No immediate gains for cable distributors

While the FDI increase is a positive, investor interest will depend on pace of improvement in operational metrics of companies

Hathway Cable and Den Networks have gained 10-17 per cent over the past couple of trading sessions, after the government increased the foreign direct investment (FDI) limit in broadcast distribution platforms from 74 per cent to 100 per cent. While it is a positive over the long term, analysts say there might not be any significant investments in the near term. Unlike the direct to home (DTH) distribution platform, the value chain for cable distribution is complicated and there is little clarity on the revenue potential of subscribers, say analysts. The sector will turn attractive for investors if the consumer pay-out increases or the way the revenue pie is split (with local cable operators or LCOs) turns in the favour of multi-system operators (MSOs). Average revenue per user has been muted at Rs 100 for phase 1 markets and Rs 75-80 for phase II markets.

Lower cable revenues, along with higher content costs, has been hampering operational improvement for the larger listed players. An analyst at a local brokerage says investors, both domestic and foreign, do not see value being created given the excessive competition both within and from DTH players, lack of pricing power and procedural delays. While the onset of digitisation was expected to improve the profitability of MSOs, slower-than-expected increase in net realisation from LCOs and sharp increase in content costs have proved otherwise, say analysts at IDFC. Average revenue per user will have to improve by 30-40 per cent through consolidation or more efficient collection for the sector to attract investors.

The quarterly revenue trend from the cable segment   reflective of the muted performance with September  quarter sales for Hathway growing four per cent, while that for Den is down seven per cent, over the year-ago period. Quarterly run-rate for both  has been around Rs 260-270 crore over the past few quarters with losses at a 10th of that number. While growth pick-up in broadband has been strong (about 60 per cent on a sequential basis) on a low base, the companies could see some pressure on the broadband average revenue per user once Reliance Jio launches its services. Profit metrics are unlikely to improve soon, given the investments in the broadband network. While the stocks have run up recently, the gains come on the back of a sharp price correction of 30-40 per cent over the past year. Given little clarity on improvement in operational metrics and the RJio launch, investors should not hurry to take exposure to the sector.