shopping channels will be a key challenge for Den.

The Den stock is currently being traded at 6.8 times the FY16 estimated enterprise value/earnings before interest, tax, depreciation and amortisation, a 46 per cent discount to Hathway Cable.

Analysts expect this valuation gap to narrow as Den realises the benefits of full digitisation. “With gross billing due to commence in the coming quarters, we believe the Den stock is set for a re-rating, as till now, the value-creation potential from digitisation is yet to become visible to investors. Therefore, it remains only partially built into the current valuations,” says Mohan Lal, media analyst at Elara Capital. He expects the company’s subscription revenue to increase threefold to Rs 1,200 crore on completion of the digitisation process.

Of Den’s total subscriber base of about 13 million, about five million have been digitised in the first two phases. The remaining will see digitisation in the third and fourth phases. Therefore, the entire benefits are likely to be reflected in Den’s financials only in FY16.

The company has a healthy balance sheet, with net cash of Rs 110 crore. This will enable it to invest in digitisation, broadband and the Indian Soccer League. Amid this backdrop, most analysts recently polled by Bloomberg are positive on Den. They have an average target price of Rs 203, an upside potential of about 20 per cent from the current Rs 169.