Den Networks Limited (DNL) is entering the capital markets to raise between Rs 390 – 410 crs this week. The company is a cable television company with a service reach currently of 1cr homes. This business has very little transparency and therefore though the signal goes to 1cr homes, only 10% of them pay the company. The remainder 90% is eaten away by the system and local cable operators.

Business

The company is in the business of providing analog and digital cable television services. Currently the company provides these services in 77 cities in India and the same reach around 1 cr homes. The average collection made per subscriber per month is Rs 200. The amount actually received by the company is only about 10% due to gross under-reporting of revenues by the LCO or local cable operator who has the last mile connectivity and actually provides the connection to our television sets. The up-gradation of offering from analog to digital is the key to the growth in this business as it will automatically help in upgrading the service to the subscriber, increase the revenue per subscriber per month and also help in better reporting. The competition in digital television is from the DTH players and this is a big threat to the business.

The company also has a 50:50 JV with Star which is a part of the News Corp group known as Star-Den. This company has the exclusive right to distribute 23 channels such as Star, Times group, select Network -18 channels and MGM. The revenues from this business are substantial and were Rs 252.66crs for the three months ended June 09 and Rs 824.64 crs for the year ended March 09.

DNL has as of date 65 subsidiaries where the company owns 51% shareholding in cable distribution companies. Of these companies as many as 57 companies have revenues for the period ending 30th June 2009.

Objects of issue

The broad objects of the issue are as follows:-

Risks

There are many risks associated with this business. This is a business where there is muscle power and money power involved. The under-reporting is as much as 90%. How much this will improve and how soon is a moot point and would weigh very heavily on the future of this business.

• The extension of ‘CAS’ or Conditional Access System which is a big trigger for the company’s business is a political issue and the timing of the same cannot be ascertained. We are all aware that the set top boxes had become a big issue when they were introduced and since then the issue is just hanging.
• The competition from DTH or direct to home players is very large. There are many players in that field like Tata Sky, Dish TV, Sun Direct, Big TV, Doordarshan, Airtel and Videocon. These big players have deep pockets and because of the ease of operation and last mile connectivity direct to subscriber, have made huge inroads in the short time duration that they have been in business.
• The competitors in the cable business include people like Hathway and Incable. The fragmented nature of this business makes it difficult to predict.
• The nature of growth has been through acquisition and through cashless deals where equity has been issued in lieu of acquisition. The possibility that competition may offer higher valuation and cash payment may cause local operators and MSO’s (Multi Systems Operators) to break of their existing relationships and join someone else.
• There are regulatory controls on the amount that can be charged from subscribers and revenue increase per subscriber can only happen if regulatory approval for the same is available.

Valuations

The consolidated revenues of the company for the year ended March 2009 were at Rs 719.35 crs and for the three month period ended June 2009 were at Rs 214.05 crs. The company was incorporated in July 2007 and had limited operations in the year ended March 2008 with revenues of 86.9 crs. The rapid growth of over 8 times in one year is on account of the massive inorganic growth achieved by the company in acquiring as many as 65 MSO’s. The company has made losses for the periods of revenue mentioned above.

There can be no valuations based on EPS for such a company as there is no positive EPS currently. The valuations based on current quarterly revenue on annualised basis to post issue market capitalisation would be 3 times and 3.16 times based on the lower and higher price band respectively. This is by no means cheap. In comparison with Wire and Wireless which is a listed entity there revenues for March 2009 were at Rs 308.26 crs and the market cap is 427.9 crs or 1.4 times sales to market cap. In short both companies are currently loss making.

In its short history of just about two years, the company has issued two very liberal bonus issues in the ratio of 4 shares for every one share held in November 2007 and June 2009 respectively.

Promoters

The company is promoted by Mr Sameer Manchanda and his group company M/s Lucid systems Private Limited. Sameer Manchanda is a Chartered Accountant by profession and has been associated with the television industry since 1984. Currently he is the Joint Managing Director of IBN 18 Broadcast Limited.

The promoters as a combined group hold 62.65% of the company pre-IPO which would get diluted to 53.15% post issue.

Key Drivers

• The key driver for this business is the demand for better quality which is provided by digital rather than analog.
• The gradual reduction in under reporting from the present 90% currently by a few percentage points each year.
• The growth in demand for broad band and internet TV.
• Consolidation of markets and market players.

Conclusion

An investor applies in the IPO because he believes that post listing the share will trade at a higher price. The intention is to make money and not necessarily sell on day one and exit. Even if one were to speculate or try to estimate on the expected profit of the company, one could conclude that to get fair returns on the share assuming that the company makes profits in the current year itself,   would still make money making unsustainable. Assuming a net profit on a consolidated basis of Rs 135 crs would imply a P.E. ratio of 20 times at the top end of the price band. The company is in an investment mode and would be incurring huge capital expenditure in the next two to three years.

There is likely to be an excellent response of institutional investors in the issue considering that this could be a play on India’s television and entertainment industry, considering the very small revenues that are generated from this sector. However in many of the recent IPO’s it has been observed that huge institutional support is not an indication of making money in the market.

I would advise retail investors that this may not be the best of opportunities to make money today. It would be better to look at the same company later on, after the business has stabilised. We have many instances in the past where we have seen that post the issue and its listing things are available substantially cheaper.

Sebi disclaimer: – I do not intend to subscribe to the IPO.