Description

Note: The EBIT amounts above are EBITDA

Videocon DTH (VDTH)

Videocon is the fastest growing direct-to-home “DTH” pay-TV service provider in India (by acquisition of new subscribers), distributing digital television channels to subscribers via direct satellite feeds (think of Videocon as one of the DirecTVs of India).  Videocon commenced DTH operations in 2009 and has since grown to over 12 million gross subscribers and 17% of the Indian DTH satellite market. 

Videocon went public in April following a transaction with Silver Eagle, which was a Special Purpose Acquisition Company (SPAC) sponsored by two very well-respected and successful media executives/investors, Harry Sloan and Jeff Sagansky.  Mr. Sloan has a long career in media, having previously served as CEO of Metro-Goldwyn-Mayer and Chairman of LionsGate Entertainment, both independent movie and television production and distribution companies, and as Founder, Chairman and CEO of SBS Broadcasting, a European media company which was sold in 2005 for $2.5bn.  Mr. Sagansky also has had a very successful career in media, previously serving as CEO of Paxson Communications, a television broadcast company, President of Sony Pictures, a movie and television production and distribution company, and President of CBS Entertainment, a television network.  

The transaction was consummated by Silver Eagle’s purchasing a minority stake in Videocon and then distributing the shares in Videocon to existing shareholders in Silver Eagle, which effectively took Videocon public on the NASDAQ exchange.  

Investment Thesis

India is an enormous market with over 162 million television households.  Despite the large number of absolute households, television household penetration in India is only 62%, significantly lower than the 83% penetration in the Philippines, 86% penetration in Vietnam, 97% penetration in China, and 100% penetration in the United States.

In addition, Pay-TV penetration (homes that subscribe to pay television via cable or satellite) stands at only 83% of total television households.  Thus, there will be significant industry subscriber growth for all DTH providers as more households 1) are formed; 2) start getting television; and 3) begin subscribing to pay television.

An added benefit to this dynamic is that the DTH satellite market is growing much faster than the overall Pay-TV market, as satellite companies are taking significant share (in 2013, satellite companies were responsible for 66% of the Pay-TV industry’s net subscriber growth compared with their aggregate 28% market share).  In addition, through a superior distribution network, differentiated programming, and a very broad content package offering, Videocon is increasing subscribers at a faster rate than other DTH satellite companies, making it the fastest growing DTH service provider in India.

Despite the large and growing number of subscribers, India’s Pay-TV Average Revenue Per User “ARPU” is one of the lowest in the world at ~$3 per month.  This is despite the fact that Indian Pay-TV companies offer almost 160 channels in their basic offerings, well more than other countries like Korea, Thailand, the Philippines, or Indonesia.

Indian ARPU has been showing improvement in recent years as a direct result of digitalization, smarter packaging of content and channels, and the provision of value added services, such as High Definition channels and DVRs.  For example, Videocon has increased ARPU by an average of 14% the last two years, even while churn has declined from 0.97% to 0.65%.  Further improvements from rational DTH providers and digital cable pricing, and the growth of premium Pay-TV, are expected to help grow ARPU in the next few years.  We believe there is an enormous opportunity to increase ARPU over time as it relates to other forms of media spend.  For example, Indian households spend 60+% more on newspapers and over 100% more on going to the movies every month than on cable TV.  This is in direct contrast to other countries like the United States, Hong Kong, Malaysia, Thailand, the UK, Germany, Italy, and France, where households typically spend multiples more on Pay-TV than on newspapers and movies.

One reason that India ARPU is so low is that India currently has six national DTH satellite providers.  This compares with three providers in the Philippines ($9 ARPU), two in Thailand ($11 ARPU), and one in Malaysia ($30 ARPU).  We believe that inorganic growth via DTH satellite consolidation is inevitable in India, and a couple of the smaller DTH satellite operators are already rumored to be for sale.  If/when this market consolidates, we believe there will be a large opportunity to increase pricing in India.

In addition to subscriber and pricing gains, we believe that over time, as DTH satellite companies gain more scale, there will be an opportunity for other revenue opportunities and margin expansion.  Unlike in the U.S., the Indian government has capped the amount that channels can charge TV distributors.  Further, Indian regulators require that all channels be available to all distributors (i.e., exclusive content arrangements like the DirecTV Sunday Ticket are not allowed).  This has allowed content costs as a percentage of revenue for Videocon to decline from 41% of revenue in 2012 to 35% last year.  Videocon has also recently renewed all key content contracts, so 95% of all content costs are locked in for the next three to four years, allowing Videocon the opportunity for significant margin expansion.

Given the large number of channels and the lack of significant subscriber fees paid to cable TV channels, channel placement is very important.  In India, unlike in the United States, the cable providers don’t get any advertising inventory from TV channels (e.g., in the U.S., Time Warner Cable will get some advertising inventory from cable networks each hour).  As the subscriber base expands, and with market share gains and potential market consolidation, we believe that DTH providers will capture some of this advertising inventory in exchange for favorable channel placement.  Videocon also has several owned channels (music and movie) on which they will shortly introduce advertising, and the company will start selling advertising on the channel guide.  We believe that all of these advertising initiatives will, over time, generate very high margin revenue that could equal almost half of 2014 EBITDA.

Another large opportunity for Videocon will be the continued digitalization of cable TV.  In 2012, the Indian government mandated the digitalization of the cable TV industry (“DAS”) to be rolled out over four different phases.  The rollout was opposed by local cable groups and local political parties (which are often connected) because the mandated switch would give DTH satellite providers an opportunity to take a large number of customers as they switched to digital Pay-TV from analog cable.  In November 2012, DAS Phase I was successfully implemented, and in March 2013, Phase II was implemented in 38 additional cities.  Digital cable managed to retain a little over 70% market share in DAS Phases I and II combined (meaning the other 30% of their subscribers switched to DTH satellite).  The stronger presence of cable companies in larger Phases I and II markets (like Delhi and Mumbai) enabled them to maintain a relatively high share against DTH satellite (although continued churn away from cable has allowed DTH satellite to capture 40% market share in these markets currently from 30% initially).  Phase III is scheduled for December 2015, and Phase IV is scheduled for December 2016.  In the remaining markets, it will be very challenging for legacy cable providers, as these markets are dominant for DTH satellite when customers switch to digital Pay-TV from analog cable, as DTH satellite has the benefit of an established distribution network spread across a much wider geography.  For reference, there are almost 100 million television households that will potentially switch from analog cable and choose a digital Pay-TV provider in DAS III and DAS IV markets, which is an enormous opportunity for the DTH satellite industry (which currently has approximately 50mm subscribers in total, but DTH satellite has over 80% market share in DAS III and DAS IV markets).

Valuation

Based on our numbers, Videocon trades at approximately 10X 2015 EBITDA and 7X 2016 EBITDA.  We believe this is far too low for a company that grew EBITDA by over 50% in 2014 and that we expect to organically grow EBITDA by over 40% on average over the next two years.  At $20, Videocon would be trading at only 11X 2016 EBITDA, a multiple that we would still argue is way too cheap.  We also believe that over time Videocon will benefit from scarcity value, as it is one of the very few Indian media companies that trade publicly and the only Indian-based media company that trades on a US exchange.  By our calculation, only 11 Indian-based companies in total trade on a US exchange, and the entire market cap for these companies is approximately $200bn, a very small number for the 10^th (soon to be 8^th) largest economy in the world.  In addition, 90% of the market cap is from the largest five companies which are comprised of two banks, two IT companies, and one automotive company.  Thus, we believe that Videocon will be an excellent vehicle for investors looking to invest directly in the fast growing and dynamic Indian media industry.

DISCLAIMER:
Nothing contained in this analysis shall be deemed to constitute investment advice or a recommendation to purchase, sell or otherwise transact in any security.  This analysis contains information from sources the author believes to be reliable, but the author cannot guarantee the accuracy of any such information.  The author undertakes no obligation to update or revise this analysis, whether as a result of new information, future events or otherwise.  The author owns shares of the company, and may buy additional shares or sell shares at any time. 

Catalyst

·         Investors doing work on the name

·         Initiation of research reports

·         Digitalization of Indian TV market

·         Consolidation in the Indian DTH space