CMP Rs 180 Rs Target Rs 230, Upside 27% (Medium Term Target :- maximum time 3 to 6 montths)
Consolidated revenue for DEN stood at Rs2.7bn, implying 12.6% sequential growth. The yoy growth is not comparable due to change in reporting policy at Media Pro, from gross revenues to net revenues (Gross Revenues less Cost of Distribution Rights paid to Broadcasters). The increase in revenue is attributable to digitization in Phase I locations, resulting in seeding of 900,000 Set Top Boxes (STBs) in Q3 FY13. However, Q3 FY13 has not witnessed complete recognition of the Phase I digitization-related income due to delay in billing activity. As per management, the benefits of Phase I digitization will start flowing in from Q1 FY14. Consolidated PAT rose from Rs156mn in Q2 FY13 to Rs172mn, 10.2% qoq/385% yoy. Cable revenue and PAT grew by 14% qoq and 19% qoq respectively.
DEN has seeded 1.8mn STBs in Phase I locations and expects to cross 2mn after the completion of digitization in Kolkata (expected by Jan'2013). In Phase II locations, DEN has presence in 23 cities out of the total 38 cities. The company has already set up 600,000 STBs in these locations and expects another 3-3.5mn to be added at the end of Phase II.
With under-reporting of subscribers by LCOs now gradually fleeing from the system, revenues are expected to grow at a faster pace. Operating expenses being largely fixed in nature will relatively grow at a slower pace. Thus, as digitization progresses margins are expected to expand significantly. The glimpse on this transition is already visible in the consolidated OPM that rose from 19.8% in Q1 FY13 to 23% in Q3 FY13. Cable business's EBITDA margin widened from 22.9% in Q2 FY13 to 25.5% in Q3 FY13, an uptick of 260bps.
Incremental borrowing to fund the subsidy on STBs resulted in an increase in interest expenses, from Rs91mn in Q2 FY13 to Rs117mn in Q3 FY13. We expect it to remain high for few more quarters until the company generates sufficient internal accruals to fund the subsidy on the additional STBs required. Den has total borrowing of ~Rs5.2bn currently, resulting in debt/equity ratio of 0.6x. Debt/Equity ratio is expected to decline once the complete benefit of digitization is realized.
With government's heightened efforts in digitizing the nation and DEN's endeavour in spreading awareness, providing value added services and significant presence across the nation, we expect DEN's stellar performance to continue. Full impact of Phase I implementation, commencement of Phase II – a bigger opportunity, significant demand for STBs and margin improvement would be structural earnings growth drivers over FY13‐14. Recommend BUY on the company with target price of Rs230.
| (Rs m) | Q3 FY13 | Q2 FY13 | % qoq |
| Net Income | 2,371 | 2,106 | 12.6 |
| Total Expenditure | (1,826) | (1,674) | 9.1 |
| Operating Profit | 545 | 432 | 26.0 |
| OPM(%) | 23.0 | 20.5 | 245 bps |
| Other Income | 47 | 55 | (14.7) |
| EBITDA | 592 | 487 | 21.4 |
| EBITDAM (%) | 25.0 | 23.1 | 182 bps |
| Depriciation | (210) | (173) | 21.4 |
| Interest & Finance charges | (117) | (91) | 29.0 |
| PBT | 265 | 224 | 18.4 |
| Tax | (69) | (44) | 56.6 |
| Tax rate (%) | 26.0 | 19.7 | |
| PAT | 196 | 180 | 9.1 |
| Minority Interest | (25) | (24) | 1.7 |
| APAT | 172 | 156 | 10.2 |
| NPM(%) | 7.2 | 7.4 | (157) bps |
| Ann. EPS (Rs) | 5.1 | 4.7 | 9.1 |
Financial Summary
| Y/e 31 Mar (Rs m) | FY12 | FY13E | FY14E | FY15E |
| Revenue | 11,295 | 9,940 | 13,916 | 18,786 |
| yoy growth (%) | 10.5 | (12.0) | 40.0 | 35.0 |
| Operating profit | 822 | 2,435 | 3,688 | 5,354 |
| OPM (%) | 7.3 | 24.5 | 26.5 | 28.5 |
| Net Profit | 143 | 807 | 1,343 | 2,302 |
| yoy growth (%) | (61.9) | 465.2 | 66.3 | 71.5 |
| EPS (Rs) | 1.1 | 6.0 | 10.0 | 17.2 |
| BVPS (Rs) | 61.5 | 66.1 | 76.2 | 93.3 |
| P/E (x) | 188.9 | 34.3 | 20.6 | 12.0 |
| P/BV (x) | 3.4 | 3.1 | 2.7 | 2.2 |
| EV/EBIDTA (x) | 24.0 | 10.7 | 7.6 | 5.3 |
| RoCE | 1.4 | 6.1 | 8.1 | 12.2 |
| RoE | 1.8 | 9.6 | 14.1 | 20.3 |
| RoA | 1.0 | 4.7 | 6.4 | 9.2 |
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