initiating coverage of zee and dish at buy; we expect both...

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Equity Research

AN

CH

OR

RE

PO

RT

India media: A new digital age

Initiating coverage of Zee and Dish at Buy; we expect both to benefit from digitization, relative preference for Dish

We initiate coverage of Zee and Dish TV with Buy ratings.

We believe the government’s intent to enforce mandatory digitization will benefit both broadcasters such as Zee and DTH (satellite TV) players like Dish TV.

For broadcasters, digitization should give them a greater share of subscription revenue, more accurate reporting of subscribers – and thus greater negotiating power with advertisers – and a likely cut in carriage fee.

DTH players, in our view, should benefit even more as they can grab a majority of the subscriber base that is likely to come up for digitization, due to their more scalable model and greater financial flexibility.

Key analysis in this anchor report includes:

Detailed analysis of the impact of digitization on the media value chain

Analysis of the cash flow generation potential of Dish TV

Analysis of Zee explicitly factoring digitization into our forecasts

October 3, 2012

Research analysts

India Media

Ankur Agarwal, CFA - NFASL [email protected] +91 22 4037 4489

Lalit Kumar - NSFSPL [email protected] +91 22 4037 4511

Indian media

MEDIA

EQUITY RESEARCH

A new digital age

Dish, Zee to benefit significantly from digitization; relative preference for Dish

October 3, 2012

Action: Initiate coverage of Dish TV and Zee TV Entertainment We initiate coverage of Dish TV and Zee Entertainment with Buy ratings. While we see both as major beneficiaries of digitization and a good proxy for the Indian consumption story that we expect to unfold in Indian media as digitization becomes a reality, we see more upside potential in Dish TV.

Catalyst: Digitization should significantly benefit broadcasters/DTH We believe the government’s intent to enforce mandatory digitization, a stance backed by key stakeholders like broadcasters, direct-to-home (DTH) TV operators and multiple-system operators (MSOs), suggests that this transformational change for television in India is likely to materialize in the near term. We believe digitization will benefit the major stakeholders. We expect broadcasters to receive a greater subscription revenue share, more accurate reporting of subscribers and thus greater negotiating power with advertisers, and a likely reduction in carriage fees. We expect DTH players to benefit more than MSOs, grabbing a majority of the subscriber base that is likely to come up for digitization as they have a more scalable model, greater financial flexibility than MSOs even though their funding requirement is lower, have greater brand recall and the benefit of not having to deal with the local cable operators (LCOs) whose bargaining power is likely to come down substantially post-digitization, we believe.

Dish TV: Initiate with a Buy; TP of INR107 (31% upside) Dish TV should be a key beneficiary of strong growth in the media industry, where we estimate the subscriber base will double in the next three years and ARPU will record a CAGR of ~8% driven by mandatory digitization. As a leader in the DTH space, Dish is well positioned in our view to benefit from this forecast growth. Our DCF-based TP of INR107 implies an FY14F EV/EBITDA of 16.1.x (FY13F EV/EBITDA of 20.1x, falling to 6.4x FY16F EBITDA), which appears fair in the context of an EBITDA FY12-16F CAGR of 40%.

Zee Entertainment: Initiate with a Buy; TP of INR238 (29% upside) A leading broadcaster and the largest listed by market cap in India, Zee has a strong, diversified portfolio of channels and a solid balance sheet. We believe Zee could get a significant revenue/profitability/return digitization-related boost in the short to medium term as: 1) its subscription revenue stream should rise as under-reporting is addressed; 2) its broadcaster share of consumer ARPU should at least double from the current 10-15% even as consumer ARPU gradually picks up; and 3) its cost base should benefit from lower carriage and placement fees. Our DCF-based TP of INR238 implies an FY14F EV/EBITDA of 17.7x (FY13F EV/EBITDA of 25.3x falling to 9.1x FY16F EBITDA), which we think is fair in the context of an FY12-16F EBITDA CAGR of ~34% and expected ROE (ex goodwill) increase from 23% in FY13F to 34% by FY16F.

Anchor themes

We believe the Indian media industry is at an inflection point, as digitization is set to become a reality. We believe completion of Phase 1 will be a significant catalyst for broadcasters such as Zee and DTH players such as Dish.

Nomura vs consensus

Unlike consensus, we have explicitly factored into our estimates the impact of digitization in various phases.

Research analysts

India Media


Lalit Kumar - NFASL [email protected] +91 22 4037 4511


Nomura | Indian media October 3, 2012

2

Contents

3 Buyers of Dish TV and Zee Entertainment; but have a relative preference for Dish TV

4 Investment summary for Dish TV

5 Investment summary for Zee Entertainment,

8 Television, the biggest contributor to the Indian media industry, set for a transformational change post digitization

8 TV penetration rate in India to expected to increase

9 India’s ARPU among the world’s lowest; steady improvement expected till mandatory digitations is implemented

11 Average TV viewing time in India is also one of the lowest in the world

12 Increasing demand for HD channels to further drive ARPU

13 Digitization, the holy grail of the industry that is set to be a reality

13 Digitization an eventual outcome, albeit with risk of slight delay in current deadlines

14 Most stakeholders in the media industry value chain will benefit from digitization, in our view

17 Increase in FDI limit in broadcasting carriage services indicates more supportive regulations

20 Digitization transformed the media industry in other markets, and led to industry consolidation and stock outperformance

23 Dish TV India

48 Zee Entertainment

81 Appendix A-1


3

Buyers of Dish TV and Zee Entertainment; but have a relative preference for Dish TV We initiate coverage of Dish TV and Zee Entertainment with Buy ratings. While longer term we see both as likely major beneficiaries of digitization and a good proxy for the Indian consumption story that we expect to unfold in Indian media as digitization becomes a reality, we have a relative preference for Dish TV from current levels as we believe the market has still not recognized the cash-generating potential of this business once subscriber addition stabilizes. Dish TV has traditionally traded at a 9% premium on an EV/EBITDA one-year forward consensus valuation to Zee, but is now trading at a 20% discount. We believe that market concerns around a likely equity raise for organic subscriber acquisition are overdone and highlight our view that Dish should generate enough free cash flow in the next 3 years which, along with its current cash on hand, should be able to fund its subscriber growth till FY15F.

The Cable Television Networks (Regulation) Amendment Bill 2011, which makes it mandatory to digitalize analogue cable networks before the end of 2014 in four phases, aims at increasing addressability of the last-mile customer as eventually viewers will be able to access digital services only through a set top box (STB). This will in our view be a win-win for all stakeholders like the government, broadcasters, DTH operators and MSOs as it should improve the transparency in the system and increase their share of the revenue paid by the last-mile consumer. It should also lead to an increase in average revenue per user (ARPU) which for India is one of the lowest in the world. On the consumer end, digitization should mean a better viewing experience, a greater number of channels and other options like high-definition (HD) services.

We highlight that the digitization process under Phase 1 (digitization in four metros with a targeted deadline of 31 October 2012) has gained good momentum (68% of the homes as per data from the Information and Broadcasting Ministry have already been digitized). We conservatively assume completion of Phase 1 by the end of FY13 and expect completion of Phase 1 to give a big impetus to completion of the subsequent three phases which once completed, should be transformational for India’s broadcasting industry.

Fig. 1: Current digitization deadlines, expected target households in each phase

Households in millions. Source: TRAI, company reports, Nomura estimates

Fig. 2: Summary of rating, target price and trading multiples

Source: Bloomberg, Nomura Estimate, pricing as of 27th Sep 2012

Phase Impact Region Current DeadlineNumber of households likely to be digitized

Phase I Delhi, Mumbai, Kolkota, Chennai 31st October 2012 10

Phase 2 Cities w ith population higher than 1mn 31st March 2013 20

Phase 4 All other Urban areas 30th Sep 2014 20

Phase 4 Rest of India 31st Dec 2014 18

FY13F FY14F FY13F FY14FDish TV DITV IN 82 1,636 BUY 107 31% NA NA 15.4 12.4Zee Entertainment Z IN 184 3,335 BUY 238 29% 27.9 19.2 19.8 13.4

Target PriceRatingCompany Ticker Price

Market Cap (mn USD)

P/E EV/EBITDAUpside


4

Investment summary for Dish TV

• Dish TV, a leader in the DTH space (with a 29% market share) and the only listed pure-play DTH player in India, has built sufficient scale in the last seven years such that it should be a key beneficiary of strong growth in the DTH industry, where we estimate the subscriber base should double in the next three years and average revenue per user (ARPU) should witness an estimated CAGR of ~10% driven by mandatory digitization. Dish TV, as a dominant player with, is well positioned, in our view, to benefit from this growth. We estimate that cable and satellite (C&S) penetration in India will increase from 82% in 2011 to 95% by 2016F and DTH services, as a percentage of C&S homes, should increase from ~31% in 2011 to 51% by 2016F.

• Dish should generate sufficient cash to fund its subscriber growth till FY15F: We estimate that Dish TV will generate net cash from operating activities of ~INR36bn over FY13-15F. This amount, along with a current cash balance of INR4bn, should in our view be sufficient to fund our expectation of gross subscriber addition of 12.7mn over this period. Paradoxically, we believe that a DTH operator such as Dish TV may potentially require additional funding (for growth) if MSOs do not succeed to the extent that we expect, thereby resulting in a higher-than-expected subscriber shift from analogue to the DTH industry.

• Customer upgrades to higher value pack overtime, increasing consumption of HD and digitization, should drive ARPU growth: Apart from a structural increase in ARPU due to digitization, we believe Dish can further increase its ARPU by changing its customer mix. Dish TV’s current subscriber base consists of 70% rural with the remainder as urban. As well, ~ 55% of the company’s subscribers have subscribed to the lowest ARPU basic tier pack. Consequently, with the general population’s income increasing, particularly in rural India as per Nomura’s Economics team, we expect consumers to upgrade to the higher value pack, which would thereby lead to an increase in ARPU without any price increase. The company has a ~ 0.2mn HD subscriber base which is increasing at the annual rate of ~7%. Dish’s ARPU from HD pack is INR414 vs consolidated ARPU of INR156. With increasing sales of HD, plasma, LCD TVs and rising customer demand for a better viewing experience as per the companies, we expect the proportion of HD subscribers to increase, which would give a further boost to ARPU in the medium term.

• Fixed-fee contracts with most broadcasters a positive: Dish TV has fixed-fee contracts with all of India’s large broadcasters (except Sun); thus, in the short to medium term, we expect it should win a greater share of the industry’s expected high subscriber growth, along with an increase in ARPU. We currently build in a content cost CAGR in FY13-15F of ~17.5% for Dish TV versus a revenue CAGR of ~29% over the same period.

• Catalysts: Completion of digitization Phase1 will likely re-rate Dish TV; further consolidation in the industry: We believe that DTH players — especially a leader like Dish TV with significant scale already achieved owing to an early-mover advantage — should benefit significantly from mandatory digitization. The completion of Phase1 by the end of FY13 at the latest should be a major catalyst for Dish TV shares, in our view. Moreover, as a market leader in the Indian DTH industry, the company is well positioned to participate in further consolidation in the industry, which we expect should get a boost with significant progress on the digitization front.

• Valuation attractive in the context of strong growth: The stock currently trades at FY14F EV/EBITDA of 12.7x (FY13F EV/EBITDA of 15.8x) which is a ~22% discount to its three-year average one-year forward trading multiple of 16.2x. However on FY16F EBITDA, when the full impact of digitization will be evident, the stock currently trades at a mere 4.6x. Our DCF-based TP of INR107 implies an FY14F EV/EBITDA of 16.1x (which falls to 6.4x EBITDA FY16F), which we believe appears fair in the context of FY13-15F EBITDA CAGR of ~39%. This is well ahead of the consensus forecast CY13-15F EBITDA CAGR of 7% for Direct TV and 5% for British Sky Broadcasting Group PLC (BskyB) — and in our view justifies Dish TV’s current premium to Western peers such as DirecTV at ~5.6x CY14F EV/EBITDA and BskyB at 8.1x CY14F EV/EBITDA (consensus). In a blue-sky scenario, which assumes favourable regulatory


5

outcome on license fee (details below) and implementation of GST, we see a further 35% upside to our current target price for Dish TV.

Fig. 3: Valuation Comparison of Dish TV versus global and regional satellite/cable peers

Note: Pricing as of 27th Sep 2012 FY1 denotes FY13 and FY2 denotes FY14 for all Indian names. For all other FY1 denotes CY13 while FY2 denotes CY14

Source: FACTSET consensus for all the names except Dish TV where we have used Nomura estimates

Investment summary for Zee Entertainment,

• Zee is a leading broadcaster and likely key beneficiary of digitization: Zee is a leading broadcaster and the largest listed by market cap in India. Coupled with a diversified channel portfolio and international presence across five continents, Zee Entertainment, in our view, is the best proxy to play Indian media’s digitization theme amongst broadcasters. We believe that broadcasters will be a key beneficiary of digitization given that without needing to incur any significant capex (unlike MSOs and DTH players), they should benefit from:

– Increased subscription revenue as under-reporting by LCO is addressed post digitization and reduced dependence on cyclical advertising revenue, making them a more consumer-centric business. We expect Zee Entertainment’s subscription income contribution to increase from 44% of the total revenue in FY12 to 51% by FY16F as a result of digitization. We are building in a cable subscription revenue CAGR for FY12-16F of ~57% for Zee TV as digitization should lead to convergence of ARPU received from MSOs towards the DTH level (currently ARPU from analogue is less than one-third that of DTH). We also foresee broadcasters’ share of consumer ARPU at least doubling from the current 10-15% of total consumer ARPU in India. On the DTH side, we are building in a FY13-16F CAGR of ~42% driven by a shift from analogue to DTH, which should lead to a 24% increase in the DTH subscriber base over this period. The remaining 18% comes from an expected increase in ARPU accruing to Zee from DTH subscribers and increase penetration of Zee among DTH subscribers.

– We forecast Zee’s cost base will benefit from lower carriage and placement (C&P) fees as digitization increases the channel-carrying capacity from 80-90 channels (30-40 in prime band) for analogue to 500 channels in a digitized environment.

– Higher and fairer share of subscription as a result of digitization should mean a return to profitability of Zee’s sports business, which has been loss making for the last 3 years.

• Solid balance sheet with net cash of INR10bn; we expect this to improve with strong cash flow generation in FY13-15F. We expect Zee to generate ~INR20bn of free cash in the next three years. Considering also FY12 ending net cash of ~INR10bn, the company looks to have significant financial flexibility in our view. We believe that Zee will likely use the cash in a combination of stock buyback, dividend increase and greater focus on regional markets. The company launched a share buyback programme in FY11 (bought back ~19.4mn shares) and followed it up with another buyback programme announced in FY12, not exceeding INR2.8bn at a maximum price of INR140 (it already has bought back and extinguished ~4.8mn shares in Q1FY13). This ongoing buyback, along with forecast improving profitability, should translate into

Company Name Ticker Rating Price Market Cap CountryUSD M FY1F FY2F FY1F FY2F

Den Netw orks Ltd. DEN IN Not Rated 162 403 India 12.4 9.0 39.2 39.7 52%Hathw ay Cable & Datacom Ltd. HATH IN Not Rated 221 593 India 15.6 10.5 NA 83.3 42%Dish TV India Ltd. DITV IN BUY 82 1,636 India 15.4 12.4 NA NA 39%Sky Deutschland AG SKYD GR Neutral 3 2,982 Germany NA 50.0 NA NA naCablevision Systems Corp. CVC US BUY 16 4,268 United States 6.9 6.7 19.6 16.6 3%Kabel Deutschland Holding AG KD8 GR Neutral 55 6,312 Germany 8.8 7.9 16.6 17.2 11%DISH Netw ork Corp. Cl A DISH US Neutral 31 13,954 United States 6.1 5.9 12.8 12.2 2%Eutelsat Communications ETL FP Neutral 25 7,101 France 7.9 7.3 15.6 14.5 7%Charter Communications CHTR US Not Rated 75 7,580 United States 7.5 7.2 NA 99.7 5%SES S.A. FDR A SESG FP Neutral 21 13,433 France 10.7 10.1 14.4 13.8 6%British Sky Broadcasting Group BSY LN BUY 8 20,361 United Kingdom 8.3 8.1 13.5 12.9 5%DIRECTV DTV US Reduce 52 33,077 United States 6.1 5.6 12.3 10.0 7%Comcast Corp CMCSA US BUY 36 95,754 United States 6.8 6.4 18.5 16.2 5%

7.2 7.5 15.1 17.4 6%Market cap w eighted Average

EV/EBITDA P/E EBITDA FY1-FY3 CAGR


6

an ROE improvement from 23% in FY12 to ~34% in FY15F, on our estimates (even after we assume no share buyback post Q1 in FY13).

• Advertising revenue: We expect robust growth in FY13F backed by healthy top-line growth and gross margin expansion for FMCG companies’ gross margins. Advertising contributed ~52% of total revenue for Zee in FY12. FMCG remains the dominant sector contributing ~43% to advertising volume for the industry in FY11. In fact, 9 companies out of the top 10 advertisers on TV were FMCG companies (Source: KPMG) which have been extremely resilient during the current slowdown. Our consumer team believes that that FMCG names will continue to have a solid growth profile and expects that FMCG gross margin will expand due to moderation in global commodity prices, which should translate into higher A&P expenditures. We therefore are building in ~14% advertising revenue growth in FY13F (was 18% in Q1FY13, when expansion in gross margin of FMCG companies resulted in strong A&P spend) and ~12% over FY14-15F. This is higher than the projected overall advertising industry growth of 7-9% (as per Zee), which assumes a relatively muted economic backdrop. Our forecast growth for Zee advertising revenue is reflective of the company’s higher exposure to FMCG (versus other advertising media like print, radio etc) and increasing investment in content, which we think led to the 18% growth in Q1FY13.

• Valuation attractive, see a further 31% upside to our target price of INR238 in a blue-sky scenario if the sector re-rates during digitization: The stock currently trades at FY14F EV/EBITDA of 13.4.x (FY13F EV/EBITDA of 19.8x), which is a 7% discount to its historical 4-year average one-year forward multiple of 14.4x. This is broadly line with the multiple for regional broadcasters, even though we estimate a significantly higher FY13-15F EBITDA CAGR of 40% for Zee relative to its Asia ex Japan peers, where the FY13-15F EBITDA CAGR is 18%. Given Zee is a leading broadcaster in the world’s top 3 television market (according to Media Partners ), we consider the shares attractive compared to regional peers such as BEC World in Thailand (12.7x FY14F EV/EBITDA with an EBITDA FY13-15F CAGR of 9% on consensus estimates); Media Nusantara Citra in Indonesia (11.5x EV/EBITDA FY14F with an EBITDA FY13-15F CAGR of 20% on consensus estimates) and Surya Citra Media in Indonesia (12.8x EV/EBITDA FY14F with an EBITDA FY13-15F CAGR of 19% on consensus estimates). Our DCF-based price target of INR238 for Zee implies an FY14F EV/EBITDA of 17.7x (FY13F EV/EBITDA of 25.3x). In a blue-sky scenario, however, if we were to apply Zee’s four-year average historical multiple of 14.4x (of note, EBITDA multiples up to 18x were seen in markets like North America, Korea or Taiwan during their high-growth digitization phases) to our EBITDA estimate for Zee in FY16F (which would suggest a target price for FY15F end and discount it back to H1FY14) when we expect the real impact of full digitization will be visible in the numbers, we would see a further 31% upside to our target price. We are on an average 23% ahead of consensus in terms of FY14-15F EBITDA estimates for Zee, and we expect a strong upgrade cycle for this name once the market fully absorbs the impact of digitization.


7

Fig. 4: Valuation Comparison of ZEE versus global and regional broadcasters/pay TV

Note: Pricing as of 27th Sep 2012, FY1 denotes FY13 and FY2 denotes FY14 for all Asian names. While for all US names FY1 denotes CY13 while FY2 denotes CY14

Source: FACTSET consensus for all the names except Zee Entertainment where we have used Nomura estimates

Fig. 5: Comparison of historical EV/EBITDA one-year forward consensus valuation trends between ZEE and Dish TV

Dish TV has traditionally traded at a 9% premium on an EV/EBITDA one-year forward consensus valuation to Zee but is now trading at a 20% discount. We believe that market concerns around a likely equity raise for organic subscriber acquisition are overdone and highlight our view that Dish has enough firepower to fund its subscriber growth till FY15F.

Source: FACTSET consensus

Company Name Ticker Rating Price Market Cap Country EBITDA FY1-

USD Mn FY1F FY2F FY1F FY2F FY3 CAGRSurya Citra Media SCMA IJ Not Rated 10,600 2,158 Indonesia 15.5 12.8 22.0 17.8 19%Sun TV Netw ork Ltd. SUNTV IN Not Rated 338 2,514 India 9.1 8.03 18.3 15.7 17%Zee Entertainment Z IN BUY 184 3,335 India 19.8 13.4 27.9 19.2 36%Television Broadcasts Ltd. 511 HK Not Rated 55 3,132 Hong Kong 8.4 8.0 14.0 13.4 5%Media Nusantara Citra MNCN IJ Not Rated 2,500 3,642 Indonesia 13.9 11.5 21.8 18.1 20%Nippon Television 9404 JP Neutral 1,144 3,604 Japan 4.6 4.1 10.9 10.1 9%BEC World PCL BEC TB Not Rated 59 3,810 Thailand 14.0 12.7 25.3 21.4 9%Fuji Media Holdings Inc. 4676 JT BUY 133,300 3,974 Japan 4.2 4.0 10.2 10.5 2%

10.9 9.1 18.6 15.6 14%

13.6 11.2 21.9 17.8 18%Scripps Netw orks SNI US Neutral 61 9,124 United States 9.3 8.5 18.2 16.1 9%Discovery Communications DISCA US Neutral 59 15,348 United States 8.9 8.0 21.4 17.6 10%CBS Corp (Cl B) CBS US Neutral 36 23,050 United States 7.9 7.4 14.1 12.4 7%Viacom Inc. Cl B VIAB US BUY 54 27,996 United States 8.2 7.9 12.9 11.3 5%New s Corp. Cl A NWSA US BUY 25 58,742 United States 8.7 8.0 14.9 12.5 9%Walt Disney Co. DIS US BUY 53 95,112 United States 9.6 8.6 17.1 15.0 8%

8.2 7.5 16.1 14.0 8%

Asian market cap w eighted Average

US market cap weigthed average

Asian ex Japan market cap weighted Average

EV/EBITDA P/E

-30%

-10%

10%

30%

50%

70%

90%

5

10

15

20

25

30

Aug

-09

Oct

-09

Dec

-09

Feb

-10

Ap

r-10

Jun

-10

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Ap

r-11

Jun

-11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Ap

r-12

Jun

-12

Aug

-12

Premium/discount (RHS)

Dish (LHS)

Zee (LHS)


8

Television, the biggest contributor to the Indian media industry, set for a transformational change post digitization Television represents about 45% of the ~INR728bn revenue generated by the Indian media industry in 2011 (Source: KPMG), which is more than the contribution of the next two segments — print and film — combined. We expect this contribution to increase to 50% by 2016F, driven by a combination of 1) increased penetration of TV, where India still lags some of the emerging market peers; 2) an increase in average revenue per user (ARPU) aided by the impending digitization; 3), an increase in television viewing time amongst Indian households; and 4) relatively lower growth in other competing medium (such as print) for advertising.

Fig. 6: India – Historical trend and forecast of revenue generated by various media industry components(in INR bn)

Source: KPMG

Fig. 7: India – % revenue contribution by various media industry components in 2011

Source: KPMG

Fig. 8: India – % revenue contribution by various media industry components in 2016F

Source: KPMG

In India, ~40% of advertising spends is directed towards television, making it the second most important preferred medium for advertisers after print, according to KPMG.

TV penetration rate in India to expected to increase

The TV penetration rate in India is low, even when we compare it to that of emerging market peers like China, Brazil and Indonesia. Even though the percentage of C&S households in India was 82% in 2011, within the C&S households, ~57% have analogue cable. In coming years, we look for increasing penetration of TV households driven by rising incomes in India and increasing digitization as a combination of regulation and market forces phase out analogue cable to be the key growth drivers for the industry.

(INRbn) 2007 2008 2009 2010 2011 2012F 2013F 2014F 2015F 2016F CAGR '07-11 CAGR '11-16

TV 211 241 257 297 329 380 435 514 618 735 12% 17%

Print 160 172 175.2 192.9 208.8 226 246.8 270 294.9 323.4 7% 9%

Film 92.7 104.4 89.3 83.3 92.9 100 109.7 121.1 134.5 150.3 0% 10%

Radio 7.4 8.4 8.3 10 11.5 13 16 20 24 29.5 12% 21%

Music 7.4 7.4 7.8 8.6 9 10 11.3 13.1 15.4 18.2 5% 15%

OOH 14 16.1 13.7 16.5 17.8 19.5 21.5 23.6 26 29 6% 10%

Animation a 14 17.5 20.1 23.6 31 36.3 43 51.1 61 69 22% 17%

Gaming 4 7 8 10 13 18 23 29 37 46 34% 29%

Digital Adve 4 6 8 10 15.4 19.9 25.8 33.5 43.7 57 40% 30%

Total Indian 515 580 587 652 728 823 932 1075 1255 1457 9% 15%

TV, 45%

Print, 29%

Film, 13%

Radio+ Music, 3%

OOH, 2%

Animation, VFX,

Gaming, 6%

Digital Advertising,

2%

TV, 50%

Print, 22%

Film, 10%

Radio+ Music, 3%

OOH, 2%

Animation, VFX,

Gaming, 8%

Digital Advertising,

4%


9

Fig. 9: Evolution of GDP per Capita (in INR)

Source: Nomura Economics Team

Fig. 10: TV penetration rate in India is low compared to emerging market peers

Source: KPMG

Fig. 11: India – Expect the TV and C&S penetration rate to increase

Source: Company reports, Nomura estimates

India’s ARPU among the world’s lowest; steady improvement expected till mandatory digitations is implemented

According to PWC, India is the second-largest C&S market in the world after China but India’s subscription revenue in 2010 was ~USD4bn (~USD4.5bn in 2011) versus ~USD75bn in the US, ~USD12bn in the UK and ~USD6.8bn in China. This reflects the fact that monthly ARPU in India is one of the lowest in the world. According to PWC, India’s ARPU in 2010 was ~USD2.9 vs USD3.14 in China, ~USD57 in the US and USD45.4 in the UK. We believe this low ARPU is a result of a highly fragmented industry wherein about 60,000 local cable operators (LCOs) interface with ~74mn cable households, a majority of which are still not digitized (~68mn were analogue in 2011).

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

50,000

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

E

2014

E

0% 20% 40% 60% 80% 100% 120%

India

Indonesia

Brazil

Germany

China

0%

20%

40%

60%

80%

100%

0

50

100

150

200

250

30020

09

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

Total HHs (LHS)TV House HHs (LHS)C&S HH (LHS)TV penetration as % of total HHs (RHS)C&S penetration as % of total TV HHs (RHS)


10

Fig. 12: India’s monthly ARPU comparison versus other countries in 2010 In USD

Source: PWC

According to KPMG, 57% of the cable households in India are still based on analogue which limits the ARPU of the competing platform, where addressability, customization and the scope to increase ARPU can be higher if digitization takes place. While ARPU of the movie industry in India, especially in urban areas, has increased significantly owing to growth of multiplexes, we believe the TV industry’s monthly ARPU at the consumer level, which sometimes can be lower than the price of a single multiplex’s movie ticket, will take off especially after 2014F when the analogue platform is likely to have been largely marginalized. TV ARPU as a multiple of an average movie ticket price in India is 1.2x (Source: Zee Entertainment) whereas the ratio stands at ~7x in the US and 5x in the UK (Source: Zee Entertainment). We believe that digitization will be a key driver for increasing ARPU at the consumer level apart from ensuring a higher share of that ARPU to broadcasters and MSOs.

Fig. 13: Expect ARPU to increase at a steady CAGR of ~6.5% till 2014F, but expect mid-teens growth in subsequent years as analogue cables are marginalized in INR/month

Source: KPMG, Nomura estimates

Average TV viewing time in India is also one of the lowest in the world

Based on data from Office of Communication (OFCOM), the average TV viewing time in India is very low even when it is compared to some emerging market peers such as Brazil and China. We believe that increased viewing time can be a growth driver for the industry.

0 10 20 30 40 50 60

US

UK

China

India

150

170

190

210

230

250

270

2011 2012E 2013E 2014E 2015E 2016E

Analog Cable Digital Cable

DTH IPTV

Average ARPU

TV ARPU as a multiple of an average movie ticket price in India is 1.2x whereas the ratio stands at ~7x in the US and 5x in the UK


11

Fig. 14: Comparison of TV viewing time per day across countries in 2011 In Minutes/day

Source: OFCOM

Increasing demand for HD channels to further drive ARPU

We expect demand for HD channels to increase especially with increased sales in LCD and plasma TVs in India. We expect the demand for HD channels to grow at an average pace of ~22% per year over 2011-15F, driven by increased incomes and falling prices of LCD/LED/plasma TVs which together have increased the affordability of HD TVs for Indians. As well, with more viewers demanding to watch sports events on HD TVs, broadcasters were encouraged to launch ESPN HD, Star Cricket HD and Ten Sports HD in 2011. We believe with increasing income levels, consumers, especially those that have bought HD TVs, are more likely to pay a premium for better viewing experience on HD channels. This should give a further boost to ARPU at the consumer level and should significantly benefit the broadcasters, in our view. Although penetration of HD TVs is currently low in India, we believe it has the potential to improve sharply based on the experience of other countries. According to OFCOM the three-year 2007-10 CAGR of HD TVs was 326% in France, 39% in the US, 358% in Italy, 95% in the UK and 264% in Germany.

Fig. 15: Increasing number of LCD television sales in India

Source: Euromonitor, KPMG, Nomura research (estimates pertain to KPMG and Euromonitor)

0 50 100 150 200 250 300

US

UK

RUS

GER

BRA

FRA

CHI

IND

5 4 4 4 3 3 3 2 2 2

1 2 3 4 5 7 8 9

8 89

10 1010

1010

1010

0

3

6

9

12

15

18

21

FY06 FY07 FY08 FY09 FY10 FY11E FY12E FY13E FY14E FY15E

Analogue LCD Plasma Other Digital


12

Fig. 16: Take-up rates of HD TVs in various countries

Source: IDATE, Industry data, Ofcom, Nomura research

1%

7%

42%

60%

20%

29%

45%

54%

39% 40% 40% 40%

0%0%

13%

28%

3% 5%

14%

21%

0% 0%

7%

14%

0%

10%

20%

30%

40%

50%

60%

2007 2008 2009 2010

FRA US JPN

ITA UK GER


13

Digitization, the holy grail of the industry that is set to be a reality We believe that digitization is now largely a question of “when” and not “if”, and we foresee a successful implementation becoming a transformational event for the television industry in India. In our opinion, the key stakeholders such as the Indian government, MSOs and broadcasters are likely to benefit significantly as the transformation will likely shift the balance of power up the value chain from the 60,000 LCOs. India currently has one of the highest percentages of analogue subscribers globally, and this in our view has resulted in extensive under-reporting of subscribers. We estimate LCOs garner ~80% of the subscription revenue industrywide and likely declare only ~15% of their actual customer revenue.

Fig. 17: Comparison of % digitization across countries - India has one of the lowest rates in the world

Source: OFCOM

Digitization an eventual outcome, albeit with risk of slight delay in current deadlines

We believe a mass digitization process in India is inevitable, although the Information and Broadcasting Ministry has pushed the 30-June deadline for a complete switch-over (to digitization) to 31 October 2012. The postponement was due to delays in the installations of set top boxes (STBs), and delays in Telecom Regulatory Authority of India (TRAI) tariff orders and signing of interconnect agreements between MSOs and LCOs. Although LCO bottlenecks remain, we believe that MSOs, broadcasters and the regulator are actively trying to meet the revised deadline. A further delay (another six months, in our view) is likely, especially in Phase 1, as MSOs fine-tune their negotiations with LCOs. However, we believe the experiences gathered from Phase 1 will form the basis for all subsequent negotiations in later stages, helping to speed up the switch-over exercise eventually.

Fig. 18: Current digitization deadlines and expected households to be digitized in each phase

Households in millions Source: TRAI, company reports, Nomura estimates

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

ES

P

UK

FR

A

US

IRE

ITA

CA

N

AU

S

NE

D

JPN

SW

E

GE

R

BR

A

PO

L

IND

RU

S

CH

I

Analogue Digital

Phase Impact Region Current DeadlineNumber of households likely to be digitized

Phase I Delhi, Mumbai, Kolkota, Chennai 31st October 2012 10

Phase 2 Cities w ith population higher than 1mn 31st March 2013 20

Phase 4 All other Urban areas 30th Sep 2014 20

Phase 4 Rest of India 31st Dec 2014 18


14

Most stakeholders in the media industry value chain will benefit from digitization, in our view

We believe that most stakeholders in media except LCOs will benefit significantly from digitization. We discuss below the likely impact that we see on the key stakeholders involved in digitization.

Fig. 19: The media value chain as it exists now

Source: Company reports

• Broadcasters. We believe that broadcasters will be the key beneficiaries. As a significant amount of capex will likely be incurred by MSOs and DTH players, we expect broadcasters to benefit from increased subscription revenue (we believe digitization will help address the under-reporting issue, enabling the broadcasters to get a fair share for their content subscription revenue, which is a stable mode of revenue stream compared to revenue from advertising that is more cyclical). We estimate their combined share of consumer ARPU will at least double from current levels of 10-15% of total consumer ARPU. As well, we expect their cost base to benefit from lower carriage and placement (C&P) fees as digitization increases the channel carrying-capacity from 80-90 analogue channels (30-40 in prime bands) to 500 digitized channels. Traditionally, carriage fees were paid to MSOs for prime band placement of a particular channel. We expect carriage fees to drop significantly, but placement fees (paid to MSOs for favourable channel positioning with a digital bouquet) to remain, which is as seen in developed countries with a high level of digitization.

Fig. 20: Evolution of the advertising revenue and subscription revenue in INRbn

KPMG expects total revenue of broadcasters to more than double from INR330bn in 2011 to INR735bn by 2016F, driven by fast growth in subscription revenue (a 9% CAGR over CY11-16F versus advertising revenue CAGR of 15% over CY11-16F). Consequently, we estimate the contribution from less cyclical subscription revenue stream will increase from ~65% in 2011 to ~69% in 2016F

Source: KPMG

Broadcaster

MSO (6 national and around 25 small players)

LCO (around 60000)

Consumer (~74m)

DTH (6 players)Consumer (~37m)

0 100 200 300 400 500 600 700 800

2006

2007

2008

2009

2010

2011

2012E

2013E

2014E

2015E

2016E

Advertizing Revenue

Subscription Revenue


15

• DTH operators. We believe that DTH players have a much more scalable model, a stronger balance sheet and greater economies of scale in their business model and are better positioned versus the MSOs, which are likely to focus on: 1) arranging funding for the capex of STBs, and front- and back-end infrastructure; and 2) convincing LCOs that digitization is inevitable and the risks of losing customer base to DTH operators if they fail to adopt digitization. We believe that in the early phases of digitization, the shift in cable subs to DTH players will be ~30%, as per our discussions with the companies in the DTH space. In our view, HD services already offered by DTH players are a key differentiator versus digital cable players, as most of them (except Digicable and Hathway) have yet to launch these services.

• MSOs. We believe MSOs will benefit in terms of getting a fair share of subscription revenue post digitization as we expect the number of under-reporting to drop post digitization. Currently, the industry (as per KPMG)estimates that a cable operator declares only ~15% of its actual subscriber base to the MSO, and this is likely to increase to 100% after full digitization as it will result in complete addressability of the last-mile customer

However unlike broadcasters, MSOs have to make substantial upfront investment in terms of STB installations, front- and back-end infrastructure, as well as handle LCOs’ concerns by involving them in the digitization process. We believe the other impact on MSOs will be a significant reduction (we expect reductions of up to 50%) in carriage fees post digitization, as the channel-carrying capacity of digital is significantly higher than that of analogue; however, we expect this to be more than offset by a potential 4.0-5x increase in subscription revenues.

Fig. 21: How MSO economics will likely evolve in digital cable in India

Source: Media Partners Asia, Nomura estimates

Apart from a potential increase in subscription revenue, we believe digitization will pave the way for “double play” involving pay-TVs and broadband through a combination of cross-marketing, competitive pricing and packaging and high speeds .We believe this “double play” could be the differentiating factor for MSOs vs DTH operators, implying reduced payback period on the capital employed for the operator.

Common Size P&L Units AnalogDigital @30%

LCO share @35%

LCO share @40%

LCO share @45% Comments

Monthly subscription revenue INR 100 120 120 120 120 20% increase in ARPU post complete digitization

Declaration by LCO % 15 100 100 100 100 Under-reporting dissapears post digitization

Subscription revenue to LCO INR 85 36 42 48 54 Varying subscription share of LCO

Subscription revenue to MSO INR 15 84 78 72 66

C&P revenue to MSO (net of service tax) INR 15 8 8 8 8 Assuming carriage and placement comes down by 50%

Content payment to broadcaster INR 14 48 48 48 48Assume 40% of the share of subscription revenue from consumers is paid as content fees

MSO gross profit INR 16 44 38 32 26

Churn to DTH % 25 25 25 25 Assumed a 25% churn

MSO gross profit net of churn to DTH INR 16 33 28.5 24 19.5 Absolute level of MSO gross profit can double

MSO gross profit margin % 53% 36% 33% 30% 26%Better payback and margins if we introduce double play through broadband


16

Fig. 22: Double play involving pay-TV and broadband (BB) will likely reduce the payback period for MSOs, a likely scenario

MSOs can reduce their payback periods by offering broadband services, in our view, something which players like Comcast in the US or First Media in Indonesia have done

Source: Media Partners Asia

In our opinion, double play is also potentially a way of ensuring an additional revenue stream (commissions from broadband ARPU) for LCOs whose subscription income is likely to drop significantly after the digitization process. While this double play has been very successful in the west (according to KPMG, Comcast is the largest cable operator as well as the home Internet service provider globally) the recent auction of Broadband Wireless Access (BWA) and the launch of 4G could be a threat to double play in the medium term, in our view in India as

• LCOs. We believe LCOs’ bargaining power will wane significantly post digitization. In our view, LCOs need to re-invent themselves as customer-facing interface of the MSOs. We believe that they will eventually have to co-operate with MSOs during digitization to prevent losing their customer base to DTH players

Per month (INR)

Hathway Cable BB Cable + BB

Revenues 226 330 556

- Broadband (BB) 330 330

- Cable (gross) 205 205

- Placement 21 21

Service tax 0

- Broadband (BB) 0 34 34

- Cable (gross) 21 21

- Placement 2 2

Net Revenue per user 203 296 499

Cost

-Bandwidth/content cost 74 30 104

-Commission cost 55 53 108

Gross Profit 74 213 287

Gross Margin (%) 37 72 109

- Employee cost 16 53 69

- Marketing Cost 16 9 25

- Admin and other cost 16 56 72

Operating Profit 26 95 121

Operating Profit Margin 13% 32% 24%

Capex

- Modem/STB 1400 1100 2500

- Other hardware 125 1500 1625

Advance from customer 600 500 1100

Net capex 925 2100 3025

Payback period (in months) 35.6 22.1 25.0

Secondary Point under digital


17

Fig. 23: LCO operating margins are currently boosted by under-reporting – indicative numbers

Source: MPA Partners

• Consumers. In our opinion, Indian consumers are ready for the digital shift, judging from the significant penetration DTH operators have achieved in the past five years. We believe that digital will be a solid “value proposition” for users, as it enhances viewing experience, offers more TV channels and more flexible tiered pricing options with high-quality contents including HD and niche channels. Intensifying competition amongst the seven existing DTH players and MSOs will likely mean an increase in ARPU at a moderate pace, in our view. Subsequently we foresee greater consolidation in the broadcasting industry, implying that consumer ARPU will likely increase at a faster rate post full digitization. We believe that over time the broadcasting industry will slowly move towards a free pricing model-based in Digital Addressable System (DAS) vs Conditional Access System (CAS) in which channel pricing is capped at INR5 per month per channel and channel pricing on digital platforms is fixed at 42% of analogue cable rates.

• Government. We estimate that the Indian government loses ~INR40bn every year in tax revenues (split among service tax, entertainment tax and income tax) owing to under-reporting (assuming only 15% of subscribers are declared) of analogue cable subscribers, although it is likely to have benefitted immensely from the significant growth in the DTH sector which has in the past, on our estimates, transparently paid ~30% of its revenues to the government in the form of taxes (service, entertainment and license fees) after excluding custom duty of imported hardware equipment. This is a big incentive for the government to push for complete digitization, we believe. We also believe that the digitization process will eventually be a success in terms of achieving increased addressability although the Information and Broadcasting Ministry pushed the 30-June deadline for a complete switch-over to 31 October 2012. The government has been indicating that it has no intention of postponing the deadline further. Our discussions with various stakeholders such as Telecom Regulatory Authority of India (TRAI) indicate that any additional delay would not likely be more than six months.

Increase in FDI limit in broadcasting carriage services indicates more supportive regulations

The recent step taken by the government to lift the FDI (foreign direct investment) limit in broadcasting carriage services (DTHs and MSOs) to 74% from 49% is a sign of increased regulatory support for the sector, we believe, with an aim to achieve full digitization. Investors will only need to secure a Foreign Investment Promotion Board (FIFB) approval if FDI in broadcasting carriage services is more than 49%. Although we may not see immediate interest from foreign investors in the DTH/MSO space, we believe that the changed FDI limit augurs well for the sector, which according to Media Partners Asia, will require ~USD8bn for complete digitization, of which USD300mn will be required for Phase 1. We believe it is MSOs that need significant capital, and in our

LCO key monthly metrics Units Value Comments

Total subs per LCO 1,000

ARPU INR 176

Declaration % 15

Revenue to LCO INR 176,000

Declared Revenue INR 26,400

Service tax @10.3% INR 2,719 Applied to declared revenueEntertainment Tax @16 per month INR 6,400 Paid as per industry sources on ~40% of the

subscriber base

Subscription revenue shared with the INR 26,400

SG&A expenses @25% INR 44,000

Operating income INR 96,481

Operating Margin % 55


18

view, DTH players are relatively better placed in terms of balance sheet strength. We believe that any potential stake/interest from a foreign player may allay investors concerns around funding for the required capex to achieve full digitization. As a parallel, after the Japanese government allowed 100% FDI in 1998, it resulted in the entry of Microsoft, Liberty Global and Time Warner into cable distribution in partnerships with local players such as Sumitomo Corp which accelerated the digital TV penetration in Japan

Fig. 24: India -- Foreign investment limits have been increased recently; this should give a further impetus to digitization

Source: CRISIL, PWC

Currently, there is regulatory restriction in terms of crossholdings that prevents broadcasting and cable companies from owning more than a 20% stake in a DTH network. Similarly, a DTH company cannot hold more than a 20% stake in a broadcaster or a cable network

Regulatory policy around content exclusivity still constrains the value of content In India, regulations prohibit a distribution platform such as a DTH operator to show exclusive content on its platform. A broadcaster also cannot offer content exclusivity to a single distributor. In sports specifically, the Sports Broadcasting Signals Act (October 2007) made it mandatory for broadcasters to offer broadcasting signals of sporting events which are of national importance to Prasar Bharati, a public broadcaster in India. The stipulated revenue-sharing ratio is 75%:25% between the owner of the content and Prasar Bharti.

Prior Limit Revised guidelines

FDI + FII FDI+FIIBroadcast carriage services

DTH 49% 74%

IPTV 74% 74%

Mobile TV No policy 74%

HITS 74% 74%

Teleport (hb) 74%

MSOs operating at the national or state level and taking up digitization with addressability

49% 74%

Other MSOs 49% 49%

Local Cable Operators 49% 49%

FM radio 20% 26%

Downlinking 100% 100%

Uplinking – non-news and current affairs 100% 100%

Uplinking –-news and current affairs 26% 26%


19

Fig. 25: Impact of digitization and the scenario we envisage in terms of number of consumers in 2016F (DTH would have more viewers than Digital Cable)

Source: Nomura estimates

Broadcasters1. Higher share of subscription revenue 2. Carriage and placement fees will likely go down3. An accurate subscriber number will mean greater bargaining power with advertisers

MSOs

1. Increased subscription revenue as under-reporting by LCOs disappears and MSOs' bargaining power goes up2. Carriage and placement fees are expected to reduce3. Unlike broadcasters, we believe MSOs will have to incur significant capex and deal with LCOs who are reluctant participants in digitization, in our view

3 M&A to lead to consolidation, in our view4. Opportunity to increase revenue through broadband services

LCOs1. Likely to be marginalized post digitization, some of them likely to be bought by MSOs

2. Need to re-invent themselves as a collection/servicing agent of MSOs

Consumer (~79m)

DTH operators 1. Will likely benefit significantly in the initial phases of digitization as they have better access to capital than MSOs. They also do not have to deal with LCOs and are better equipped in terms of infrastructure 2. HD services can be a differentiator, in our view

3. Has a definitive edge in cable dark areas, in our view

Consumers (~86nm)1 More choices with a higher number of TV channels2 Better quality viewing experience

3. Better content as competition intensifies 4. ARPU is likely to increase slowly till full digitization, but likely to move up sharply after full digitization


20

Digitization transformed the media industry in other markets, and led to industry consolidation and stock outperformance

India’s pay-TV distribution market is, in our view, all set for a transformation change as a result of digitization, and we see a significant increase in ARPU from an expansion of pay-TV, broadband and HDTV services.

In terms of absolute numbers, India had ~42mn digital homes in 2011 (the second highest in the world as per Media Partners Asia), which we estimate will increase by ~3.6x by 2016F.


21

Fig. 26: Digitization in other markets was transformational and resulted in consolidation, strong growth and value creation

Source: Media Partners Asia, Nomura research

So we believe a combination of increased ARPU, higher addressability of consumers and a significant increase in the number of digital subscribers will likely make India a high growth market when it comes to the media industry. We believe that digitization will benefit broadcasters and increase value accretion of distributors such as MSOs/DTH players as we expect LCOs’ bargaining power to wane. In a similar high growth phase witnessed in North America between 1998 and 2003, Korea between 2003 and 2007, and Taiwan 2005 and 2010, the valuations for operators averaged a one-year forward

Country YearPre-consolidation Year Triggers Year

Key events during consolidation Year Post consolidation Growth trajectory

Digital pen./ cable TV subs

Cable broadband market share

USA 1970 50+ large 1994 DTH launches 1996 US West Inc acquisition 2011 Top 5 players: 85 Cable (CATV & BB) 85% 55%

MSOs of Continental % market share of industry revenue

Cablevision total CATV subs grows at 9% CAGR

(2005-2010)

1996 The Telecommunications 1998 AT&T buys TCI in US$48 Average operating

Telecommunications bil. deal margin of 40%

Act and cable rate

deregulation

1997 Digital cable launches 2001 AT&T merged its cable

business with Comcast,

creating world's largest

operator with 22 mil.

subscdribers

2005 Digital cable passes 2010 Comcast buys NBCU

30 mil. subs

UK 1980s 50+ Late DTH gained market 1994 International CableTel 2011 Virgin Media: 95% Cable (CATV & BB) 98% 25%

players 1980s share acquired Insight market share of industry revenue

Communications total CATV subs grows at 5% CAGR

(2005-2010)

1991 Rights granted to 1998- NTL acquired Comcast Average operating

cable companies to 99 UK, ComTel, Diamond margin of 37%

offer telephony with Cable, and Cable &

TV services Wireless

2006- NTL acquired Telewest

7 Global

Virgin acquired NTL

and rebranded it Virgin

Media

Japan Pre 686 1993 Regulation eased, Late Larger MSOs acquired 2011 Top 3 players: 65% Cable (CATV & BB) 80% 15%

1993 players companies allowed to 1990s small cable operators market share of industry revenue

own more than one total CATV subs grows at 9% CAGR

operator (2005-2010)

Government's 2000 J:COM and TITUS Average operating

mandate for complete Communications margin of 43%

digitalization by 2010 merge, with Liberty and

1998 FDI increased to Microsoft emerging

100% as major investors

in partnership with

local conglomerate

Sumitomo.

Taiwan 1980s 600+ 1996 Government's thrust 1996- Larger MSOs acquired 2010 Top 4 players: 80% Cable (CATV & BB) 10% 16%

players -2000 towards digitization; 2003 local cable operators market share of industry revenue

FDI at 60%. total CATV subs grows at 9% CAGR

(2005-2010)

2009 Full scale launch of 2004 Carlyle acquires kbro Average operating

digital cable 2005 Macquarie buys stake margin of 50%

in Taiwan Broadband–

continued consolidation

2006 MBK buys stake in CNS

2009 Tsai family buys kbro

2010 Want Want consortium

buys stake in CNS

Korea Late 1,000 2000 Government mandate 2001- Various MSOs merge 2010 Consolidation Cable (CATV & BB) 30% 20%

1990s players for consolidation 6 with regional cable continues; top industry revenue

creating 108 players operators 5 players: 75% grows at 10% CAGR

market share of (2005-2010)

total CATV subs

2001 Government mandate 2003 Goldman Sachs buys Average operating

for digitization into C&M, largest cable margin of 42%

MSO

2002 Launch of DTH 2006 Carlyle group invests

in cable

2003 Cable FDI increased 2007 Macquarie Group and

to 49% MBK Partners acquire all

2007 Full-scale launch of of C&M

digital cable


22

EBITDA of 12-16x on one-year forward consensus estimates, based on data from Media Partners Asia.

As shown in the table above, digitization has also resulted in consolidation in the broadcasting services sector globally. We expect that as the digitization progress in India gets underway, there will be consolidation especially in the distribution space where MSOs with a relatively stronger balance sheet may acquire each other or LCOs as MSOs are likely to aim for greater scale to increase their bargaining power with broadcasters. There is also a possibility of further consolidation in the DTH segment, in our view, where there are currently seven players.

Key company data: See page 2 for company data and detailed price/index chart.

Dish TV India DSTV.NS DITV IN

MEDIA

EQUITY RESEARCH

Initiate with Buy, see good upside potential

Beneficiary of mandatory digitization, steady positive free cash generation starting FY1F3

October 3, 2012

Rating Starts at

Buy

Target price Starts at INR 107

Closing price September 27, 2012 INR 81.65

Potential upside +31%

Action/Valuation: Initiate with a Buy rating and TP of INR107 Dish TV, a leader in the domestic DTH space, should be a key beneficiary of strong growth in the industry; we see the subscriber base doubling and ARPU increasing at an estimated CAGR of ~8% in the next three years driven by mandatory digitization. Dish as a dominant Indian player seems well positioned to benefit from this growth. Our DCF-based TP of INR107 implies FY14F EV/EBITDA of 16.1x (falls to 6.4x FY16 EBITDA), which appears fair in the context of an FY12-16F EBITDA CAGR of 40%.

Dish has enough firepower to fund its subscriber growth until FY15F We estimate that Dish TV will generate cash flow of ~INR36bn in FY13-15F, which along with current cash of INR4bn should be sufficient to fund gross subscriber additions of 12.7m in this period. Dish may potentially require additional funding (for growth) if the MSOs don’t succeed to the extent we have factored in, thus resulting in a higher-than-expected subscriber shift from analogue to the DTH industry.

Fixed-fee contracts with most big broadcasters a positive Dish TV has fixed-fee contracts with most big broadcasters, which means that in the short to medium term it is likely to have a greater share of high subscriber growth along with an increase in ARPU.

Catalyst: Completion of digitization Phase1 likely to re-rate Dish TV DTH players, especially Dish TV with ~29% market share and early-mover advantage, should benefit significantly from mandatory digitization. Completion of Phase1 latest by end-FY13 should be a major catalyst.

31 Mar FY12 FY13F FY14F FY15F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 19,580 22,484 27,831 37,893

Reported net profit (mn) -1,331 -1,459 -1,093 598

Normalised net profit (mn) -1,331 -1,459 -1,093 598

FD normalised EPS -1.25 -1.37 -1.03 56.26c

FD norm. EPS growth (%) na na na na

FD normalised P/E (x) na N/A na N/A na N/A 145.1

EV/EBITDA (x) 19.6 N/A 15.8 N/A 12.7 N/A 8.3

Price/book (x) na N/A na N/A na N/A na

Dividend yield (%) na N/A na N/A na N/A na

ROE (%) 98.8 53.4 27.3 -14.1

Net debt/equity (%) -1,081.8 -379.6 -277.9 -348.9

Source: Company data, Nomura estimates

Anchor themes

We believe that India’s media industry is at an inflection point as digitization, in our view, is set to become a reality. Completion of Phase 1 should be a significant catalyst for Dish as it would add more subscribers in subsequent phases.

Nomura vs consensus

We have the highest TP on the Street as we expect higher subscriber additions during digitization, particularly in Phases II, III and IV.

Research analysts

India Media




Nomura | Dish TV India October 3, 2012

24

Key data on Dish TV India Income statement (INRmn) Year-end 31 Mar FY11 FY12 FY13F FY14F FY15F

Revenue 14,367 19,580 22,484 27,831 37,893Cost of goods sold -5,058 -6,115 -7,035 -8,093 -9,712

Gross profit 9,309 13,465 15,449 19,738 28,181SG&A -10,163 -12,975 -14,550 -18,237 -24,629

Employee share expense -761 -748 -875 -1,024 -1,198

Operating profit -1,614 -258 23 477 2,354

EBITDA 2,381 4,960 6,069 7,601 11,751

Depreciation -3,996 -5,219 -6,046 -7,124 -9,397Amortisation

EBIT -1,614 -258 23 477 2,354Net interest expense -1,534 -1,780 -1,900 -1,900 -1,900

Associates & JCEs

Other income 1,226 707 417 330 294Earnings before tax -1,922 -1,331 -1,459 -1,093 748

Income tax 3 0 0 0 -150

Net profit after tax -1,919 -1,331 -1,459 -1,093 598Minority interests

Other items

Preferred dividends

Normalised NPAT -1,919 -1,331 -1,459 -1,093 598

Extraordinary items

Reported NPAT -1,919 -1,331 -1,459 -1,093 598

Dividends 0 0 0 0 0

Transfer to reserves -1,919 -1,331 -1,459 -1,093 598

Valuation and ratio analysis

Reported P/E (x) na na na na 145.1

Normalised P/E (x) -45.2 -65.2 -59.5 -79.5 145.1

FD normalised P/E (x) na na na na 145.1FD normalised P/E at price target (x) na na na na 190.8

Dividend yield (%) na na na na na

Price/cashflow (x) 22.0 21.2 10.9 7.5 5.1Price/book (x) na na na na na

EV/EBITDA (x) 39.7 19.6 15.8 12.7 8.3EV/EBIT (x) na na 4,150.9 202.7 41.2

Gross margin (%) 64.8 68.8 68.7 70.9 74.4

EBITDA margin (%) 16.6 25.3 27.0 27.3 31.0EBIT margin (%) -11.2 -1.3 0.1 1.7 6.2

Net margin (%) -13.4 -6.8 -6.5 -3.9 1.6

Effective tax rate (%) na na na na 20.0Dividend payout (%) na na na na 0.0

Capex to sales (%) 70.0 33.5 24.3 37.9 41.6Capex to depreciation (x) 2.5 1.3 0.9 1.5 1.7

ROE (%) -190.7 98.8 53.4 27.3 -14.1

ROA (pretax %) -6.8 -1.1 0.1 2.0 8.4

Growth (%)

Revenue 32.4 36.3 14.8 23.8 36.2EBITDA 113.1 108.3 22.3 25.2 54.6

EBIT na na na 1,960.8 393.8Normalised EPS na na na na na

Normalised FDEPS na na na na na

Per share

Reported EPS (INR) -1.81 -1.25 -1.37 -1.03 56.26c

Norm EPS (INR) -1.81 -1.25 -1.37 -1.03 56.26cFully diluted norm EPS (INR) -1.81 -1.25 -1.37 -1.03 56.26c

Book value per share (INR) na na na na naDPS (INR) na na na na na


Relative performance chart (one year)

Source: ThomsonReuters, Nomura research

(%) 1M 3M 12M

Absolute (INR) 18.3 31.8 5.1

Absolute (USD) 23.7 41.6 -3.1

Relative to index 12.5 21.6 -7.4

Market cap (USDmn) 1,633.0

Estimated free float (%) 36.3

52-week range (INR) 83.7/51.65

3-mth avg daily turnover (USDmn)

4.8

Major shareholders (%)

Promoters 64.8

Source: Thomson Reuters, Nomura research

Notes

We expect the company to report a loss in FY13-14F on account of higher subscriber additions, which would lead to higher depreciation


25

Cashflow (INRmn) Year-end 31 Mar FY11 FY12 FY13F FY14F FY15FEBITDA 2,381 4,960 6,069 7,601 11,751

Change in working capital 424 -2,312 1,425 2,859 3,751

Other operating cashflow 1,143 1,457 494 1,050 1,487Cashflow from operations 3,948 4,105 7,988 11,509 16,989

Capital expenditure -10,052 -6,553 -5,455 -10,537 -15,774Free cashflow -6,104 -2,448 2,534 973 1,215

Reduction in investments 2,318 821 0 0 0

Net acquisitions

Reduction in other LT assets 2 521 0 0 0

Addition in other LT liabilities

Adjustments 836 344 417 330 294Cashflow after investing acts -2,949 -762 2,951 1,303 1,508

Cash dividends 0 0 0 0 0Equity issue 56 22 0 0 0

Debt issue 1,751 2,185 0 0 0

Convertible debt issue

Others -1,152 -784 -1,900 -1,900 -1,900

Cashflow from financial acts 655 1,424 -1,900 -1,900 -1,900

Net cashflow -2,293 662 1,051 -597 -391Beginning cash 5,550 3,257 3,919 4,970 4,373

Ending cash 3,257 3,919 4,970 4,373 3,981Ending net debt 7,545 10,154 9,103 9,700 10,092


Balance sheet (INRmn) As at 31 Mar FY11 FY12 FY13F FY14F FY15F

Cash & equivalents 3,257 3,919 4,970 4,373 3,981

Marketable securities 0 0 0 0 0Accounts receivable 227 286 329 407 554

Inventories 44 69 66 128 192Other current assets 2,687 2,326 2,379 2,498 2,689

Total current assets 6,215 6,600 7,743 7,406 7,416

LT investments 2,000 1,500 1,500 1,500 1,500Fixed assets 18,474 18,044 17,235 20,226 25,972

Goodwill 384 43 43 43 43

Other intangible assets

Other LT assets 158 152 152 152 152

Total assets 27,231 26,340 26,674 29,327 35,084Short-term debt 4,317 3,880 3,880 3,880 3,880

Accounts payable 10,711 6,408 7,612 10,319 13,907

Other current liabilities 3,286 4,999 5,313 5,723 6,288Total current liabilities 18,313 15,287 16,804 19,922 24,075

Long-term debt 6,485 10,194 10,194 10,194 10,194

Convertible debt

Other LT liabilities 2,063 1,798 2,074 2,703 3,708

Total liabilities 26,861 27,278 29,072 32,818 37,977Minority interest

Preferred stock 1,063 1,064 1,064 1,064 1,064

Common stock -693 -2,002 -3,462 -4,555 -3,956Retained earnings

Proposed dividends

Other equity and reserves

Total shareholders' equity 370 -939 -2,398 -3,491 -2,893

Total equity & liabilities 27,231 26,340 26,674 29,327 35,084

Liquidity (x)

Current ratio 0.34 0.43 0.46 0.37 0.31Interest cover -1.1 -0.1 0.0 0.3 1.2

Leverage

Net debt/EBITDA (x) 3.17 2.05 1.50 1.28 0.86

Net debt/equity (%) 2,039.3 -1,081.8 -379.6 -277.9 -348.9

Activity (days)

Days receivable 7.4 4.8 5.0 4.8 4.6Days inventory 2.6 3.4 3.5 4.4 6.0

Days payable 900.3 512.3 363.7 404.4 455.3

Cash cycle -890.3 -504.1 -355.2 -395.1 -444.6Source: Company data, Nomura estimates

Notes

We expect the company to generate positive FCF from FY13F onwards

Notes

The company has a negative working capital cycle on account of advanced income received from customers and credit period received from broadcasters and CPE suppliers


26

Investment summary Dish TV: a leader in India’s direct to home (DTH) industry; subscriber base to double in three years, based on our estimates Dish TV, a leader in the DTH space (with ~29% market share, according to the company) and the only listed pure-play DTH player in India, has built sufficient scale in the last seven years. The company should be a key beneficiary of strong growth in the domestic DTH industry, where we forecast the subscriber base to double and ARPU to increase at a CAGR of ~8% in the next three years, driven by mandatory digitization. We estimate that cable and satellite (C&S) penetration in India will increase from 82% in 2011 to 95% by 2016F and DTH as a percentage of C&S homes is likely to increase from ~31% in 2011 to 51% by 2016F.

Internal accruals and cash on balance sheet should fund subscriber additions over FY13-15F Dish appears to have enough firepower to fund its subscriber growth until FY15F, in our view. We estimate that Dish TV will generate net cash from operating activities of ~INR36bn in FY13-15F, which along with current cash of INR4bn, should be sufficient to fund gross subscriber additions of 12.7mn in this period. Ironically, a DTH player like Dish may potentially require additional funding (for growth) if the multiple system operators (MSOs) don’t succeed to the extent we have factored in, thus resulting in a higher-than-expected subscriber shift from analogue to the DTH industry.

Fixed-fee contracts with most of the big broadcasters in India should lead to margin expansion in medium term Dish TV has fixed-fee contracts with most of the large domestic broadcasters (except Sun), which means that in the short to medium term it should have a greater share of high subscriber growth along with an increase in ARPU.

Completion of digitization Phase1 by FY13 at the latest is likely to re-rate Dish TV, along with further consolidation in the industry The completion of Phase1 at the latest by end-FY13F, in our view, will be a major catalyst for the stock. This should pave the way for subsequent phases which target cities outside of metros where Dish has a stronger presence than other domestic peers. Also we believe that Dish because of its scale can play the role of a consolidator which, in our view may get a boost as significant progress is achieved on the digitization front.

Customers upgrade to a higher value pack over time; increasing consumption of HD and digitization would drive ARPU growth Apart from a structural increase in ARPU due to digitization, we believe Dish can further increase its ARPU by changing its customer mix. Dish TV’s current subscriber base consists of 70% rural with the remainder as urban. In addition, ~ 55% of the company’s subscribers have subscribed to the lowest ARPU basic tier pack. Consequently, with the general population’s income increasing, particularly in rural India, we expect consumers to upgrade to the higher value pack, which would thereby lead to an increase in ARPU without any price increase. The company has ~ 0.2mn HD subscriber base which is increasing at the annual rate of ~7%. The company’s ARPU from HD pack is INR414 vs consolidated ARPU of INR156. With increasing sales of HD, plasma, LCD TV and customers’ demand for a better viewing experience, we expect the proportion of HD subscribers to increase, which would give a further impetus to ARPU.

Valuation appears attractive in the context of strong growth The stock currently trades at FY14F EV/EBITDA of 12.7x (FY13F EV/EBITDA of 15.8x) which is a ~22% discount to its three-year average one-year forward trading multiple of 16.2x. However, on FY16F EBITDA which is where the full impact of digitization will be evident, the stock currently trades at a mere 4.6x. Our DCF-based TP of INR107 implies a FY14F EV/EBITDA of 16.1x (which falls to 6.4x FY16F EBITDA) which we believe appears fair in the context of FY12-16F EBITDA CAGR of ~40%. In a blue sky scenario we see a further 35% potential upside to our target price (from INR107 to INR144).


27

DTH industry in India: Beneficiary of mandatory digitization

India had ~ 37mn DTH ~68mn analog cable and ~6mn digital cable out of the total 146mn TV households in 2011. As mandatory digitization becomes a reality in India (spread across four phases), we believe it should result in a gradual shift in analog cable subscribers to DTH or digital cable. We see the DTH industry emerging as a dominant force post digitization due to two key reasons:

• There are ~6,000 MSOs in India (unlike the DTH players, MSO are likely to find it relatively difficult to raise capital to fund capex required for digitization).

• LCOs (Local Cable Operators) have turned out to be a big bottleneck for digitization. Post digitization, their bargaining power is likely to come down as addressability of the last mile customer is likely to increase. However, the initial challenge for digital cable will largely be around a modified revenue-sharing model between the LCOs and MSOs will provide an opportunity of significant growth to the DTH industry

These factors along with increasing TV penetration, cable & satellite penetration and demand for a better quality of TV signal should result in solid growth for the DTH industry between 2012 and 2016. We expect the net subscriber base to more than double from 42mn net subscribers to ~84mn net subscribers by FY16F, which translates to a CAGR over 2011-16 of ~19%.

Fig. 27: Number of DTH subscribers: – expected to reach 84mn by end-2016F


Fig. 28: DTH subscribers: India has largest DTH subscriber base in Asia Pac; this number should double by 2016F

Source: Company data, Nomura research

Dish TV: Likely to double gross subscriber base from 12.9mn to ~26mn in the next three years

Dish TV is a leading and first direct-to-home (DTH) player in India with current market share of ~ 29% (as per the company). At the end of FY12, the company had a gross and net subscriber base of 12.9mn and 9.6mn, respectively. Based on projected DTH subscriber as shown above and assuming incremental Dish market share of 24% and 1% churn rate, we expect the company to add ~13mn gross subscribers over the next three years. We believe that Dish TV, which currently has 70% of its subscriber base located in rural India, will benefit more during Phases III and IV of digitization.

69 68 68 6341

5 0 0

4 5 6 1635

59 66 70

16 28 3742 54 73 80 84

0

20

40

60

80

100

120

140

160

2009

2010

2011

2012

E

2013

E

2014

E

2015

E

2016

E

Analog Cable Digital Cable DTH(mn)

1.4 0.5

42.5

1.23.6 3.3 3.1

0.8 0.3 0.2 1.1 0.505

1015202530354045

Aus

tral

ia

Ch

ina

Ind

ia

Ind

one

sia

Jap

an

Ko

rea

Mal

aysi

a

New

Zea

lan

d

Ph

ilipp

ines

Sri

Lan

ka

Th

aila

nd

Vie

tnam

(mn)


28

Fig. 29: Dish TV subscriber base – to double in three years


Fig. 30: Dish TV: leading market share in India’s DTH industry


Price increase in FY12-13 would lead to a shift in ARPU levels over the next two to three quarters

Dish TV as a player with the highest market share (refer to the chart above) clearly has a big role to play in terms of determining pricing trends in the industry. Recently the company has taken an INR10 hike in some of the customer packs in Nov’11 and INR20 in the base pack (except in the south India pack and HD) in July’12. Subscribers typically recharge for about ~2 months as is reflected in the average advance days of ~66. Although the price hike in Nov’11 was visible in Q1FY13 ARPU, we expect the price hike in July’12 to be visible in Q3-Q4FY13F ARPU. We expect Dish to exit FY13F at an ARPU of INR165.

Fig. 31: Quarterly ARPU: Dish to exit FY13F at an ARPU of INR165, driven by July ’12 price hike INR per month per subscriber


35

7

1013

15

19

2629

34

6

910 11

13

18 19

0

5

10

15

20

25

30F

Y08

FY

09

FY

10

FY

11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F

Gross Net

Dish TV29.4%

Tata Sky18.4%Sun Direct

14.1%

Big TV8.2%

Airtel Digital18.6%

Videocon D2h

11.3%

139 139142

150 150152 152 151

156158

162165

125

130

135

140

145

150

155

160

165

170

Q1F

Y11

Q2F

Y11

Q3F

Y11

Q4F

Y11

Q1F

Y12

Q2F

Y12

Q3F

Y12

Q4F

Y12

Q1F

Y13

Q2F

Y13

F

Q3F

Y13

F

Q4F

Y13

F


29

Fixed-fee deal with broadcasters: likely to lead to short- to medium-term margin expansion

Dish TV has changed its content cost model with broadcasters from being per subscriber to a fixed fee basis. We believe this is a result of Dish’s negotiating power increasing after it raised its subscriber base; broadcasters can no longer ignore revenue stream from the DTH industry where Dish is a clear market leader. Change in content model to fixed-fee basis has enabled the company to become more aggressive in acquiring new customers. As shown below, content cost as a % of sales has been on a downward trajectory. In the short to medium term, we believe this operating leverage will result in margin expansion for Dish.

Fig. 32: Content cost and as a % of revenue


Fig. 33: Fall in content cost as a % of sales and expansion in margin


The fixed-fee contract with broadcasters is typically for one to three years. With digitization, we expect content cost to gradually increase by 15-25% over FY14-16F as broadcasters are likely to negotiate on the basis of an increased subscriber base on account of digitization. However, we expect sales to grow faster, which would result in margin expansion, in our view. Gradually as contracts are renewed, broadcasters will demand more share from revenue, which would bring back margins to the 31-32% level, in our view.

FCF generation and cash on balance sheet appear sufficient to fund subscriber growth in FY13-16F

We estimate that Dish TV will generate cash flow of ~INR56bn between FY13-16F, which along with current cash of INR5.5bn (including investment) should be sufficient to fund gross subscriber additions of ~16mn (from ~13m currently to ~29m in FY16F) in this period. This would entail a total capex of ~INR40bn, on our estimates, related to consumer premise equipment (CPE) which includes a set-up box, wire, dish and smart card and other subscriber acquisition costs, which include marketing costs and dealer margins. Ironically, a DTH player like Dish may potentially require additional funding (for growth) if the MSOs don’t succeed to the extent we have factored in, therefore resulting in a higher-than-expected subscriber shift from analogue to the DTH industry.

60%

47%

40%

35%

31% 31%29%

25% 24%20%

30%

40%

50%

60%

0

3,500

7,000

10,500

14,000

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F

Cost (LHS)

% of sales (RHS)

(INR mn)

20%

30%

40%

50%

60%

-50%

-32%

-14%

4%

22%

40%

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F

EBITDA margin (LHS)% of sales (RHS)


30

Fig. 34: Internal accruals to fund subscriber acquisitions over next 3 years (in INRmn)


We believe that the company will be able to fund this capex through the INR5.5bn of cash and investment on its balance sheet as at end-FY12 and internal accruals from:

• An increase in subscriber base, which would result in an increase in subscription revenues and set-up box rentals, leading to higher EBITDA and incremental FCF.

• The company receives cash in advance (~66 days) from customers, pays broadcasters after ~48 days and pays creditors for fixed assets (CPE) after ~90 days, which typically results in a negative working capital cycle.

Pick-up in subscription additions, expansion in margin and FCF positive is likely to lead to a re-rating of the stock

We expect Dish to add ~16mn gross subscribers over FY13-16F vs 9.9mn gross subscriber additions during FY09-12. This acceleration in the subscriber base is due to digitization and along with the increase in ARPU would lead to a sales CAGR of ~27% over FY12-16F. This along with expansion in margin as mentioned above should result in an EBITDA CAGR of ~40% over FY12-16F. Dish became FCF positive in Q4FY12; we expect it to be FCF positive over FY12-16F even though the company would require capex of ~INR40bn, on our estimates. In our view, the stock should re-rate as has been seen in the US and the UK during a high subscriber addition phase.

Fig. 35: BSKYB EV/EBITDA: traded at a higher valuation during high growth in the subscriber addition phase

Source: FACTSET, Bloomberg, Nomura research

Fig. 36: BSKYB: subscriber base and its growth

Source: Bloomberg, Nomura research

FY13F FY14F FY15F FY16F

EBITDA 6,069 7,601 11,751 19,079

Loss on discard of fixed asset 218 421 631 310

Tax 0 0 (150) (1,741)

Change in working capital 1,701 3,487 4,756 2,531

Cash from operation 7,988 11,509 17,288 23,661

Capex (5,455) (10,537) (15,774) (7,749)

FCF 2,534 973 1,514 15,911

Other Income 417 330 294 422

Interest Payment (1,900) (1,900) (1,900) (1,562)

Debt repayment 0 0 0 (5,000)

Dividend Payout 0 0 0 (2,090)

Beginning Cash & Investments 5,419 6,470 5,873 5,481

Ending Cash 6,470 5,873 5,481 9,680

0

10

20

30

40

50

60

70

80

Jan

-01

Jul-

01Ja

n-0

2Ju

l-02

Jan

-03

Jul-

03Ja

n-0

4Ju

l-04

Jan

-05

Jul-

05Ja

n-0

6Ju

l-06

Jan

-07

Jul-

07Ja

n-0

8Ju

l-08

Jan

-09

Jul-

09Ja

n-1

0Ju

l-10

Jan

-11

Jul-

11Ja

n-1

2Ju

l-12

HIgher trading multiple during high growth in subscriber base

0%

5%

10%

15%

20%

25%

30%

35%

0

2

4

6

8

10

12

FY

01

FY

02

FY

04

FY

05

FY

06

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

Subcriber base (LHS)Subscriber growth (RHS)


31

DTH players should benefit from an increased shift from analog cable to DTH during subsequent phase of digitization

We expect DTH players to benefit from the increased shift from an analog subscriber base to DTH. Based on our discussion with the industry participants like cable operators, DTH players and broadcasters, we are building in a shift of 25%, 35%, 40% and 45% during Phases I, II, III and IV, respectively from analogue cable to DTH.

Major MSOs are present mainly in phase I and II towns and cities As shown below, major MSOs in India are present mainly in Phase I and II cities. Based on interaction with industry stakeholders (like cable operators, DTH players and broadcasters etc) and the D/E ratio of MSOs as shown below, we expect that the major MSOs will be able fund their capex requirements in Phase I. However, as we move to Phase II, III and III cities/towns in India, the number of smaller MSOs having limited access to capital is likely to increase. In our opinion, these MSOs will find it difficult to raise capital and given their scale, would be unlikely to derive benefits of scale from vendors like set-top box (STB) manufacturers, which is likely to lead to a greater shift towards the DTH players.

Fig. 37: Number of households under major MSOs in different phases – have presence mainly in Phases I and II Mn households

Source: MPA, Nomura estimates

Fig. 38: Debt/equity of major MSOs

Source: MPA, Nomura research

Fig. 39: Capex requirements for national MSOs

Source: MPA, Nomura research

DTH players likely to benefit from economies of scale – competitive advantage

over smaller MSOs in Phase III and IV towns/cities We believe DTH players like Dish TV that have a pan-Indian footprint would have more gross subscriber additions vs MSOs in Phase III and IV towns and cities and, hence DTH players will require more STBs than regional/local MSOs. This would mean that DTH players like Dish would be able to provide STBs at a lower price than the MSOs/LCOs, thereby increasing churn from analog subscriber to DTH.

Hathway Den InCable DigicableYou Broadband

& Cable Ortel

Total as % of analog cable

HH

Phase I 1.8 2.7 2.5 2.5 0.8 0.002 100%

Phase II 5.5 2.7 4.0 4.5 1 0.005 89%

Phase III 1.4 2.7 1.0 1.5 - 0.4 35%

Phase IV - 2.9 1.0 - - 0 39%

1.6

0.8

0.3 0.30.2

0.08

0

0.3

0.6

0.9

1.2

1.5

1.8

Ortel WWIL Hathway Incable DEN Digicable


32

Digitization: to increase the subscriber pie for DTH players thus reducing price war; shift cable ARPU an anchor point and likely to lead to an increase in ARPU of DTH players such as Dish

India’s DTH industry has been loss-making on account of low ARPU, low subscriber base and increasing competition. We believe that the DTH players’ ARPU is on an upward trajectory on account of the following:

• The DTH industry should add ~52mn gross subscribers over FY13-16F due to digitization from a 44mn gross subscriber base in FY12. In our view, this gives enough space for players to expand their subscriber base rather than getting involved in a price war, a situation seen in FY09-10.

• Due to the industry’s current lack of accountability and considerable under-reporting, local cable operators could be profitable at a low consumer ARPU as well. This ARPU served as an anchoring level for DTH players and limited the pricing power of the industry. In our view, this should change post-digitization. With digitization, the bargaining power of LCOs is likely to decline and MSOs, which often have to incur capex related to customer acquisitions, would be keen to increase price in order to maintain their profitability (especially as carriage fees are likely to fall) and fund their capital expenditures. This is likely to lead to a price hike by DTH players as well.

• At this point, we believe the DTH players are not being aggressive enough in taking price hikes in order to attract more analog customers to the DTH platform. Once a particular phase of digitization is complete, we expect DTH players to make substantial price increases in a staggered manner, across towns/cities associated with a particular phase.

Fig. 40: Dish TV – quarterly ARPU INR per month per subscriber


Fig. 41: Dish TV ARPU – upward trajectory from FY12 INR per month per subscriber


• Dish’s subscriber base consists of 70% rural and the rest is urban. Currently ~ 55% of customers have subscribed to the basic tier pack. With rising incomes in India particularly in rural India, we expect consumers to upgrade to a higher value pack, driving the company’s ARPU higher.

• The company has a subscriber base of ~ 0.2mn HD, which increases 7% annually. The company’s ARPU from the HD pack is INR414 vs consolidated ARPU of INR156. With increasing sales of HD, plasma, LCD TV and consumers’ demand for a better viewing experience, we expect HD subscriptions to increase, thereby increasing the company’s ARPU

100

110

120

130

140

150

160

170

Q1F

Y08

Q2F

Y08

Q3F

Y08

Q4F

Y08

Q1F

Y09

Q2F

Y09

Q3F

Y09

Q4F

Y09

Q1F

Y10

Q2F

Y10

Q3F

Y10

Q4F

Y10

Q1F

Y11

Q2F

Y11

Q3F

Y11

Q4F

Y11

Q1F

Y12

Q2F

Y12

Q3F

Y12

Q4F

Y12

Q1F

Y13

Price war

230

131

146139 143

151160

173

189

207

110

130

150

170

190

210

230

FY

07

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F


33

High entry barrier business – long payback period, although NPV accretive with increasing subscriber base

The DTH industry is characterized by high initial cash outflow associated with customer acquisition costs but as the customer base stabilizes at a critical mass, the business generates a very high level of operating cash flow.

For customer acquisition DTH companies in India have to spend on subsidy on CPE, marketing expenses to acquire new customers and commissions to dealers while cash inflows are spread over the average lifetime of a customer that is dependent on the churn rate (determined by the level of competition, brand recall, service levels). As shown below, Dish TV had a payback period of ~ six years in FY09 which has been gradually coming down. The long payback period typically means that the early part of the industry is characterized by losses globally which is evident from our analysis (shown below) of the DTH operators like BSkyB, and DISH US in the West. We believe that the high payback period and substantial costs associated with customer acquisition (Dish for example has spent ~USD0.5bn on capex in the last 4 years 2009-2012) are significant entry barriers for a new entrant.

Fig. 42: Dish payback period & NPV analysis: long payback period should decline due to digitization, NPV to increase INR per subscriber

Note: we have calculated NPV using 14.4% as cost of equity


Fig. 43: DTH players – loss at net income, negative FCF & equity pre-digitization & partly during digitization

Source: Bloomberg, Company, Nomura estimates

Dish TV, being the first Indian player in DTH industry, has had an early-mover advantage and thus benefits from economies of scale. Currently there are six DTH players (excluding DD Direct) in India. We believe that for any new entrant, the payback period will be much longer than Dish’s and NPV/customer in the initial phase will be much lower than the current incumbents especially Dish TV.

FY09 FY10 FY11 FY12 FY13F FY14F FY15F FY16F

SAC 2677 2488 2153 2125 2104 2134 1970 2310

Average ARPU per month 146 139 143 151 160 173 189 207

Average ARPU per year 1,752 1,668 1,716 1,815 1,923 2,078 2,267 2,489

Cost per year 1,629 1,495 1,206 1,369 1,398 1,345 1,263 1,512

Income 123 173 510 446 525 732 1,003 977

Churn per month 0.60% 0.70% 0.85% 1.05% 1.00% 1.00% 1.00% 1.00%

Churn per year 7.20% 8.40% 10.20% 12.60% 12.00% 12.00% 12.00% 12.00%

Life of customer (years) 13.89 11.90 9.80 7.94 8.33 8.33 8.33 8.33

Payback Period (years) 6.17 5.11 3.92 3.43 2.96 2.29 1.91 2.26

NPV 1,245 1,566 2,197 1,694 2,282 2,744 3,273 3,180

Dish Network Corp (DISH US, USD mn) FY97 FY98 FY99 FY00 FY01 FY02 FY03

- Net income (321) (296) (800) (622) (216) (852) 224

- FCF (232) (178) (150) (450) (148) (369) 254

- Total Equity 110 (145) (48) (628) (778) (1,206) (1,033)

Dish TV (DITV IN, INR mn) FY09 FY10 FY11 FY12 FY13F FY14F FY15F

- Net income (4,805) (2,621) (1,919) (1,331) (1,459) (1,093) 598

- FCF (7,801) (2,766) (6,104) (2,448) 2,534 973 1,215

- Total Equity (6,475) 3,768 370 (939) (2,398) (3,491) (2,893)


34

Target price of INR107, implies 31% potential upside

We value the company based on DCF, as we believe that the benefits from digitization will become more evident in the medium term (FY15-16F). Our DCF-based TP of INR107 implies an EV/EBITDA of 16.1x FY14F EBITDA (FY13 EBITDA of 20.1x). The stock currently trades at EV/EBITDA of 12.7x FY14 (FY13 EBITDA of 15.8 x) which is a 22% discount to its average one-year forward trading multiple of 16.2x, as shown below. We do not expect Dish to report an accounting profit in FY13-14F (as incremental subscriber addition will lead to an increase in depreciation) as well and thus, in our view, a valuation based on free cash flow is more appropriate for this name

Our assumptions underlying DCF:

• Robust sales at a CAGR of ~27% over FY12-16F on account of digitization, which is likely to double Dish’s gross subscriber base and increase in APRU on account of the price hike taken by the company in FY12-13 and the price hike after completion of digitization in different phases. We assume 24% incremental market share for Dish. In order to increase subscriber shift from analog cable to DTH, we believe that DTH players are not aggressively increasing prices. Post-digitization and increases in price by LCOs, we expect DTH players to make aggressive price increases. Post-digitization we expect 0.2-0.3mn subscriber additions per year, while ARPU is likely to drive sales growth of ~9%. We assume a churn rate of 1% until FY16F and have reduced it by 0.1% per year stabilizing it at 0.6%. This is because we expect the DTH market to stabilize and churn to cable should reduce after price differential between cable and DTH reduces.

• We have assumed a gradual shift in consumer from analog cable to digital cable/DTH during digitization, as shown below. We have assumed six months delay each in Phases I and II and three months delay each in Phases III and IV.

• We assume a gradual margin expansion over FY12-15F on account of the fixed cost agreement with broadcasters, as noted above. We expect margin to jump further in FY16F on account of the higher sales growth and reduction in commission cost as a % of sales as the number of subscriber additions fall post-digitization in FY16F. In our view, broadcasters will gradually charge more for content, which would bring back margins to 31-32%.

• The company has negative working capital on account of advance income from consumer, credit period from broadcasters and CPE suppliers. We have built in 90 days for credit from suppliers of fixed assets, 48 days credit from broadcasters while we have reduced advance income days by 2 per year from 66 in FY12-16F as we believe that subscriber from Tier 3/4/5 cities would recharge for lower amount. Post FY16F, we expect advance income days to increase by 2 as Dish would increase the minimum recharge amount.

• Regulatory provisions: As per news articles on Indiatelevision from 13 July 2011, “DOT has challenged the Telecom Disputes Settlement and Appellate Tribunal (Tdsat)'s directive that had excluded income from non-licensed activities for the purpose of calculating license fee”. Although this issue around calculation of gross revenue for the purpose of calculation of license fee is pending before the Apex court, Dish has taken provisions on a conservative basis. Outflow of this provision is likely to depend on the final decision rendered by the Regulatory Authority. We are building in a 10% license fee in the P&L and added a 4% license fee to the provision. We have removed the NPV of this provision to perpetuity (~ INR14 per share) from our target price which means that a positive outcome for DISH TV can result in a further 13% potential upside to our target price.

• We assume no debt repayment over FY13-15F as internal cash accruals will be used to do capex required for acquiring new subscribers. The company will commence debt re-payment from FY16F onwards.

• We have assumed 6% terminal growth, risk free rate of 8.16% (10-year Indian government risk free bond), beta of 1.12 and market premium of 6%. Based on these numbers, we have taken cost of equity of 14.9%.


35

Fig. 44: Valuation – DFC-based TP of INR107 INR mn


Fig. 45: TP sensitivity to cost of equity and terminal growth rate


Fig. 46: TP sensitivity to cost of equity and Churn rate


Fig. 47: Cost of Equity Assumptions

Source: Bloomberg, Nomura estimates

Fig. 48: EV/Sub – trading at 10% premium to historical average, expect premium to increase in order to capture digitization over FY13-16F

Source: FACTSET, Bloomberg, Nomura estimates

Year FY11 FY12 FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E 2021E 2022E 2023E Terminal

Sales 14367 19580 22484 27831 37893 50445 56109 61488 67357 73803 81039 89377 98421

Growth 32% 36% 15% 24% 36% 33% 11% 10% 10% 10% 10% 10% 10% 6%

EBITDA 2381 4960 6069 7601 11751 19079 20481 21485 22250 24114 26151 28649 31280

EBITDA Margin 16.6% 25.3% 27.0% 27.3% 31.0% 37.8% 36.5% 34.9% 33.0% 32.7% 32.3% 32.1% 31.8%

D&A 3996 5219 6046 7124 9397 9232 9085 8922 7709 5322 4566 4309 4230

Interest 1534 1780 1900 1900 1900 1562 887 280 10 10 10 10 10

Taxes (3) 0 0 0 150 1741 2266 2758 3404 7371 8656 9973 11325

Tax Rate 0% 0% 0% 0% 20% 20% 20% 20% 20% 33% 33% 33% 33%

Capital Expenditure 10052 6553 5455 10537 15774 7749 5388 4639 4473 3838 3970 4106 4245

ΔWorking Capital 1602 (977) 1701 3487 4756 2531 2359 2856 3417 3707 4182 4696 5130

FCFE -7600 -4349 416 -1349 -1316 10556 14299 16664 17780 16602 17696 19257 20830 248649

Cost of Equity 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9% 14.9%

Discount Factor 0 0 0 0.9 0.8 0.7 0.6 0.5 0.5 0.4 0.4 0.3 0.3 0.3

Time 0 0 0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 9.5

Discounted FCFE 0 0 0 -1258 -1069 7463 8799 8926 8291 6739 6252 5923 5577 66568

PV of FCFE 122,210

Add: cash 6,171

Sub: PV of provision 14,200

Total PV 114,182

No. of shares 1064

One Year TP 107

Terminal g

107 13.0% 14.0% 14.9% 16.0% 17.0%

4% 120 106 96 85 77

5% 129 113 101 89 80

6% 140 121 107 94 84

7% 156 132 115 99 88

8% 177 146 126 107 93

Cost of Equity Churn

13.0% 14.0% 14.9% 16.0% 17.0%

0.8% 155 134 119 104 94

0.9% 148 128 113 99 89

1.0% 140 121 107 94 84

1.1% 133 114 101 88 78

1.2% 124 107 94 82 73

Cost of Equity

Cost of Equity Assumptions

Rd 8.2%

Beta 1.12

Rm-Rf 6.0%

Re 14.9%

4,000

6,000

8,000

10,000

12,000

14,000

May

-08

Jul-

08S

ep-0

8N

ov-

08Ja

n-0

9M

ar-0

9M

a y-0

9Ju

l-09

Sep

-09

No

v-09

Jan

-10

Mar

-10

Ma y

-10

Jul-

10S

e p-1

0N

ov-

10Ja

n-1

1M

ar-1

1M

a y-1

1Ju

l-11

Se p

-11

No

v-11

Jan

-12

Mar

-12

Ma y

-12

Jul-

12

EV/Sub 4 year Average

4 year maximum 4 year Minimum


36

Fig. 49: Dish EV/EBITDA trading multiple on consensus


Fig. 50: Historically Dish has traded at premium to Zee while currently trading at ~20% discount to Zee


Fig. 51: Global peers valuation

Price in local currency, pricing as of 27th Sep 2012

Source: FACTSET, Bloomberg, Nomura estimate for DITV IN

Investment risks

• Delay in digitization: We have assumed six months’ further delay in phase I & II each of digitization and three months’ delay each in phase III & IV of digitization. Any further delay in digitization would mean slower subscriber additions, which would result in a deviation from our estimates.

• Change in government regulation: The media industry, which includes cable operators, broadcasters, DTH players, etc., is regulated by the government. Any change in government policies, such as tax rate, import duty on STB, etc., can adversely impact our estimates.

• Competition: Aggressive strategy by a competitor – India’s DTH industry has six players (excluding DD Direct), with Dish being the market leader, with a 29% market share. Currently, there are six DTH players and any aggressive strategy by a competitor to increase its market share can result in an increase in churn rate. This would adversely impact our numbers.

• Depreciation of INR vs USD: Dish imports STBs from Korea. As noted, we assume Dish would add ~13mn gross subscribers over FY13-15F and would need to import ~11.7mn STBs as it only has ~ 1.3mn in STB inventory. Depreciation of INR vs USD would increase the cost of STBs, thereby increasing capex and slower acquisition of new subscribers which would adversely impact our estimates.

7.0

10.5

14.0

17.5

21.0

24.5

28.0

31.5

35.0A

ug-0

9

Oct

-09

Dec

-09

Feb

-10

Ap

r-10

Jun

-10

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Ap

r-11

Jun

-11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Ap

r-12

Jun

-12

Aug

-12

EV/EBITDA FY1Last 3 year average EV/EBITDALast 3 year max EV/EBITDALast 3 year min EV/EBITDA

-30%

-10%

10%

30%

50%

70%

5

10

15

20

25

30

Aug

-09

Oct

-09

Dec

-09

Feb

-10

Ap

r-10

Jun

-10

Aug

-10

Oct

-10

Dec

-10

Feb

-11

Ap

r-11

Jun

-11

Aug

-11

Oct

-11

Dec

-11

Feb

-12

Ap

r-12

Jun

-12

Aug

-12

Premium/discount

Dish

Zee

Company Name Ticker Rating Price Market Cap CountryUSD M FY1 FY2 FY1 FY2

Den Netw orks Ltd. DEN IN Not Rated 162 403 India 12.4 9.0 39.2 39.7 52%Hathw ay Cable & Datacom Ltd. HATH IN Not Rated 221 593 India 15.6 10.5 NA 83.3 42%Dish TV India Ltd. DITV IN BUY 82 1,636 India 15.4 12.4 NA NA 39%Sky Deutschland AG SKYD GR Neutral 3 2,982 Germany NA 50.0 NA NA naCablevision Systems Corp. CVC US BUY 16 4,268 United States 6.9 6.7 19.6 16.6 3%Kabel Deutschland Holding AG KD8 GR Neutral 55 6,312 Germany 8.8 7.9 16.6 17.2 11%DISH Netw ork Corp. Cl A DISH US Neutral 31 13,954 United States 6.1 5.9 12.8 12.2 2%Eutelsat Communications ETL FP Neutral 25 7,101 France 7.9 7.3 15.6 14.5 7%Charter Communications CHTR US Not Rated 75 7,580 United States 7.5 7.2 NA 99.7 5%SES S.A. FDR A SESG FP Neutral 21 13,433 France 10.7 10.1 14.4 13.8 6%British Sky Broadcasting Group BSY LN BUY 8 20,361 United Kingdom 8.3 8.1 13.5 12.9 5%DIRECTV DTV US Reduce 52 33,077 United States 6.1 5.6 12.3 10.0 7%Comcast Corp CMCSA US BUY 36 95,754 United States 6.8 6.4 18.5 16.2 5%

7.2 7.5 15.1 17.4 6%Market cap weighted Average

EV/EBITDA P/E EBITDA FY1-FY3 CAGR


37

Blue Sky Scenario for Dish TV suggests a further ~35% upside to our target price

• Favourable Regulatory outcome: As per news articles on Indiatelevision from 13 July 2011, “DOT has challenged the Telecom Disputes Settlement and Appellate Tribunal (Tdsat)'s directive that had excluded income from non-licensed activities for the purpose of calculating license fee”. Although this issue around calculation of gross revenue for the purpose of calculation of license fee is pending before the Apex court, Dish has taken provisions on a conservative basis. Outflow of this provision is likely to depend on a final decision rendered by the Regulatory Authority. We are building in a 10% license fee in the P&L and added a 4% license fee to the provision. We have removed the NPV of this provision (INR14/share) from our target price but if the verdict is favour of the DTH operators then we will have another 13% upside to our target price of INR107.

• Roll out of GST – will reduce total tax rate by 5-6% - The DTH industry is currently paying multiple taxes in the form of service tax, entertainment tax, license fee and value added tax. As per management, the rollout of GST would lead to a reduced cumulative tax rate by 5-6%, thereby providing upside potential to our estimates. If we were to assume a reduction in taxes as % of DTH revenues by 5% then our DCF based target price increases by INR24/share or ~22% from its current level.

Our blue sky scenario incorporating the first 2 aspects suggests a further 35% potential upside to our target price. The other upside can emanate from further consolidation in the DTH industry in India which would reduce the competitive intensity in the space. Dish we believe is well positioned to benefit from any likely consolidation in the space where some of the late entrants have still to build the economies of scale that Dish TV has as an early entrant.


38

Company background Dish TV is India’s first and the largest satellite based direct to home (DTH) television service provider. The company is a part of the Essel group – the parent company of Zee Network and is the only listed pure-play DTH player in India. Dish has ~13.4mn and 9.8mn gross and net subscribers, respectively, as of Q1FY13 and is an industry leader with a 29% market share. The company is the third-largest DTH operator globally and the largest outside the US (as per Media Partners Asia). Apart from providing DTH services, Dish also provides other value-added services to consumers like video on demand (VoD) and up linking facility to broadcasters.

The company has a strong distribution network in rural as well as urban areas reaching 80,000 retail outlets for STBs and more than 0.2mn recharge outlets. Dish has DTH service in 96 cities and plans to expand to 200 cities and towns in the near future. On the infrastructure front, Dish has 17 transponders with a total transmission bandwidth of 648 MHz.

Fig. 52: Shareholding FY12


Fig. 53: market share in DTH industry – Dish, the market leader


Fig. 54: Dish – offers highest number of TV & high definition (HD) channels


Promoters64.8%

Individuals4.1%

Domestic Companies

3.3%

FIs, Mutual Funds and

Banks5.4%

Flls, OCBs, NRI & GDRs22.4% Dish TV

29.40%

Tata Sky18.40%Sun Direct

14.10%

Big TV8.20%

Airtel Digital18.60%

Videocon D2h

11.30%

Dish TV Tata Sky Airtel Sun Direct Big TV D2H

Linear channels 298 200 258 191 234 234

Audio channels 22 0 10 11 11 20

Others, including VOD 15 17 14 0 28 46

Total 335 217 282 202 273 300

HD Channels 42 9 12 7 14 13


39

Fig. 55: TOM brand Recall – Dish TV consistent recall

Source: AC Nielsen Brand Track 2012, Company data, Nomura research

Business Model- Once the subscriber acquisition stabilizes it is a cash generating machine DTH players like Dish TV have a very attractive business model as once the customer acquisition stabilizes, it will generate a very high level of cash. In the customer addition phase they incur a lot of capex which leads to increased depreciation that depresses the profitability at the net level. Therefore, we believe net cash flow from operations is a better metric to focus on in the customer addition phase (capex is associated with customer addition) as that is reflective of the cash generation potential of the business once its customer addition tapers off.

However, once the initial capex around customer acquisition is done, economies of scale kick in, and if the companies keep churn under control they can steadily increase Average Revenue per Customer (ARPU) from the current low levels because of structural increases especially once digitization is completed and a combination of product mix.

Fig. 56: Forecast of Net Cash flow from operations/Market Capital

We expect significant net cash flow generation from operations in FY16E where the real impact of digitization will be visible. Currently for Dish TV net cash flow from operations in 2016 /current capital ratio is 20% which is reflective of the free cash flow generation potential of the business once the capital expenditure associated from customer acquisition has tapered off

Source: Company reports, Nomura estimates

0

8

16

24

32

40Ja

n'1

1

Feb

'11

Mar

'11

Ap

ril'1

1

May

'11

Jun

e'11

July

'11

Aug

'11

Sep

'11

Oct

'11

No

v'11

Dish TV Tata Sky Sun Direct

Big TV Airtel Digital D2H

0%

5%

10%

15%

20%

25%

FY12 FY13E FY14E FY16E


40

Financial analysis We forecast Dish’s consolidated revenue at a CAGR of ~27% and EBITDA at a CAGR of ~ 39% over FY12-16F. We expect Dish to become FCF positive in FY13F but high depreciation on account of subscriber addition would mean the company becoming profitable in FY15F on a consolidated basis. Key assumptions underpinning our forecasts follow:

• We assume digitization over FY13-16F and subscriber distribution across DTH and cable as shown below (Industry section).

• Dish TV is the current market leader in the DTH space with ~29% market share which has come down over years on account of entry of new players and increasing competition. We forecast an incremental market share of ~24% for Dish.

• We forecast a churn rate of 1% until FY16F and beyond that has moderated it by 0.1% per year stabilizing it to 0.6%. This is because we expect the DTH market to stabilize and churn to cable will reduce after the completion in the industry normalizes.

• We have assumed gradual margin expansion over FY12-15F on account of fixed cost agreement with broadcasters. We expect margin to further jump in FY16F on account of higher sales growth and reduction in commission cost as a % of sales as the number of subscriber addition falls post digitization in FY16F. We believe gradually broadcasters will charge more for content which should bring back margin to 31-32%.

Fig. 57: Nomura vs Consensus – we expect company to become profitable in FY15F against consensus expectation of FY14F(in INRmn)


Revenue – digitization to drive growth through shift in consumers from cable to DTH and increased ARPU

We expect consolidated sales at a CAGR of ~27% over FY12-16F driven by an increase in DTH subscribers on account of digitization and increase in ARPU on account of base price hike taken in July’12 and staggered price increase post different phases of digitization.

Fig. 58: Consolidated sales – to be driven by digitization INR mn


We expect DTH subscriber revenue growth to be muted at ~ 16% in FY13F on account of flattish gross subscriber addition by Dish (as DTH players would benefit more in phase 2/3/4) in FY13F and increasing competition.

Subscriber base – to increase exponentially over FY13-FY15F Based on the above digitization timeline and subscriber distribution among cable & DTH assumptions mentioned below (Industry section) and incremental market share of ~24%

FY13F FY14F FY15F FY13F FY14F FY15F FY13F FY14F FY15F

Revenue 22,484 27,831 37,893 22,943 27,422 32,678 -2% 1% 16%

EBITDA 6,069 7,601 11,751 6,418 8,152 10,206 -5% -7% 15%

PAT -1,459 -1,093 598 -164.7 1130 2900 NA NA NA

EPS -1.4 -1.0 0.6 -0.15 1.06 2.73 NA NA NA

DifferenceNomura Consensus

FY11 FY12 FY13F FY14F FY15F FY16F

Consolidated sales 14,367 19,580 22,484 27,831 37,893 50,445

- growth 32% 36% 15% 24% 36% 33%

DTH subscriber revenue 11,927 16,639 19,232 25,139 34,588 46,334

- growth 43% 40% 16% 31% 38% 34%

DTH lease rental 1,985 2,206 2,334 1,547 1,876 2,341

- growth 32% 11% 6% -34% 21% 25%


41

(against current market of ~29%), we expect Dish TV to add 2.2mn, 4.2mn and 6.6mn subscribers in FY13F, FY14F and FY15F, respectively. Company price hike in July’12 and increased competition would result in lower gross subscriber addition in FY13F vs FY12 in our view. We assume a churn rate of 1% per month for Dish TV as well as for the industry to arrive at a net subscriber base as shown below. Post digitization, we expect the DTH market to mature and churn rate to come gradually from 1% to 0.6% over FY17-20F.

Fig. 59: Gross/Net subscriber and average yearly ARPU assumption INR mn


ARPU – price hike in July’12 to drive ARPU in short term, digitization, demand for HD content and consumer upgrade to higher value pack to be long-term drivers Dish took a base price hike of INR10 in selected packs in Nov’11. This was followed by a base price hike of INR20 across all packs except HD and south India. Since there is a lag between price hike and increase in ARPU as subscribers pay in advance for 1/6/12 months, we expect price hikes to be reflected in average yearly ARPU over FY13/14F as shown above. Because of the lack of addressability and under-reporting, LCO can be profitable by charging the customer a relatively low amount which then also serves as a anchoring price level for the DTH players. We believe that mandatory digitization will change this especially over the longer term once competition to attract analogue customers stabilizes.

Price hikes by DTH players are also limited in order to attract more analog cable subscribers. We expect DITV to take decent price increases after different phases of digitization, as digital cable operators increase consumer ARPU. So we expect ARPU growth to increase as different phases of digitization complete.

Dish subscriber base consists of 70% rural and rest is urban. Currently ~ 55% of the company's subscriber have subscribed to basic tier pack. So with increasing income particularly in rural India, we expect consumers to upgrade to higher value pack, driving company ARPU higher. The company has a ~ 0.2 mn HD subscriber base which is increasing at 7%. The company ARPU from HD pack is INR 414 vs consolidated ARPU of INR 156. With increasing sales of HD, Plasma, LCD TVs and demand for better viewing experience, we expect HD subscription to increase, thereby increasing company ARPU. Overall we believe that ARPU for the DTH operators including Dish TV will increase at a CAGR over FY12-16E of ~8%

Lease rental from DTH subscribers – change in accounting policy would lead to marginal growth in FY13F and de-growth in FY14F

The company charges a one-time fee as STB rental which was recognized over 3 years till FY12. Accounting policy has been changed and that rent is being recognized over 5 years from FY13 onwards. This would result in marginal growth of ~ 6% in FY13 as this would consists of 1/5th rental of subscriber acquired in FY13 and 1/3rd of rental of subscriber acquired in FY11 & FY12. We expect rental income to de-grow in FY14F as it would consists of 1/5th rental of subscribers acquired in FY13F & FY14F and 1/3rd of rental of subscribers acquired in FY12.


Gross Subscriber (mn) 10.4 12.9 15.1 19.2 25.6 28.7

- Increment (mn) 3.5 2.5 2.2 4.1 6.4 3.1

Net Subscriber (mn) 8.5 9.6 10.6 13.3 17.9 18.8

- Increment (mn) 2.8 1.1 1.0 2.6 4.6 0.9

ARPU (INR) 143 151 160 173 189 207

- growth 2.9% 5.8% 5.9% 8.1% 9.1% 9.8%


42

Margin – to increase marginally in FY13-14F, we expect substantial expansion over FY15-16F

We expect consolidated EBITDA to grow at a CAGR of ~39% over FY12-16F on account of sales growth backed by digitization and margin expansion particularly over FY15-16F. As mentioned above, the company has fixed fee contract for 1-3 years with big broadcasters (except Sun). This fixed fee contract should lead to expansion in margin over FY13-16F. We expect margin to increase marginally over FY13-14F on account of increase in commission to dealers & distributors due to increase in subscriber addition during digitization and increase in advertisements to drive more analog subscriber to Dish TV.

Program/content from broadcasters is the major cost for Dish TV and constitutes ~42%, as shown below. The company has fixed fee contracts with broadcasters for 2-3 years with an annual escalation clause in the range of 15-20%. The contract with Media Pro (JV between Zee Turner and Star Den) for content is due for renewal in Sep’12 and the company expects price escalation in the range of 15-20%. The company is guiding for content cost increment of 12-15% in FY13F and we are building in 15% in FY13F. With digitization, and an increase in subscriber addition and margin expansion for Dish, we expect growth in content cost to rise as broadcasters will likely demand higher share.

Fig. 60: Dish cost breakup – content cost contributes ~ 42% FY12


We expect advertisement and publicity expenses to increase over FY13-15F driven by the drive to shift more analog consumers to Dish during digitization. Although the company has not done much advertisement spending in Q1FY13, we expect spending to increase from Q2FY13 as we approach the timeline for completion of phase 1.

Programming Costs42%

Transponder Lease

8%License Fees

14%

Entertainment Tax5%

Personnel Cost5%

Administration & Other Expenses

7%

Advertising & Publicity expenses

5%

Commission10%

Customer Support Service

3%

Others1%


43

Fig. 61: Cost projection & EBITDA margin – expansion in margin lead by fixed fee contract with broadcasters INR mn


Commission expense is dependent on recharges by subscribers (~4%) and the number of new subscribers. As shown above, the rise of new subscribers due to digitization over FY14-15F would result in an increase in commissions. Post digitization, we are building in ~4% of DTH revenue as recharge commission, but a fall in gross subscriber addition from FY16F would result in a fall in total commission from FY16F, thereby improving margin. One distinguishing factor among the DTH players is the customer service level. With increasing competition and DISH being a market leader, we expect the company to increase customer service expense as a % of sales over FY13-16F.

Profitability – high depreciation on account of new subscription additions will lead to loss in FY13-14F, Dish to become profitable in FY15F, FCF a better metric

Although we expect EBITDA to grow at a CAGR of ~39% over FY12-16F, we expect Dish to become profitable at the net level (while it will be free cash flow positive) only in FY15F on account of the reasons mentioned below.

Fig. 62: Dish estimated to become profitable in FY15F, increase in depreciation on account of subscriber addition should lead to loss in FY13-14F INR mn



EBITDA 2,381 4,960 6,069 7,601 11,751 19,079

- margin (%) 16.6% 25.3% 27.0% 27.3% 31.0% 37.8%

Content Costs 5036 6066 6976 8022 9626 12033

- y-y growth 15.2% 20.5% 15.0% 15.0% 20.0% 25.0%

Transponder Lease 617 1136 1046 1203 1444 1805

- % of prog cost 12.3% 18.7% 15.0% 15.0% 15.0% 15.0%

License Fees 1499 2003 2299 2846 3875 5159

- % of DTH subscripion revenue 10.4% 10.2% 10.2% 10.2% 10.2% 10.2%

Entertainment Tax 518 679 785 1026 1412 1892

- % of DTH subscripion revenue 4.3% 4.1% 4.1% 4.1% 4.1% 4.1%

Personnel Cost 761 748 875 1024 1198 1438

- y-y growth 48.2% -1.7% 17.0% 17.0% 17.0% 20.0%

Administration & Other Expenses 793 1005 1024 1352 1761 1679

- % of sales 5.5% 5.1% 4.6% 4.9% 4.6% 3.3%

Advertising & Publicity expenses 782 797 1012 1252 1705 2169

- % of sales 5.4% 4.1% 4.5% 4.5% 4.5% 4.3%

Commission 1590 1508 1520 2373 3539 3018

- % of sales 13.3% 9.1% 7.9% 9.4% 10.2% 6.5%

Customer Support Service 139 505 675 891 1288 1816

- % of sales 1.0% 2.6% 3.0% 3.2% 3.4% 3.6%


EBITDA 2,381 4,960 6,069 7,601 11,751 19,079

- growth 113% 108% 22% 25% 55% 62%

Depreciaition 3996 5219 6046 7124 9397 9232

- growth 24% 31% 16% 18% 32% -2%

Other Income 1226 707 417 330 294 422

EBIT -388 449 441 807 2,648 10,269

Interest 1534 1780 1900 1900 1900 1562

Tax -3 0 0 0 150 1741

PAT -1,919 -1,331 -1,459 -1,093 598 6,965


44

Increase in depreciation on account of increase in gross subscriber base We expect the company to add~16mn gross subscribers over FY13-16F as shown above. Dish provides consumer premise equipment (CPE), which includes set top box (STB), wire, Dish, associated wire and smart card at a cost of ~ INR2450. Although the company is hedged against currency fluctuation until FY13F at USD/INR of 48, we expect the CPE price to increase by INR147 (assuming USD/INR of 53.5 in FY14F) on account of depreciation of INR. Also based on our interaction with the company (and also as per KPMG), the price of STBs has historically declined in the range of 10-20% per annum. We are building in a 10% decline in STB price in FY14-15F. This CPE is depreciated over 5 years, so depreciation would increase over FY12-FY15F as the addition of gross subscriber increases. We expect depreciation to decrease from FY16F as the increase in gross subscriber tapers off.

FCF and internal accruals likely to fund capex to acquire subscribers, other income would fall while interest expense is likely to remain at current levels The company had ~INR5.4bn of cash and investments as of FY12. Dish plans to add ~13mn subscribers over FY13-15F, which would entail capex of INR32bn, which would be funded through internal accruals and cash and investments on its balance sheet. Thus we don’t expect any repayment of outstanding debt, thereby interest expense would remain at current levels. Based on our estimates, use of cash and investment from the balance sheet would result in a fall in other income, as shown above.

FCF positive would lead to aggressive acquisition of subscribers, working capital days likely to remain negative

The company turned FCF positive in Q4FY12. Even though the company is planning to add ~16mn subscribers over FY13-16F, we expect it to generate enough operating cash flow to fund capex over FY13-15F, as shown below. We estimate cash will be generated from high growth in sales and inflows from working capital (has negative working capital).

The company receives income in advances from customers (prepaid model) and also lease rental of ~ INR740 from customers. We expect Income received in advance days to come down gradually as subscribers recharge for smaller durations in smaller towns/cities. Further trade payable days at 48 days and creditors for fixed assets (STB) at 90 days makes working capital days negative as shown below. The company inventory (mainly STBs) and debtors is minimal.

Fig. 63: Negative working capital days



Inventory 2 4 4 4 4 4

Debtors 6 5 5 5 5 5

Advances to vendors, distributors etc 8 7 7 7 7 7

Income received in advances 180 105 103 101 99 97

Trades Payable 181 48 48 48 48 48

Advances/ deposits received 23 15 15 15 15 15

Creditors for fixed assets 110 52 90 90 90 90

Other creditors 13 11 11 11 11 11

WC days -492 -214 -249 -247 -245 -243


45

Fig. 64: FCF – positive from FY13, high capex over FY13-15F on account of new subscriber additions


Fig. 65: ROCE – to be depressed due to high depreciation due digitization, but should pick up significantly from FY16F onwards

Note: Includes other income, cash & investment


ROCE – depressed during subscription acquisition phase, but likely to increase significantly post digitization The DTH industry is highly capital-intensive as companies have to do substantial capex in the beginning to acquire customers in the form of subsidy on CPE. Consequently, ROCE looks depressed as shown above. However, once a customer is acquired, it generates cash without much investment. We expect subscriber additions over FY13-15F and expect ROCE to expand substantially after FY16F.

Dividend – cash generated from operation to be used for capex over FY13-15F, expect steady dividend from FY16F Dish doesn’t have a history of paying dividends to shareholders as it has reported losses over the years. Moreover the company needs to conserve cash to fund capex for subscriber acquisitions. Thus the company is unlikely to pay any dividend until FY15F. We estimate that Dish will turn marginally profitable in FY15F but would generate FCF of ~INR43mn only. Thus we expect Dish to start paying a dividend to shareholders from FY16F when we estimate it would generate FCF ~INR13bn in FY16F.

DTH industry – Number of DTH subscribers to overtake cable subscribers in FY14F, assumptions around digitization timeline and subscriber base

Digitization timeline – expect further delay by 3-6 months We assume varying degree of delays for different phase of digitization as illustrated below. We are building in a six-month delay for phases 1 and 2 from current deadlines based on our interaction with industry experts. Post phase 1 & 2, MSOs and LCOs should be able to finalize the business model which is likely to lead to acceleration in phase 3 & 4. So we are building in 3 months delay in both phase 3 & 4 as shown below.

Fig. 66: Assumptions - Timeline for different phases of digitization


-10,000

-5,000

0

5,000

10,000

15,000F

Y11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F

(INRmn)

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

FY10 FY11 FY12 FY13F FY14F FY15F

Phase Impact Region Current DeadlineNomura

Assumption Delay Months

Phase I Delhi, Mumbai, Kolkota, Chennai 31-Oct-12 30-Apr-13 6

Phase 2 Cities with population higher than 1mn 31-Mar-13 30-Sep-13 6

Phase 4 All other Urban areas 31-Sep-14 31-Dec-14 3

Phase 4 Rest of India 31-Dec-14 31-Mar-15 3


46

Gradual shift from analog to digital – faster execution post phase 1 We assume a gradual shift from analog to digital cable/DTH as shown below. Based on our interaction with TRAI (Telecom Regulatory Authority of India), once the deadline for a phase is over and assuming that a substantial portion of analog subscribers have shifted to digital, the possibility of switching off analog signal cannot be ruled out. This will induce the remaining analog cable subscribers to shift to digital cable/DTH.

Fig. 67: Timeline for % of homes digitized during different phase of digitization post FY12


Cable & Satellite (C&S) connection – growth likely to be driven by population/household growth and increase in TV and C&S penetration Growth in total cable & satellite connection should come from following:

• Rise in number of households in India – With population growth of ~1.5% and more nuclear families, we assume 2% y-y growth in the number of households in India.

• Increase in TV penetration – TV penetration in India is very low compared to other countries, as shown above. TV penetration in India in 2011 was 61% which we estimate will increase to~ 66% by 2016 on the back of increasing income and discretionary expenditure.

• Increase in cable & satellite penetration – Cable and satellite penetration in India was ~82% in 2011 as shown below. With digitization, an increase in aspiration and increasing spend on entertainment, we expect C&S penetration to increase to 95% by 2016F.

Fig. 68: Cable & satellite households – growth to be driven by increase in TV and C&S penetration Mn

Source: Dish TV presentation, KPMG, Nomura estimates

Distribution of C&S households – DTH households to exceed cable HH by 2014F We estimate that the DTH subscriber base is likely to exceed cable subscribers by 2014F, as shown below. Based on interaction with industry stakeholders (like cable operators, DTH players and broadcasters, etc), we expect that the major MSOs will be able fund their capex requirements in Phase I. However, as we move to Phase II, III and III cities/towns in India, the number of smaller MSOs having limited access to capital is likely to increase. In our opinion, these MSOs will find it difficult to raise capital and given their scale, would be unlikely to derive benefits of scale from vendors like set-top box (STB) manufacturers, which is likely to lead to a greater shift towards the DTH players. We forecast a 25%, 35%, 40% and 45% shift from analog cables to DTH in Phase I, II, III and IV, respectively.

1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Phase 1 10% 15% 20% 25% 30% - - - - - - - -

Phase 2 - 5% 10% 15% 25% 25% 20% - - - - - -

Phase 3 - - - - - 5% 5% 10% 15% 20% 25% 20% -

Phase 4 - - - - - - 5% 5% 10% 15% 20% 25% 20%

2009 2010 2011 2012E 2013F 2014F 2015F 2016F

Total HHs 223 232 240 245 250 255 260 265

- growth 4% 3% 2% 2% 2% 2% 2%

TV House HHs 134 141 146 151 157 163 168 174

- growth 5.2% 3.5% 3.7% 3.6% 3.6% 3.6% 3.6%

C&S HH 95 108 119 129 139 147 157 165

TV penetration as % of total HHs 60% 61% 61% 62% 63% 64% 65% 66%

C&S penetration as % of total TV HHs 71% 77% 82% 85% 88% 91% 93% 95%


47

Fig. 69: Distribution of subscribers across analog/digital cable, DTH, IPTV and DD Direct

Source: Dish Presentation, KPMG, Nomura estimates

2009 2010 2011 2012F 2013F 2014F 2015F 2016F

Cable subscriber 73 73 74 79 76 64 66 70

- Analog 69 68 68 63 41 5 - -

- Digital 4 5 6 16 35 59 66 70

DTH subscriber 16 28 37 42 54 73 80 84

DD direct 6 7 8 8 8 9 9 9

IPTV 0 0 0 0 1 2 2 3

Total 95 108 119 129 139 147 157 165

Key company data: See page 2 for company data and detailed price/index chart.

Zee Entertainment Enterprise ZEE.NS Z IN

MEDIA

EQUITY RESEARCH

Key beneficiary of digitization

Expect further outperformance as digitization leads to a more consumer-centric model

October 3, 2012

Rating Starts at

Buy

Target price Starts at INR 238

Closing price September 27, 2012 INR 184

Potential upside +29.3%

Action/Valuation Initiate with Buy rating and a TP of INR238 We initiate coverage of Zee with a Buy rating and INR238 target price. We value Zee on a DCF basis; our TP implies an FY14F EV/EBITDA of 17.7x, falling to 9.1x FY16F. Zee’s historical average is 14.4x, so we think 17.7x is appropriate as we expect an EBITDA CAGR of ~34% and look for ROE to increase from 23% to 34% (excluding goodwill) over FY12-16F.

Catalyst: Broadcasters likely key beneficiaries of digitization; as India’s largest listed broadcaster, Zee is the best proxy, in our view Broadcasters will likely be the key beneficiaries of digitization, in our view; we expect Phase I completion by end-FY13. Without incurring any significant capex (as will MSOs and DTH players), broadcasters should benefit from: 1) increased subscription revenue (as under-reporting is addressed), which is “stickier” and should somewhat offset dependence on cyclical advertising revenue, making for a more consumer-centric business; 2) we foresee broadcasters’ share of consumer ARPU at least doubling from the current 10-15%. We also expect consumer ARPU to increase by ~8% between FY12F and FY15F; 3) we forecast the cost base should benefit from lower carriage and placement (C&P) fees as digitization increases channel-carrying capacity from 80-90 (30-40 in prime bands) for analogue to 500 channels in a digitized environment; and 4) a greater and fairer share of subscriptions should mean a return to profitability of Zee’s sports business (13% of sales).

Solid balance sheet with net cash of INR10bn We expect Zee to play a key role in the consolidation of the industry. We believe investors can benefit from the ongoing stock buyback and a potential increased dividend payout.

31 Mar FY12 FY13F FY14F FY15F

Currency (INR) Actual Old New Old New Old New

Revenue (mn) 30,406 34,326 41,566 50,709

Reported net profit (mn) 5,892 6,324 9,150 12,383

Normalised net profit (mn) 5,892 6,324 9,150 12,383

FD normalised EPS 6.08 6.62 9.59 12.98

FD norm. EPS growth (%) -4.6 8.9 44.9 35.3

FD normalised P/E (x) 30.3 N/A 27.9 N/A 19.2 N/A 14.2

EV/EBITDA (x) 23.4 N/A 19.8 N/A 13.4 N/A 9.5

Price/book (x) 5.2 N/A 4.6 N/A 3.9 N/A 3.4

Dividend yield (%) 0.9 N/A 1.1 N/A 1.6 N/A 2.8

ROE (%) 18.6 17.9 22.6 26.1

Net debt/equity (%) net cash net cash net cash net cash


Anchor themes

We believe that India’s media industry is at an inflection point as digitization, in our view, is set to become a reality. Completion of Phase 1 should be a significant catalyst for Zee as it would lead to increase in revenue from MSOs.

Nomura vs consensus

We are ahead of consensus on FY14F sales and EBITDA by 6% and 14% as we expect a greater number of subscribers to shift to digital cable/DTH during digitization.

Research analysts

India Media




Nomura | Zee Entertainment Enterprise October 3, 2012

49

Key data on Zee Entertainment Enterprise Income statement (INRmn) Year-end 31 Mar FY11 FY12 FY13F FY14F FY15F

Revenue 30,088 30,406 34,326 41,566 50,709Cost of goods sold -14,369 -14,311 -16,531 -18,704 -21,805

Gross profit 15,719 16,095 17,795 22,861 28,904SG&A -5,051 -6,097 -6,253 -6,917 -7,667

Employee share expense -2,738 -2,925 -3,322 -4,036 -4,763

Operating profit 7,930 7,073 8,219 11,907 16,474

EBITDA 8,219 7,396 8,558 12,263 16,847

Depreciation -289 -323 -339 -355 -373Amortisation

EBIT 7,930 7,073 8,219 11,907 16,474Net interest expense -88 -50 -72 0 0

Associates & JCEs 0 2 0 0 0

Other income 883 1,384 1,314 1,393 1,444Earnings before tax 8,725 8,409 9,461 13,300 17,918

Income tax -2,610 -2,500 -3,029 -3,990 -5,375

Net profit after tax 6,115 5,909 6,433 9,310 12,543Minority interests 118 -17 -109 -160 -160

Other items

Preferred dividends

Normalised NPAT 6,233 5,892 6,324 9,150 12,383

Extraordinary items 137 0 0 0 0Reported NPAT 6,370 5,892 6,324 9,150 12,383

Dividends -2,273 -1,671 -1,897 -2,745 -4,953

Transfer to reserves 4,097 4,221 4,427 6,405 7,430

Valuation and ratio analysis

Reported P/E (x) 28.3 30.3 27.9 19.2 14.2

Normalised P/E (x) 28.9 30.3 27.9 19.2 14.2

FD normalised P/E (x) 29.0 30.3 27.9 19.2 14.2FD normalised P/E at price target (x) 37.4 39.2 35.9 24.8 18.3

Dividend yield (%) 1.3 0.9 1.1 1.6 2.8

Price/cashflow (x) 31.5 43.6 29.8 25.5 19.4Price/book (x) 5.8 5.2 4.6 3.9 3.4

EV/EBITDA (x) 21.0 23.4 19.8 13.4 9.5EV/EBIT (x) 21.7 24.5 20.6 13.8 9.7

Gross margin (%) 52.2 52.9 51.8 55.0 57.0

EBITDA margin (%) 27.3 24.3 24.9 29.5 33.2EBIT margin (%) 26.4 23.3 23.9 28.6 32.5

Net margin (%) 21.2 19.4 18.4 22.0 24.4

Effective tax rate (%) 29.9 29.7 32.0 30.0 30.0Dividend payout (%) 35.7 28.4 30.0 30.0 40.0

Capex to sales (%) 1.3 2.7 2.0 1.8 1.5Capex to depreciation (x) 1.3 2.6 2.1 2.1 2.1

ROE (%) na 18.6 17.9 22.6 26.1

ROA (pretax %) 20.8 18.9 20.2 27.4 34.3

Growth (%)

Revenue 36.8 1.1 12.9 21.1 22.0EBITDA 34.0 -10.0 15.7 43.3 37.4

EBIT 35.6 -10.8 16.2 44.9 38.4Normalised EPS -6.3 -4.6 8.9 44.9 35.3

Normalised FDEPS -6.3 -4.6 8.9 44.9 35.3

Per share

Reported EPS (INR) 6.51 6.08 6.62 9.59 12.98

Norm EPS (INR) 6.37 6.08 6.62 9.59 12.98Fully diluted norm EPS (INR) 6.37 6.08 6.62 9.59 12.98

Book value per share (INR) 31.68 35.44 39.98 46.74 54.53DPS (INR) 2.32 1.72 1.99 2.88 5.19


Relative performance chart (one year)

Source: ThomsonReuters, Nomura research

(%) 1M 3M 12M

Absolute (INR) 10.0 29.6 61.1

Absolute (USD) 15.0 39.2 48.6

Relative to index 4.2 19.4 48.7

Market cap (USDmn) 3,313.0

Estimated free float (%) 38.8

52-week range (INR) 189.3/105.55

3-mth avg daily turnover (USDmn)

7.49

Major shareholders (%)

Promoters 43.7

Source: Thomson Reuters, Nomura research

Notes

We expect margins to be under pressure in FY13F on account of an increase in original content from 24hrs to 34hrs, launch of new channels like Zee Alwan, Ten HD, and Ten Golf. Margin expansion should be visible from FY14F onwards


50

Cashflow (INRmn) Year-end 31 Mar FY11 FY12 FY13F FY14F FY15FEBITDA 8,219 7,396 8,558 12,263 16,847

Change in working capital -772 -2,086 378 -1,369 -2,398

Other operating cashflow -1,722 -1,211 -3,029 -3,990 -5,375Cashflow from operations 5,725 4,099 5,907 6,904 9,074

Capital expenditure -389 -835 -700 -735 -772Free cashflow 5,336 3,264 5,207 6,169 8,302

Reduction in investments -3,565 -1,033 0 0 0

Net acquisitions -576 -195 0 0 0Reduction in other LT assets 13 19 0 0 0

Addition in other LT liabilities

Adjustments -265 1,861 1,314 1,393 1,444Cashflow after investing acts 943 3,916 6,521 7,562 9,746

Cash dividends -2,269 -2,273 -1,897 -2,745 -4,953Equity issue 58 -2,209 -594 0 0

Debt issue -677 3 -240 0 0

Convertible debt issue 0 0 0 0 0Others -63 -10 -72 0 0

Cashflow from financial acts -2,951 -4,489 -2,803 -2,745 -4,953

Net cashflow -2,008 -573 3,719 4,817 4,793Beginning cash 5,864 3,856 3,283 7,002 11,818

Ending cash 3,856 3,283 7,002 11,818 16,611Ending net debt -3,847 -3,043 -7,002 -11,818 -16,611


Balance sheet (INRmn) As at 31 Mar FY11 FY12 FY13F FY14F FY15F

Cash & equivalents 3,856 3,283 7,002 11,818 16,611

Marketable securities 6,341 7,324 7,324 7,324 7,324Accounts receivable 8,704 8,690 8,523 9,434 11,196

Inventories 5,396 7,339 8,568 9,797 11,541Other current assets 5,217 6,105 6,393 7,627 9,166

Total current assets 29,514 32,741 37,810 46,001 55,838

LT investments 623 675 675 675 675Fixed assets 1,849 2,216 2,577 2,957 3,356

Goodwill 6,064 6,894 6,894 6,894 6,894

Other intangible assets 193 290 290 290 290Other LT assets 489 337 337 337 337

Total assets 38,732 43,153 48,584 57,154 67,390Short-term debt

Accounts payable 5,373 6,886 7,955 9,000 10,492

Other current liabilities 2,487 1,705 2,365 3,325 4,479Total current liabilities 7,860 8,591 10,320 12,325 14,971

Long-term debt 9 240 0 0 0

Convertible debt 0 0 0 0 0Other LT liabilities 0 0 0 0 0

Total liabilities 7,869 8,831 10,320 12,325 14,971Minority interest -119 -32 77 237 397

Preferred stock 978 959 954 954 954

Common stock

Retained earnings 30,004 33,395 37,233 43,639 51,068

Proposed dividends

Other equity and reserves

Total shareholders' equity 30,982 34,354 38,187 44,592 52,022

Total equity & liabilities 38,732 43,153 48,584 57,154 67,390

Liquidity (x)

Current ratio 3.75 3.81 3.66 3.73 3.73Interest cover 89.9 142.9 114.2 na na

Leverage

Net debt/EBITDA (x) net cash net cash net cash net cash net cash

Net debt/equity (%) net cash net cash net cash net cash net cash

Activity (days)

Days receivable 98.2 104.7 91.5 78.8 74.2Days inventory 128.4 162.8 175.6 179.2 178.6

Days payable 136.8 156.8 163.8 165.4 163.1

Cash cycle 89.8 110.8 103.3 92.6 89.7Source: Company data, Nomura estimates

Notes

The company has been generating free cash flow

Notes

Debt-free balance sheet. We expect an increase in dividend payout on account of an increase in cash on balance sheet.


51

Investment argument Zee a leading broadcaster, key beneficiary of digitization Zee Entertainment (Zee) is a leading broadcaster and the largest listed by market cap in India. Coupled with a diversified channel portfolio and international presence across five continents, Zee, in our view, is the best proxy to play Indian media’s digitization theme amongst broadcasters. We believe that broadcasters will be a key beneficiary of digitization given that without needing to incur any significant capex (unlike MSOs and DTH players), they should benefit from:

• Increased subscription revenue, as under-reporting by LCOs is addressed post digitization and amid reduced dependence on cyclical advertising revenue. This should make Zee a more consumer-centric business. We expect Zee’s subscription income contribution to increase from 44% in FY12 to 59% by FY16F as a result of digitization. We are building in an FY13-16F CAGR of ~57% for cable subscription revenue, as digitization should lead to convergence of Zee ARPU from cable towards the DTH level (currently ARPU from cable is less than one-third that from DTH), given that we foresee the broadcaster share of the consumer ARPU will at least double from ~10-15% at present. On the DTH side, we estimate an FY13-16F CAGR of ~42% driven by a shift from analogue to DTH, which should lead to a 24% increase in the DTH subscriber base in this period. The remaining 18% is from an expected increase in ARPU from DTH subscribers to Zee and increase in Zee’s penetration among DTH subscribers.

• We forecast Zee’s cost base will benefit from lower C&P fees as digitization increases the channel-carrying capacity from 80-90 channels (30-40 in prime bands) for analogue to 500 channels in a digitized environment.

• Higher and fairer share of subscription as a result of digitization should mean a return to profitability of Zee’s sports business, which accounted for ~13% Zee’s sales in FY12.

Solid balance sheet with net cash of INR10bn; we expect this to improve with strong cash flow generation in FY13-15F We expect Zee to generate ~INR20bn of free cash in the next three years. Considering also FY12’s ending net cash of ~INR10bn, the company looks to have significant financial flexibility in our view. We believe that Zee will likely use its cash in a combination of stock buyback, dividend increase and greater focus on regional markets. The company launched a share buyback programme in FY11 (bought back ~19.4mn shares) and followed it up with another buyback programme announced in FY12, not exceeding INR2.8bn at a maximum price of INR140 (it already has bought back and extinguished ~4.8mn shares in Q1FY13). This ongoing buyback, along with forecast improving profitability, should translate into an ROE improvement from 23% in FY12 to ~34% in FY16F excluding goodwill, on our estimates (even after we assume no share buyback post Q1 in FY13).

Advertising revenue: We expect robust growth in FY13F backed by healthy sales growth and gross margin expansion for FMCG companies; an increase in Zee TV GRP during H1FY13F should drive it further, we believe Advertising contributed ~52% of total revenue for Zee in FY12. FMCG remains the dominant sector, contributing ~43% of advertising volume for the industry in FY11. In fact, nine of the top 10 advertisers on TVs were FMCG companies, which have been extremely resilient during the current slowdown (source: KPMG). Our consumer team believes that that FMCG names will continue to have a solid growth profile and expects that FMCG gross margins will expand due to moderation in global commodity prices, which should translate into higher A&P expenditures. We therefore are building in ~14% advertising revenue growth in FY13F for Zee (was 18% in 1QFY13, when expansion in gross margin of FMCG companies resulted in strong A&P expenditure) and ~12% over FY14-15F. This is higher than the projected overall advertising industry growth of 7-9% (as per Zee), which assumes a relatively muted economic backdrop. Our forecast growth for Zee advertising revenue is reflective of the company’s higher exposure to FMCG (versus other advertising media like print, radio etc) and increasing investment in content, which we think led to the 18% growth in 1QFY13.


52

Valuation attractive – we see a further 31% upside to our target price of INR238 in a blue-sky scenario if the sector re-rates during digitization The stock currently trades at FY14F EV/EBITDA of 13.4x (FY13F EV/EBITDA of 19.8x), which is a 7% discount to its historical four-year average one-year forward multiple of 14.4x. This is broadly line with the multiple for regional broadcasters, even though we estimate a significantly higher FY13-15F EBITDA CAGR of 40% for Zee relative to that of its Asia ex-Japan peers, where the FY13-15F EBITDA CAGR is 18% on consensus forecasts. Given Zee is a leading broadcaster in the world’s top-3 television market (according to Media Partners ), we consider the shares attractive compared to regional peers such as BEC World in Thailand (12.7x FY14F EV/EBITDA with an EBITDA FY13-15F CAGR of 9% on consensus estimates); Media Nusantara Citra in Indonesia (11.5x EV/EBITDA FY14F with an EBITDA FY13-15F CAGR of 20% on consensus estimates) and Surya Citra Media in Indonesia (12.8x EV/EBITDA FY14F with an EBITDA FY13-15F CAGR of 19% on consensus estimates). Our DCF-based price target of INR238 for Zee implies an FY14F EV/EBITDA of 17.7x (FY13F EV/EBITDA of 25.3x). In a blue-sky scenario, however, if we were to apply Zee’s four-year average historical multiple of 14.4x (of note, EBITDA multiples up to 18x were seen in markets like North America, Korea or Taiwan during their high-growth digitization phases) to our EBITDA estimate for Zee in FY16F (which would suggest a target price for end FY15F and discount it back to H1FY14) when we expect the real impact of full digitization will be visible in the numbers, we would see a further 31% upside to our target price. We are on an average 23% ahead of consensus in terms of FY14-15F EBITDA estimates for Zee, and we expect a strong upgrade cycle for this name once the market fully absorbs the impact of digitization.


53

India’s largest listed broadcaster with strong and diversified channel portfolio

Zee is leading broadcaster in India and the largest listed (by market cap). It has a strong, diversified portfolio of 33 channels encompassing the flagship Hindi general entertainment channel (GEC) Zee TV; regional GECs that include Tamil, Telugu, Kannada, Marathi, Bangla and Punjabi channels; a movie channel; and a sports channel (13% of the revenue), among others. It also has an international presence across five continents. Subscription revenue from the international business contributed ~13% of the group’s top line in FY12.

Zee’s recent investment in content has delivered management’s intended results, as evidenced by the fact that as per the latest television audience measurement (TAM) data for week 33, 2012, Zee TV had become the No 1 channel in Hindi GEC, surpassing Star Plus after three years (source: bestmediainfo, dated 23 August 2012). On a sustained basis, Zee TV has consistently been in the top three or four channels in India, based on the same data.

Broadcasters should be key beneficiaries of digitization; Zee is the best proxy, in our view

We believe that broadcasters will be the key beneficiaries of digitization, as we discussed in the early part of the report. We expect Phase I completion by end-FY13, and do not expect broadcasters to incur any significant capex (unlike MSOs and DTH players). They should benefit from:

Increased subscription revenue and lower dependence on advertising revenue, making the business more consumer-centric We believe that one of the biggest positives for broadcasters like Zee in a post-digitization environment will be the increase in subscription revenue (as under-reporting is addressed), which we expect to be sticker and thus somewhat lower the dependence on cyclical advertising revenue. This should make broadcasters more a consumer-centric business, we believe. Currently, advertising, which is relatively cyclical, contributes ~52% of the Zee’s top line. We forecast that the contribution of advertising will come down significantly post digitization as the importance of more stable subscription income increases. We look for subscription to be 59% of the Zee’s top line, while advertising will be 39% by FY16F.

Fig. 70: Zee – Revenue mix shift towards subscription revenue


We expect broadcasters’ share of rising consumer ARPU to increase due to digitization which should boost Zee’s subscription revenue In addition to an expected industrywide increase in consumer ARPU, we also expect broadcasters’ share of consumer ARPU to at least double. Currently in the media value

51% 49% 49%57% 52% 53% 49% 45% 39%

40% 41% 45%37% 44% 43% 48% 52% 59%

9% 10% 7% 6% 4% 4% 3% 3% 2%

0%

20%

40%

60%

80%

100%

FY08 FY09 FY10 FY11 FY12 FY13F FY14F FY15F FY16F

Advertizement Subscripton Others


54

chain, broadcasters get 10-15% of consumer ARPU (as per KPMG) as shown below, while local cable operators (which under-report the actual subscribers) garner the bulk of the value generated (this is unlike in the West, where broadcasters actually get 30-35% of the consumer ARPU). Currently, Zee’s ARPU from DTH subscribers is ~INR19.5 (Dish TV’s ARPU is INR156), and its ARPU on the cable side is a mere INR6, reflecting in our view the extent of under-reporting by LCOs and the fact that broadcasters do not get a fair share of content in an analogue environment.

As per Media Partner reports, in a INR160-200bn pay-TV market where MSOs and LCOs together garner ~85% of the revenue, even a marginal 10% increase in broadcasters’ share (all other things being equal) post digitalization would translate into to a three-year revenue CAGR close to ~19% for broadcasters.

Fig. 71: Revenue share of stakeholders – broadcaster should benefit most post digitization

Source: KPMG, Nomura research

We believe that digitization will significantly reduce the bargaining power of LCOs and usher in more transparency around subscription income. Companies like Zee have already formed JVs with other broadcasters, in our view to ensure that they have greater negotiation power when they deal with intermediaries like MSOs and DTH players in a post-digitized environment. For example, Media Pro is a 50:50 JV between Zee Turner and Star Den, which distributes Star, Zee, DEN and TIIPL channels. This JV distributes 69 pay channels and some free-to-air channels and is a platform to negotiate with the MSOs and DTH operators. Formation of the Media Pro JV and digitization should benefit Zee as follows, in our view:

• This JV includes channels of two of the largest in terms of numbers of channels and most popular broadcasters in country and therefore should have significantly solid bargaining power to negotiate for a higher share of consumer ARPU when deals with the MSOs/DTH operators come up for renewal

• The JV should facilitate to a reduction in carriage fees especially in a post digitized world when MSOs will likely also get a greater share of subscriber revenue.

We therefore forecast a subscription revenue FY12-16F CAGR of 30% for Zee driven by a combination of increasing consumer ARPU, increased broadcaster share of consumer ARPU and a rise in the number of subscribers as subscriber data becomes more transparent in a post-digitized environment.

Digitization – expected to reduce carriage fees for broadcasters and lead to ~300bp margin expansion for Zee We forecast that Zee’s cost base will benefit from lower C&P fees as digitization increases the channel-carrying capacity from 80-90 (30-40 in prime bands) for analogue to500 channels in a digitized environment. Currently, while the total number of all broadcasters’ channels is around 600, as indicated above, channel-carrying capacity is constrained by the prevalence of analogue cables. Thus, MSOs mainly rely on C&P fees for, especially as they also do not get a reasonable share of the subscription income generated by the LCOs. Amidst increasing competition among broadcasters and a spurt in the number of TV channels, C&P fees have achieved a CAGR of 23% (versus a subscription revenue CAGR of ~5%) over the past five years for broadcasters, according to Media Partners. We expect this to come down significantly (by as much as 50% in some cases) with digitalization, and be replaced largely with placement fees channels will pay to get a premium positioning within a portfolio of channels. Subscription revenue

Stake-holder revenue share Pre digitization Post 2016 (post digitization)

Consumer ARPU 100% 100%

LCO 65-70% 35-50%

Distributor 5% 0-5%

MSO 15-20% 25-30%

Broadcaster 10-15% 30-35%


55

from cable accounted for ~13% of consolidated Zee sales (as per last data point in Q2FY12).

C&P cost for the industry as a percentage of revenues from the cable operators was ~70% in CY11, based on data from Media Partners. So even if we assume a 30% reduction in C&P cost post digitization, we estimate that consolidated margin for Zee can potentially expand by 300bps.

Fig. 72: Indian broadcasters – Increasing carriage fees INRmn

Source: Media Partners, Nomura research

Fig. 73: Increasing number of permitted TV channels in India

*As of Jan 2011

Source: MIB, KPMG, Nomura research

Sports business: Expect to turn profitable post digitization as a range of niche sports apart from cricket should benefit from higher subscription revenue stream Zee TV, whose sports business is currently loss-making (loss of INR1,480mn in FY12 but likely to come down to ~INR600-700mn in FY13, on company guidance), has launched dedicated niche channels for sports such as golf (Ten Golf) with an eye on the post-digital market where, according to the company, they expect a sharp uptick in subscription revenue. The reason for current losses in the sports business largely emanates from the fact that India has largely been a single-sport market – cricket – and ~80% of sports advertising revenue comes from cricket-related advertising. However, advertising revenue is not enough to offset the aggressive bids for cricketing rights by broadcasters. In our view, Zee’s relatively selective approach when it comes to cricketing rights and its efforts to tap increasing interest in other sports will be a right strategy in a post digital environment.

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

100

200

300

400

500

CY05 CY06 CY07 CY08 CY09 CY10 CY11

Pay TV channel sub revenue on cable (LHS)Cable carriage & placement fees (LHS)C&P cost as % of subs rev (RHS)

192

266

425

506

604 626

0

100

200

300

400

500

600

700

2006 2007 2008 2009 2010 2011*


56

Advertising revenue: expect strong growth in FY13F backed by a rise in FMCG companies’ GM and improvement in Zee TV’s GRP over H1FY13F

Advertising accounted for ~52% of total revenue for Zee in FY12. FMCG (including food & beverages, personal care & hygiene, hair care, personal accessories, personal healthcare and household products) continues to be the dominant sector, contributing ~43% of media industry advertising volume in CY11 as per KPMG. In fact nine of the top 10 advertisers on TV were FMCG companies, which have been extremely resilient during the current slowdown. Our analysis indicates that advertisements/sales promotions are correlated with sales growth and gross margins of FMCG companies. When raw material prices are going up, FMCG companies curtail A&P spending to maintain their EBITDA margins. Nomura’s consumer team (and consensus) believes that that FMCG names will continue to have a solid growth profile and expects that gross margin will expand due to moderation in global commodity prices, which should translate to higher A&P expenditure. We are therefore building in ~14% advertisement revenue growth in FY13F for Zee (was 18% in Q1FY13 when expansion in gross margin of FMCG companies resulted in strong A&P spending) and ~12% over FY14-15F. This is higher than the advertising industry’s projected growth of 7-9% which assumes a relatively muted economic backdrop according to Zee.

Zee’s GRP (gross rating point) increased in H1FY13 vs FY12 (from 186 in FY12 to 215 in Q1FY13) on account of investment in content, which we think should lead to increase in advertisement revenue flow over FY13-14F. The company also plans to increase its original content from 24hrs to 34hrs, which should further increase its GRP, in our view.

Strong reasons why we believe the consensus upgrade cycle will continue

We foresee consensus upgrades for Zee as the market factors in the impact of digitization, which we believe will significantly benefit a broadcaster like Zee. Our discussions with TRAI and other industry participants indicate that they are very confident of Phase I completion at the latest by end-FY13. This should result in sharp growth in subscription revenue (~34% in FY14F) and significant margin improvement (~4.5% in FY14F) in our view, for Zee. We estimate that Zee currently receives ~INR6 per user from cable operators and ~INR19.5 per user from DTH players. Digitization should lead to an increase in the declared consumer base by cable operators, in our view, and should also lead to progressive convergence of ARPU from digital cable (as mandatory digitization is ushered in) with that of DTH players. We think this should kick off a strong growth phase for 3-4 years till the four phases of digitization are completed.

Fig. 74: Zee – Nomura vs Consensus INRmn



Revenue 34326 41566 50709 34635 39241 44582 -1% 6% 14%

EBITDA 8,558 12,263 16,847 9064 10800 12803 -6% 14% 32%

PAT 6,324 9,150 12,383 6861 8125 9828 -8% 13% 26%

EPS 6.6 9.6 13.0 7.2 8.4 10.2 -7% 14% 27%

Nomura Consensus Difference


57

The key reasons why we are ahead of consensus and believe that consensus will likely move up include:

• We believe consensus is conservative on subscriber additions over FY13-15F as the Street looks to be factoring in greater delay in digitization than we are. With serious intent shown by the government and TRAI to meet Phase 1 digitization, we expect consensus will upgrade its subscriber base number.

• Assumption of further delays in later phases of digitization likely results in lower ARPU growth assumptions by consensus, and thereby lower revenue.

• We expect Zee’s sports business to become profitable by FY15-FY16F and gradually reduce losses over FY13-14F on account of an increase in the subscriber base. Also we expect carriage and placement fees to decline, which would lead to margin expansion of ~300bps, based on our estimates. This is not being captured in consensus, we believe. Also, high sales growth during digitization should lead to higher margins; since the Street is building in a greater delay in digitization, consensus margin is lower than our estimate.

Target price of INR238; blue-sky scenario suggests another 31% upside potential to our target price

Our DCF-based target price of INR238 for Zee implies a FY14F EV/EBITDA multiple of 17.7x (FY13F EV/EBITDA of 25.3x). In a blue-sky scenario, however, if we were to apply Zee’s four-year average historical multiple of 14.4x (of note, EBITDA multiples up to 18x were seen in markets like North America, Korea or Taiwan during their high-growth digitization phases) to our EBITDA estimate for Zee in FY16F (which would suggest a target price for FY15F end and discount it back to H1FY14) when we expect the real impact of full digitization will be visible in the numbers, we would see a further 31% upside to our target price. We are on average 23% ahead of consensus in terms of FY14-15F EBITDA estimates for Zee, and we expect a strong upgrade cycle for this name once the market fully absorbs the impact of digitization.

Fig. 75: Zee – EV/EBITDA trading multiple on consensus

Source: FACTSET, Nomura research

11

12

13

14

15

16

17

18

Sep

-09

No

v-09

Jan

-10

Mar

-10

May

-10

Jul-

10

Sep

-10

No

v-10

Jan

-11

Mar

-11

May

-11

Jul-

11

Sep

-11

No

v-11

Jan

-12

Mar

-12

May

-12

Jul-

12

Sep

-12

EV/EBITDA FY1 Last 4 year average EV/EBITDA

Last 4 year min EV/EBITDA Last 4 year max EV/EBITDA


58

Fig. 76: Valuations for pay-TV/cable companies in global markets

*Based on average public and private market valuations for cable and satellite companies

Source: Bloomberg; Thomson; MPA analysis, Nomura research

Post-digitization Zee: significant improvement in financials, solid balance sheet, scope for further stock buybacks, higher dividend payout, business to become more consumer centric

We believe Zee’s top-line growth will move into a higher trajectory because of digitization, which we expect will give a major boost to the company’s subscriber revenue. We forecast a top-line CAGR of ~21% over FY12-16F vs a CAGR of ~11% over FY06-12. This increase should be largely driven by growth in subscription revenue that in our view will in the short to medium term outpace growth in content/programming costs. This additional subscriber revenue therefore should not entail a significant cost increase (or capex) and should translate to an improvement in EBITDA margin. We forecast that the EBITDA margin will increase by an average of 300bps over FY12-16F. Higher growth and improved margins should lead to better returns on capital and higher free cash flow generation, which should add to the current net cash position and give Zee the option to potentially play the role of a consolidator in the industry, pursue further stock buybacks and/or raise its dividend payout.

• We expect the company to generate INR20bn of free cash in the next three years, which when combined with FY12 ending net cash of ~INR10bn, should provide Zee with significant financial flexibility. The company launched a share buyback programme in FY11 (bought back ~19.4mn shares) and followed it up with another buyback programme announced in FY12, not exceeding INR2.8bn at a maximum price of INR140 (it already has bought back and extinguished ~4.8mn shares in Q1FY13). This ongoing buyback, along with forecast improving profitability, should translate into an ROE improvement from 23% in FY13F to ~34% in FY16F excluding goodwill (even assuming no share buyback post Q1FY13).

• Zee has no major capital expenditures planned. We think this should facilitate strong free cash flow generation in the short to medium term. The absence of capex spending, along with forecast steady top-line growth of 15-20% and ROE in excess 20%, is fairly similar to Indian FMCG/consumer companies. Also considering an expected increased proportion of revenue from subscription income (stickier than cyclical advertising), we think it is fair to expect that the consumer centricity of this business will increase overtime. In this context, we believe it is interesting to compare the valuation multiples of Zee with those of India’s consumer companies. On this basis, we think Zee stacks up very well in terms of valuation risk-reward.


59

Fig. 77: Indian consumer companies – trading at P/E multiple in excess of Price In INR

Priced as of 27 September 2012 Source: Bloomberg, Nomura estimates

Sports business: Zee targeting niche sports rather than just cricket; focus on return to profitability

Zee TV, whose sports business is currently loss-making (loss of INR1,480mn in FY12 but likely to come down to ~INR600-700mn in FY13, based on company guidance, has launched dedicated niche channels for sports such as golf (Ten Golf) with an eye on the post digital market where, according to the company, they expect a sharp uptick in subscription revenue. The reason for current losses in the sports business largely emanates from the fact that India has largely been a single-sport market – cricket – and ~80% of sports advertising revenue comes from cricket-related advertising. However, advertising revenue is not enough to offset the aggressive bids for cricketing rights by broadcasters. As per our interaction with industry experts such as, none of the broadcasters is making money in the sports (specifically cricket) business on account of aggressive bidding. Zee is no exception, and it, too, is also loss making in its cricket business. But Zee has followed a relatively cautious approach when it comes to cricket, partly because it doesn’t deal with the BCCI (Board of Control for Cricket) in India, but relies more on cricket rights from other cricket boards such as those from Sri-Lanka, Pakistan, South Africa, Kenya and West Indies. We believe that a relatively selective approach by Zee when it comes to cricketing rights and its efforts to tap increasing interest in other sports will be a right strategy in a post digital environment.

Fig. 78: Zee – loss-making sports business INRmn

Source: Company data Nomura research

To illustrate the difficulty in monetizing aggressive cricket bids, we analyzed the financials of Nimbus, a leading sports right management company engaged in the acquisition, management and marketing of commercial right relating to cricket events globally and an operator of two 24-hrs channels, Neo Cricket and Neo Sports. Nimbus owned the global broadcast rights for all India cricket matches from BCCI till 2011, when

Company Ticker Rating PriceFY13F FY14F FY13F FY14F

Titan Industries TTAN IN BUY 254 27.7 21.7 19.8 15.7 26%Asian Paints APNT IN NEUTRAL 3870 33.6 28.0 21.0 17.3 18%Godrej Consumer Products GCPL IN BUY 674 29.6 23.8 20.5 16.3 29%Dabur India DABUR IN BUY 124 28.0 23.3 20.6 17.6 20%Nestle India NEST IN NEUTRAL 4324 34.6 28.3 22.0 17.8 23%ITC ITC IN BUY 267 28.7 24.4 19.0 16.0 18%GSK Consumer SKB IN BUY 2913 28.7 23.9 18.1 15.0 20%Jubilant Foodworks JUBI IN BUY 1346 54.4 39.3 31.9 23.7 81%Colgate Palmoliv CLGT IN REDUCE 1199 32.0 28.0 23.5 20.4 15%Marico Industries MRCO IN REDUCE 199 31.4 24.4 23.0 17.2 24%United Spirits UNSP IN NEUTRAL 1275 46.0 38.2 14.6 13.0 17%Hindustan Unilever HUVR IN NEUTRAL 538 36.2 31.1 26.6 22.9 20%Market cap weighted average 32.2 27.0 21.4 18.0 21%

P/E EV/EBITDA EBITDA FY12-14F CAGR

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY09 FY10 FY11 FY12

Revenue Cost


60

the contract between Nimbus and BCCI was terminated as Nimbus failed to make an advance payment. According to some press articles (including The Hindu, on 21 Oct 2009), Nimbus was paying ~INR315mn per match to BCCI. As per our analysis, at that outlay, we estimate Nimbus would be able to recover ~80% of its costs if it could earn an on an average, a steep rate of INR0.5m per 10-sec slot.

Fig. 79: Estimated advertisement rate during cricket matches – per 10-second slot INRmn

Source: Times of India, Nomura estimates

Against this backdrop, Nimbus incurred significant losses and was not able to monetize its BCCI cricket rights. Eventually it defaulted on payment to BCCI in Dec 11. Star, another broadcaster, won cricket rights from BCCI in April 12 at a rate of INR400mn per match, ~27% higher than the rate paid by Nimbus.

Fig. 80: Nimbus – loss making in sports business (INRmn)

Source: Nimbus DRHP, Nomura research

The rate of INR400mn per match implies and an advertisement rate of INR630,000per 10-sec slot, which in our view is very high compared to an average rate of INR400,000 per sec during the World Cup and INR500,000 per 10 sec in IPL 2011 (as per Times of India, 16 Sep 2011). We believe it is very difficult to profitably monetize these rights given the aggressive bids and Zee has refrained from aggressive bidding.

Movie library: vast library of movies allows Zee to be selective in further acquisition to movie rights

Zee has the world’s largest library of Hindi movies, with rights to more than 3,000 titles. This library provides a competitive advantage given that we have seen a significant spike in new movie acquisition prices as other competitors also try to launch exclusive movie channels or focus on TRPs (total rating points) in their GECs by releasing a new movie shortly after its release. As per KPMG, movie acquisition costs have risen by 30-35% per year over the past three years. However, Zee will not hesitate to engage in opportunistic bidding even at current prices to maintain its market share and brand recall of its movie channel, according to the company.

Fig. 81: Increasing movie acquisition cost INRmn

Source: Media Articles, KPMG, Nomura research

INR mn Comment

One day cricket match duration 7 In Hour

Maximum advertisement duration 84 In min, assuming maximum duration of 12 min/hr as per TRAI

Number of 10 sec slots available 504

Cost recovery through advertisement during match 80% Remaining through subscription and right sales post match

Cost per match paid by Nimbus 315 In year 2011, now it has increased as per industry experts

Advertisement rate per 10 sec slot 0.5 For broadcasters to recover 80% cost

FY06 FY07 FY08 FY09 FY10

Income from Sports Rights 1,249 2,083 3,808 3,834 4,422

Sports Services Income 58 273 273 25 49

Cost of Sports Rights 1,903 3,273 5,642 5,253 6,834

EBITDA from sports business (596) (917) (1,561) (1,394) (2,363)

Movie Cost Movie Cost Movie Cost Movie Cost Movie Cost

Ghajini 200-250 3 idiots 300-350 Ra.One 350-400 Don 2 350-400 Dabangg2 500+

Singh is King 150-200 Housefull 150-200 Bodyguard 250-300 Agneepath 300-450 Talaash 400+

Welcome 100-150 Dabangg 100-150 Rajneeti 200-250 Krrish 3 350-400

2009 2010 2011 2012 Yet to release


61

Regional channels – another leg of growth driver for Zee

Regional channels form a substantial part of Indian TV programmes after Hindi GEC and account for the highest viewership, according to KPMG. As per 2010 data from PWC, advertisement volume on regional channels exceeded that of national channels. Advertising rates and content costs are lower for regional channels than national channels, according to PWC, but margins from both national and regional channels are the same.

Advertisers are interested in regional channels due to their low media penetration levels and rising income in rural towns. As well, the cost to reach an audience, according to PWC, is lower for broadcasters operating in regional channels than in national channels due to regional channels’ lower realization. Meanwhile, broadcasters are also interested in regional channels when launching a GEC due to the regional channels’ lower content costs and carriage fees. This has led to faster growth in advertising in regional channels than in national channels. Moreover, these regional channels are more insulated from an economic downturn than national channels as the regionals are mainly driven by local business, as per KPMG. As shown below, regional channels commanded the highest number of launches in 2010.

Fig. 82: Regional channels contributed ~53% of advertisement volume Year 2010

Source: PWC, Nomura research

Fig. 83: Viewership share of channel genres at all India levels – Regional forms a substantial part, 2010 Year 2011

Source: KPMG, Nomura research

Fig. 84: Regional channels accounted for the highest number of launches in 2010 Year 2010

Source: PWC, Nomura research

In our opinion, large-sized broadcasters have recognized the importance of the regional channels and are expanding their geographical reach through these channels.

National47%

Regional53%

Hindi GEC28%

Hindi movies

12%Kids6% Music

3%

Sports4%

Infotain-ment1%

English movies

1%

English GEC0%Regional

channels33%

Others12%

Active Channels New Channels Total Channels

Regional 225 25 250

Hindi 88 2 90

Engish 65 11 76

Others 39 4 43

Total 417 42 459


62

Fig. 85: Potential of regional markets – Tamil & Telugu are two largest market in terms of advertisement revenue and subscription base INRmn

Source: IRS Q3 2011, KPMG, Nomura research

As shown in the table above, the top six regional markets accounted for an advertisement market size of ~INR42.7bn in 2011, or ~37% of the total TV advertisement market in India. In our view, Zee has recognized the potential offered by the regional channels as it has presence in five of the top-six regions (except Malayalam) with a dominant position in Marathi and Bangla market.

Fig. 86: Zee viewership share in regional channels – dominates the Marathi and Bengali regions April'11-March'12

Source: Company data, TAM,, Nomura research

As illustrated in the table above, although Zee has a significant market share in Marathi and Bangla, we see significant opportunity for the company to expand its market share in Tamil, Telugu and Kannada.

TV – We expect Zee to have early-mover advantage in the fast-growing smartphone market

With the arrival of 3G, Indian consumers have started to view TV content on smartphones, laptops, tablets and Internet. As per KPMG, India has ~1mn active users of mobile TVs, and that number in our view will likely increase as prices of smartphones fall and Internet penetration increases. Zee has launched Indian’s first over the top (OTT) TV distribution platform (DITTO TV), which will provide TV content and video on demand to users of smartphones, laptops and tablets. Although contributions from this business are currently small for Zee, we believe the potential strong growth of smartphones in India should enable Zee to derive ~10% of sales from this segment in the next 3-4 years; we believe the reach of smartphones should expand faster than TVs, leading to margin expansion for Zee.

Investment risk

Star India-Zee Group alliance under Competition Commission of India (CCI) scanner According to an article from The Economics Times dated 6 November 2011, competition watchdog Competition Commission of India (CCI) has found prima facie evidence that the alliance between Star India and Zee Group could lead to abuse of dominant position

Language Households (mn)TV households (mn, %

penetration)C&S households (mn, % of

TV households)Advertizement market

size

Tamil 17.5 16.1 (92.3%) 15.4 (95.7%) 11,700

Telugu 20.5 14.2 (69.1%) 13.8 (97.7%) 8,000

Bangla 19.8 8.7 (43.7%) 7.4 (86.0%) 7,800

Kannada 13.2 9.3 (70.4%) 9.0 (96.9%) 5,600

Malayalam 8.1 7.4 (92.4%) 7.0 (94.0%) 5,750

Marathi 24.6 16.2 (65.8%) 13.3 (82.5%) 3,900

Oriya 9.8 3.9 (39.5%) 3.2 (81.8%) 700

Gujarati 12.4 7.6 (61.1%) 6.1 (80.4%) 400

Language Zee market share Other players & their market share

Marathi 27.70%Star Pravah (30.6%), ETV Marathi (31.1%), DD10 Sahyadri (3.5%), Saam TV (2.5%)

Bangla 35.80%Star Jalsha (41.5%), ETV Bangla(12.9%), Rupashi Bangla(4.8%), Aakaash Bangla(2.9%), Mahua Bangla(2.1%)

Telugu 18.10% Gemini TV (39.4%), Maa Telugu(22.8%), ETV Telugu(19.7%)

Kannada 20.10% Udaya TV (42.1%), Suvarna(23.4%), ETV Kannada(14.3%)


63

as both have a combined market share in excess of 60%. If this allegation is proved right, then this could lead to a potential breakup of content pro and would result in waning negotiation power of Zee with MSOs. Any activity towards cartelization is a risk in our view.

Delay in digitization The Indian government has postponed the deadlines for digitization in four phases. The deadline for Phase I, under which four metros will undergo digitization, which was once delayed from March 2012 to June 2012, is now being pushed to October 2012. Based on our interactions with industry experts, we expect further delays in the digitization deadlines. We assume another delay of six months in Phase I and II, and another three months of delay in Phase III and IV. Any further delays beyond our expectations are risks that could affect our estimates.

Fig. 87: Timeline for different phases of digitization to complete


About the company

Zee is a one of India’s leading broadcasters in the pay-television market and is the largest Indian TV network globally. Zee has a presence in more than 168 countries, has 30 channels, more than 650mn viewers and more than 100,000 hours of programming. It produces content/programs and has tie-ups with leading studios in the world, cricket boards, etc. Zee has a wide range of product offering, which includes Hindi entertainment, Hindi movies, regional channels, music, English entertainment and movies, sports and lifestyle channels. Indeed, it has the largest library of Hindi movies with rights to more than 3,000 movies in the world. In sports, the company has cricket rights from five international cricket boards (South Africa, Sri Lanka, Pakistan, West Indies and Kenya) and has secured rights to show WWE, UEFA, US Open etc. It has also launched an exclusive Golf channel.

Besides having national channels, Zee is also a leading regional entertainment player and has a presence in Marathi, Bangla, Telugu, Kannada and Tamil. Zee’s international operations cover five continents through 22 beams and cater to the Asian communities. Indian contents dubbed in local language or with local language subtitles are also shown on Zee channels. According to management, the company plans to show local content on Zee’s international channels.

Phase Impact RegionCurrent

DeadlineNomura

AssumptionDelay

Months






64

Fig. 88: Shareholder structure


Fig. 89: Zee’s market share in Hindi GEC


Fig. 90: Revenue mix FY12


Fig. 91: Geographical revenue mix FY12


Promoters43.86%

FIIs35.36%

MFs/Banks/Fis

13.09%

Others7.69%

0%

5%

10%

15%

20%

25%

Q1F

Y10

Q2F

Y10

Q3F

Y10

Q4F

Y10

Q1F

Y11

Q2F

Y11

Q3F

Y11

Q4F

Y11

Q1F

Y12

Q2F

Y12

Q3F

Y12

Q4F

Y12

Q1F

Y13

Domestic Subscript-

ion32%

Inter-national

subscription14%

Advertise-ment54%

Domestic86%

Inter-national

14%


65

Fig. 92: Zee product offerings


TRAI limits television ad duration to 12 min/hr

We expect this to increase TV consumption in India and have a mixed impact on broadcasters; market leaders such as ZEE may benefit The Telecom Regulatory Authority of India (TRAI) has limited commercial runs on TVs to 12 min/hr, according to Economic Times (May 16, 2012). It has also disallowed any shortfall in a particular hour to be carried over. For live broadcasting of sporting events, advertisements carried out by broadcasters are only allowed during the breaks in the sporting action. TV consumption (in terms of the number of TV hours watched) in India is still very low compared to other countries as mentioned above. Limiting advertisement duration will in our view increase TV consumption in India and help to drive revenue for broadcasters.

We believe the imposition of duration limit by TRAI would limit ad volumes for broadcasters. This implies growth in advertisement revenue would come from realization growth. Broadcasters have better content (and thus better GRP) compared to competition and, in our view, Zee is likely to benefit from the change while others who have low GRP ratings (low level content) are likely to suffer as they are playing an ad volume game. This also implies increased focus on content by broadcasters, which would increase programming and content costs for all broadcasters, in our opinion.


66

Financial Analysis For FY12-16F, we forecast Zee will witness a consolidated revenue CAGR of ~21% and net income CAGR ~31%, based on the following:

• We assume digitization would happen over FY13F-FY16F (please see details in the section, “Assumptions for the DTH & Cable Industry”).

• We assume that in the medium term, growth in sales backed by an increase in reported subscriber base due to digitization and an increase in ARPU would be more than growth in content cost by broadcasters. This would lead to margin expansion for broadcasters in the medium term. We also believe intensifying competition would drive broadcasters to increase investments on programs/content, which would result in margins stabilizing to 34-35% from the current 25%-28% level.

• The company has plans to buy back shares not exceeding INR2,800mn at a maximum stock price of INR140 in FY13. With current share prices and our target price higher than the maximum stock purchase price of INR140, we have not factored in further stock buybacks in FY13F (apart from the ~4.8mn shares that it extinguished in 1QFY13.)

Fig. 93: Nomura vs consensus INRmn

Source: Company, Bloomberg Consensus, Nomura estimates

Revenue – digitization to drive growth

A shift from analogue cables to DTH services and increased ARPU from MSOs because of digital addressable system (DAS) We forecast Zee’s consolidated sales will record a CAGR of ~21% over FY12-16F, driven by domestic subscription revenue. While we estimate a domestic subscription revenue CAGR of 38% during the same period, we expect international subscription revenue to remain flat (~0% growth in USD) over FY12-16F.

Fig. 94: Consolidated revenue – strong growth in domestic subscription revenue INRmn

*Company started reporting net sales from FY12 post formation of Media Pro, so y-y comparison doesn’t give true picture


Domestic subscription revenue – backed by a rise in reported subscriber base by MSOs/LCOs Domestic subscription revenue accounted for ~30% of Zee’s consolidated sales in FY12; we expect this ratio to increase to ~52% in FY16F. We believe domestic subscription


Revenue 34326 41566 50709 34635 39241 44582 -1% 6% 14%

EBITDA 8,558 12,263 16,847 9064 10800 12803 -6% 14% 32%

PAT 6,324 9,150 12,383 6861 8125 9828 -8% 13% 26%

EPS 6.6 9.6 13.0 7.2 8.4 10.2 -7% 14% 27%

Nomura Consensus Difference

FY10 FY11 FY12* FY13F FY14F FY15F FY16F

Consolidated Sales 21,969 30,114 30,406 34,326 41,566 50,709 64,873

- growth (%) 1% 37% 1% 13% 21% 22% 28%

Subscription Revenue 9,826 11,276 13,245 14,869 19,904 26,616 38,057

- growth (%) 9% 15% 17% 12% 34% 34% 43%

Domestic 5,652 7,182 9,222 10,429 15,596 22,308 33,749

- growth (%) 26% 27% 28% 13% 50% 43% 51%

International 4,173 4,094 4,022 4,441 4,308 4,308 4,308

- growth (%) -8% -2% -2% 10% -3% 0% 0%

Advertizement Revenue 10,681 17,085 15,841 18,091 20,262 22,693 25,416

- growth (%) 1% 60% -7% 14% 12% 12% 12%


67

revenue will be driven by a rise in the reported subscriber base post digitization and increased ARPU from digital cables as well as DTH services.

Cable & DTH subscribers – a shift towards digital cables and DTH services during digitization would increase transparency and drive growth We believe non addressability in analogue cables has resulted in the under-reporting of the subscriber base by LCOs. According to Dish TV, there were ~68mn analogue subscribers as of end-2011, and we expect them to shift to digital cables and DTH services during digitization as shown below. This is based on our assumptions of digitization timelines as mentioned above and the process of digitization.

Fig. 95: Cable & DTH subscriber distribution – we expect growth to be driven by increased TV and C&S penetration Million


Average revenue per user (ARPU) – we expect growth to be limited by analogue cables in the short term, increases consumer ARPU and increase in broadcasters share to be long-term drivers Currently the existence of analogue cables is the main reason limiting growth in customer APRU by DTH operators, in our view. Zee’s ARPU from cable subscribers appears further depressed when compared to its DTH ARPU (cable ARPU is one-third of its DTH ARPU), owing to under-reporting of subscribers by LCOs and a higher number of intermediaries in the value chain. As of 1QFY12, Zee recorded ARPU of ~INR6-6.5 from the analogue value chain versus INR19-19.5 from the DTH operators.

We believe that with digitization, ARPU from digital cables and DTH operators will progressively converge while ARPU from DTH will likely move up steadily. Although we believe DTH players will steadily hike prices during digitization, we expect the pace of price hikes to increase as the different phases of digitization complete. We are factoring in a marginal increase of ~1% in ARPU from DTH in FY13F, which we expect to be driven by an increase in the number of channels and HD content. However, we forecast that ARPU from DTH operators will witness a meaningful increase over FY13-16F as digitization is completed. On the digital cable front, we expect broadcaster’s ARPU to increase after each digitization phase is completed, while ARPU from analogue cables will remain at current levels.

Fig. 96: ARPU from different sources – increase to be driven by digitization, ARPU from digital cables converging with ARPU DTH services operators INR


International business –expect modest growth given saturation of South Asian subscriber base in international markets The international business contributes ~13% of Zee’s consolidate sales, driven mainly by subscription revenue. International revenue has remained flat over the past few years as Zee’s penetration in India and South Asian markets was already at very high levels. Although Zee has launched new channels like Zee Aflam and Zee Alwan to show local

2009 2010 2011 2012F 2013F 2014F 2015F 2016F


- Analog 69 68 68 63 41 5 - -

- Digital 4 5 6 16 35 59 66 70

DTH subscriber 16 28 37 42 54 73 80 84

FY12 FY13F FY14F FY15F FY16F

Analog Cable 6.0 6.0 6.0 6.0 6.0

- growth (%) 0% 0% 0% 0%

Digital Cable 6.0 6.0 15.7 18.1 25.8

- growth (%) 0% 161% 15% 43%

DTH 19.5 19.7 21.4 23.3 26.1

- growth (%) 1.0% 8.5% 9.0% 12.0%


68

content and south Asian content dubbed in local language or with subtitles to increase its subscriber base, we don’t expect any material increase in the subscriber base in the near term. Although we are building in 10% growth in the subscription base for FY13F on account of a depreciating INR, we expect flattish sales growth over FY12-16F.

Contributions from advertisements in international revenue are marginal. Although South Indian viewership constitutes a substantial viewership share, for example ~20% in UAE, it is not a major segment of the advertising industry. However with the launch of Zee Aflam that shows local content and south Asian content dubbed in local language or with subtitles, Zee intends to increase advertising contribution from the international business. We are not building any material increase in advertising revenue in the medium term for the international business.

Fig. 97: Revenue mix – contribution from subscription is more stable than income stream from advertisements


Fig. 98: Geographical revenue – we expect contribution from domestic business to increase


Advertisement revenue – expect strong growth in FY13F backed by solid sales growth and gross margin expansion for FMCG companies; increase in Zee TV GRP over H1FY13 vs FY12 to drive growth further Advertisement contributed ~52% of total revenue for Zee in FY12. FMCG (including food & beverages, personal care & hygiene, hair care, personal accessories, personal healthcare and household products) continues to be a dominant sector as it accounted for ~43% of advertisement volume in CY11 as per KPMG. In fact, nine out of top 10 advertisers on TVs were FMCG companies.

Our analysis indicates that advertisements/sales promotions are correlated with sales growth and gross margin of FMCG companies. When raw material prices increase, FMCG companies tend to curtail A&P spending to maintain their EBITDA margins. Our consumer team (and consensus) believes that FMCG names will continue to have a solid growth profile and expect their gross margins to expand due to moderation in global commodity prices, in turn likely to translate to higher A&P expenditure. We are therefore building in ~14% advertisement revenue growth for FY13F (was 18% in 1QFY13 when expansion in gross margin of FMCG companies resulted in strong A&P spending) and ~12% over FY14-15F. According to Zee, this is higher than the advertisement industry’s projected growth of 7%-9%, which assumes a relatively muted economic backdrop. This reflects the higher exposure to FMCG names, increasing investment in content by companies, which was the reason for the 18% growth rate in 1Q FY13. We believe growth in advertisement revenue will mainly come from value rather than volume, in view of the 12min/hour limit on advertisements on TVs imposed by TRAI.

51% 49% 49%57% 52% 53% 49% 45% 39%

40% 41% 45%37% 44% 43% 48% 52% 59%

9% 10% 7% 6% 4% 4% 3% 3% 2%

0%

20%

40%

60%

80%

100%

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F

Advertisement Subscripton Others

76% 77% 80% 86% 86% 87% 89% 91% 93%

24% 23% 20% 14% 14% 13% 11% 9% 7%

0%

20%

40%

60%

80%

100%

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13F

FY

14F

FY

15F

FY

16F

Domestic International


69

Fig. 99: Expansion in gross margin for FMCG companies to drive advertisement revenue growth for Zee

Source: FMCG Companies, Nomura research

Fig. 100: Revenue growth of FMCG companies to remain strong over FY12-15F

*FMCG companies under Nomura coverage, Bloomberg consensus for growth forecast


As shown above, GRP of Zee TV (flagship channel that has significant advertisement revenue) declined in FY12 but increased anew over 1Q-2QFY13; we believe this should lead to an increase in advertisement revenue in FY13F. Increasing focus on content by Zee in FY13F should also increase its GRP and drive advertisement growth over FY13-14F, in our view.

Margin expansion – on account of digitization, turnaround in sports business and reduction in carriage & placement fees

We expect an EBITDA CAGR of ~34% over FY12-16F, as we expect a ~21% CAGR in sales and margin expansion during the same period.

Fig. 101: EBITDA margin – expansion driven by digitization, turnaround in sports business and lower C&P charges INRmn


9%

10%

11%

12%

13%

14%

46%

47%

48%

49%

50%

51%

52%

Jun

-07

Dec

-07

Jun

-08

Dec

-08

Jun

-09

Dec

-09

Jun

-10

Dec

-10

Jun

-11

Dec

-11

Jun

-12

Gross margin (LHS) A&P as % of sales (RHS)

Expansion in gross margin resulted in strong advertizement revenue growth of ~18% in Q1FY13

4%

8%

12%

16%

20%

24%

28%

FY

5

FY

7

FY

9

FY

11

FY

13F

FY

15F

Sales growth

A&P growth


Sales 30088 30406 34326 41566 50709 64873

- growth 37% 1% 13% 21% 22% 28%

Content cost 14,369 14,311 16,531 18,704 21,805 27,247

- growth 52% 0% 16% 13% 17% 25%

- gross margin 52.2% 52.9% 51.8% 55.0% 57.0% 58.0%

EBITDA 8,219 7,396 8,558 12,263 16,847 23,794

- growth 34% -10% 16% 43% 37% 41%

- margin 27.3% 24.3% 24.9% 29.5% 33.2% 36.7%


70

Fig. 102: Cost breakdown FY12

Source: Company annual report, Nomura research

Fig. 103: Market share and GRP of ZEE TV in Hindi GEC


Digitization – faster growth in topline; faster growth in subscription revenue stream than content cost will likely lead to margin expansion Content (program/transmission right) cost constituted~62% of total cost for Zee in FY12 and has been the main focus for the company. We expect the company to invest heavily in content in FY13F after having lost market share in FY12. The company plans to increase its original content from 25-26 hours to 32-34 hours in FY13. It has launched new channels (Zee Alwan in Arabic and a dedicated movie channel in Bangla) in addition to new channels (Zee Golf & Ten HD) launched in 4QFY12. These, along with an increase in marketing & advertisement expense related to new programs and channel launches, should impact margin in FY13F, in our view.

We expect digitization to push revenue growth faster than content cost, implying an increase in margins for Zee over FY14-16F. For the longer term, we expect the margins to eventually normalize as broadcasters are likely to invest more in content due to competition.

Sports business – subscription revenue post digitization to drive margins, breakeven by FY15F would lead to consolidate margin expansion by ~3% As mentioned above, sports business has been a loss-making business for all broadcasters. This has been on account of aggressive bidding for cricket rights. According to the company, the sports business excluding cricket is profitable for Zee. We believe digitization will lead to an increase in the number of subscribers specifically for the sports channel, improving the sports business profitability. The company incurred a loss of INR1,480mn in the sports business in FY12. Hence, even if we were to assume that the company’s sports business breaks even by FY15F, it would imply an improvement in the EBITDA margin of only 3% by FY15F. Excluding the sports business, the company’s EBITDA margin would be in excess of 33% as shown below.

Transmission & content

cost (sports)23%

Transmission & content cost (non sports)

39%

Staff Cost13%

A&P expense14%

Other expense

11%

15%

17%

19%

21%

23%

25%

150

170

190

210

230

250

270

Q1F

Y10

Q2F

Y10

Q3F

Y10

Q4F

Y10

Q1F

Y11

Q2F

Y11

Q3F

Y11

Q4F

Y11

Q1F

Y12

Q2F

Y12

Q3F

Y12

Q4F

Y12

Q1F

Y13

GRP (LHS)Market share (RHS)


71

Fig. 104: Loss-making sports business – we expect it to turn profitable post digitization


Fig. 105: Consolidated EBITDA margin excluding sports business


The company has guided for an EBITDA loss of INR650-700mn for FY13, which we believe is due to fewer India cricket matches in countries in which Zee has broadcasting rights. The loss in sports business may remain flat in FY14F on increased costs due to more India cricket matches in FY14F, but could be offset by increased subscription revenue from the sports business. We expect the sports business to become profitable in FY15F on a higher subscriber base due to digitization and fewer cricket matches (total as well as India matches.

Fig. 106: Cricket – total number of matches in countries where Zee has broadcasting rights

Source: ICC, Nomura research

Fig. 107: India cricket matches - in countries where Zee has broadcasting rights

Source: ICC, Nomura research

Digitization – lower carriage & placement fees to expand margin by ~300 bps As mentioned above, increase in the number of channels and limited channel carrying capacity of 80-90 by analogue cables have resulted in higher C&P fees for broadcasters. According to Media Partners Asia, C&P fee will drop by 20%-50% post digitization. Zee subscription revenue from cables contributed ~13% of consolidated sales as of 2QFY12. Our industry surveys indicate that C&P cost as a percentage of sales from cables for the broadcaster industry was ~70% in CY11. As such, even if we were to assume a 30% drop in C&P cost post digitization, consolidated margin for Zee might only expand by 300 bps, as per our calculations.

-600

-200

200

600

1,000

1,400

1,800Q

1FY

09

Q2F

Y09

Q3F

Y09

Q4F

Y09

Q1F

Y10

Q2F

Y10

Q3F

Y10

Q4F

Y10

Q1F

Y11

Q2F

Y11

Q3F

Y11

Q4F

Y11

Q1F

Y12

Q2F

Y12

Q3F

Y12

Q4F

Y12

Q1F

Y13

Revenue Cost Loss

25.2%27.9% 27.3%

24.3%27.7%28.9%

34.1%

38.4%

33.5% 34.2%

0%

5%

10%

15%

20%

25%

30%

35%

40%

FY09 FY10 FY11 FY12 Q1FY13

Including sports Excluding sports

25 25 20 18

43 45

3930

1422

20

11

0

10

20

30

40

50

60

70

80

90

100

FY12 FY13 FY14 FY15

Test One day T20

9

3

15

00

2

4

6

8

10

12

14

16

FY12 FY13 FY14 FY15


72

Post digitization, ZEE is likely to have significant free cash flow generation, solid balance sheet, scope for further stock buyback, higher dividend payout

Zee currently is a net cash company with outstanding debt of only ~INR240mn while it has ~INR3.2bn of cash and ~INR8bn of investments in subsidiaries, associates, certificate of deposits and commercial paper. The company has been generating FCF and we expect it to generate ~INR20bn of FCF over the next three years on strong sales growth, improved profitability and low capex of ~INR500-800mn per year. We believe a strong balance sheet will bestow significant operational flexibility for the company as it will have the financial firepower to invest the appropriate amount on content based on the competitive landscape or position itself for an opportunistic acquisition.

Fig. 108: Net Debt/Equity – net cash company


Fig. 109: Zee – a FCF-generating company INRmn


Return on capital – to improve during digitization

Zee generates ROE in excess of 20% which we expect to increase to ~34% by FY16F adjusted for goodwill. This is because we believe digitization will lead to significant high profitability (revenue growth will outstrip content cost growth, in our view). Post digitization (after FY16F), we expect the ROE to revert to the 23% level on account of falling profitability and increase in cash on the balance sheet.

The company has plans to buy back shares not exceeding INR2,800mn at a maximum stock price of INR140 in FY13 (it has thus bought back shares worth INR593mn). We are not building in further stock buybacks, as current share prices and our target price are higher than the maximum stock purchase price of INR140. Any further stock buybacks would lead to improvement in our estimated ROEs.

-40%

-35%

-30%

-25%

-20%

-15%

-10%

-5%

0%

FY11 FY12 FY13F FY14F FY15F FY16F0

2,000

4,000

6,000

8,000

10,000

12,000



73

Fig. 110: ROE – to increase during digitization on account of supernormal profit

*adjusted for goodwill


Fig. 111: ROCE* – high on account of low asset base

*excludes other income, cash, investment and goodwill


The broadcasting business is mostly an opex business (low capex, low asset intensity business) as the main asset is content which gets depreciated over its life. So ROCE for Zee has been ~35%-40% historically, which we expect to increase on improved profitability during digitization.

Dividend payout likely to increase; debtor days to fall on formation of Media Pro

ZEE has a dividend payout ratio in excess of 25% over the past three years. It currently has ~INR12bn of cash and investment and we expect a further ~INR20bn FCF to be generated in the next three years. Although we do not rule out further stock buybacks in FY13F, we believe the company would be able to increase its dividend payout to 40% from FY15F, assuming no acquisition in the short to medium term.

Fig. 112: Dividend Payout – likely to increase


Fig. 113: Working capital – debtor days to reduce Days


Zee has a strong focus on content and with competition intensifying, we expect an increase in inventory days, as we believe broadcasters will have more and more of new/original content. We expect debtor days to come down due to better negotiation/collection by Media Pro. Also our discussion with Dish TV implies that MSOs are focusing more on collecting receivables from LCOs. Digitization and addressability

0%

5%

10%

15%

20%

25%

30%

35%

FY11 FY12 FY13F FY14F FY15F FY16F30%

40%

50%

60%

70%

80%


36% 36%

28%30% 30%

40% 40%

0%

10%

20%

30%

40%

FY10 FY11 FY12 FY13F FY14F FY15F FY16F90

120

150

180

210

FY09 FY10 FY11 FY12F FY13F FY14F FY15F FY16F

DebtorsInventoryCreditorsWC


74

will further lead to a fall in debtor days, in our opinion, so we forecast working capital (WC) days to remain stable at ~116 days.

Target price of INR238, blue-sky scenario suggests 31% potential upside to our target price

We value the company based on the discounted cash flow (DCF) method, as we believe benefits from digitization will become more apparent in the medium term (FY15-FY16). Our DCF-based target price of INR238 implies 25.3x FY14F P/E and 17.7x FY14F EV/EBITDA.

Assumptions underlying DCF • Robust sales growth (in excess of 20%) over FY14-16F on digitization, increase in the

number of subscribers (subscriber number are under reported by MSOs currently) and increase in ARPU. Sales growth will likely moderate to ~11% from FY17F (post digitization) as increase penetration in households (HH), TVs and C&S and upgrade to high-definition formats and higher-value pack will likely drive growth;

• During digitization, we believe Zee’s margins will expand as we expect sales growth to be faster than content growth. We believe the loss-making sports business will turnaround on increased subscription base during digitization. Reduced C&P fees should also drive margin expansion. Post digitization however, we expect increased competition to result in more investment in content, thereby bringing margins down to the ~35% level (from ~37% in FY16F). We also expect C&P fees to increase anew post digitization on account of increased channels;

• Depreciation and amortization will likely also increase gradually as broadcasters will focus more on new and original content due to increased competition. This should reduce the life of a program;

• Inventory days are likely to increase as we expect broadcasters to focus more on new programming content due to increase competition. On the other hand, we expect debtor days to come down due to JV Media Pro (better negotiation and collection power) and implementation of DAS; and.

• We have used 13.3% as cost of equity as shown above.

Fig. 114: Valuation – DFC-based target price of INR238 at 1HFY14 INRmn

Source: Company data Bloomberg, Nomura estimates

Year 2011 2012 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E Terminal

Sales 30088 30406 34326 41566 50709 64873 74650 83790 92840 102947 114237 126848 140933

Growth 37% 1% 13% 21% 22% 28% 15% 12% 11% 11% 11.0% 11.0% 11.1% 6%

EBITDA 8219 7396 8558 12263 16847 23794 27131 29733 32645 35865 39998 44631 49824

EBITDA Margin 27% 24% 25% 30% 33% 37% 36% 35% 35% 35% 35% 35% 35%

D&A 289 323 339 355 373 392 411 432 454 476 500 525 551

D&A as % of PPE 3.6% 3.4% 3.5% 3.5% 3.5% 3.6% 3.6% 3.6% 3.7% 3.7% 3.7% 3.8% 3.8%

Interest 88 50 72 0 0 0 0 0 0 0 0 0 0

Taxes 2671 2500 3029 3990 5375 7484 8541 9437 10458 11595 13031 14644 16456

Tax Rate 31% 30% 32% 30% 30% 30% 30% 30% 30% 30% 30% 30% 30%

Capital Expenditure (389) (835) (700) (735) (772) (810) (851) (893) (938) (985) (1034) (1086) (1140)

ΔWorking Capital 886 (1612) 378 (1369) (2398) (3222) (4653) (3461) (3107) (3143) (3316) (3663) (4048)

FCFE 5957 2399 5135 6169 8302 12279 13087 15942 18142 20142 22616 25237 28181 410946

Cost of Equity 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3% 13.3%

Discount Factor 0 0 0 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4 0.3 0.3 0.3

Time 0 0 0 0.5 1.5 2.5 3.5 4.5 5.5 6.5 7.5 8.5 9.5 9.5

Discounted FCFE 0 0 0 5796 6887 8992 8462 9100 9143 8962 8884 8752 8628 125814

PV of FCFE 209,419

Add: cash 17,359

Sum 226,778

No. of shares 954

H1FY14 target price 238


75

Fig. 115: Zee - cost of equity assumptions


Fig. 116: TP sensitivity to cost of equity and terminal growth rate INR

Source: Nomura estimate

Why we believe that consensus upgrade cycle will continue

We foresee further consensus upgrades for Zee as the market factors in the impact of digitization. Our discussions with TRAI and other industry participants suggest they are very confident that Phase 1 digitization will complete by the end of FY13 the latest. We believe this should result in a sharp rise in subscription revenue and profitability, As discussed earlier, we believe digitization will likely lead to an increase in declared consumer base by cable operators and would also lead to progressive convergence of ARPU from digital cables (as mandatory digitization is ushered in) with the DTH players. This in our view will lead to a strong growth phase of about 3-4 years until the fourth phase of digitization is completed. However, consensus earnings have largely been flat since YTD, and we expect consensus earnings to play catch up with the stock price.

Fig. 117: Zee P/E trading multiple on consensus


Fig. 118: ZEE EV/EBITDA trading multiple on consensus


Cost of Equity Assumptions

Beta 0.85

Risk Free Rate 8.2%

Risk Premium 6.0%

Cost of Equity 13.27%

Terminal g

238 11.0% 12.0% 13.3% 14.0% 15.0%

4% 279 242 207 191 173

5% 308 262 220 202 181

6% 348 289 237 216 191

7% 409 327 260 233 204

8% 510 383 291 256 220

Cost of Equity

15

17

19

21

23

25

Aug

-09

No

v-09

Feb

-10

May

-10

Aug

-10

No

v-10

Feb

-11

May

-11

Aug

-11

No

v-11

Feb

-12

May

-12

Aug

-12

ZEE P/E FY1

Average P/E FY1 in the last 4 years

Minimum P/E FY1 in the last 4 years

Maximum P/E FY1 in the last 4 years

11

12

13

14

15

16

17

18

Aug

-09

Oct

-09

Dec

-09

Feb

-10

Ap

r-10

Jun

-10

Au g

-10

Oct

-10

Dec

-10

Feb

-11

Ap

r-11

Jun

-11

Au g

-11

Oct

-11

Dec

-11

Feb

-12

Ap

r-12

Jun

-12

Au g

-12

EV/EBITDA FY1

Last 4 year average EV/EBITDA

Last 4 year min EV/EBITDA

Last 4 year max EV/EBITDA


76

Fig. 119: ZEE P/E premium/discount to Sun TV


Fig. 120: Consensus earnings lagging stock performance


Fig. 121: Global broadcaster valuation comparison - Zee trading at higher multiple on account of early digitization phase in India

Note: Pricing as of 27 September 2012

Source: FACTSET, Bloomberg, Nomura estimates for Zee

Assumptions for DTH & Cable Industry – Number of DTH subscribers to overtake cable subscribers in FY14F

Digitization timeline – expect further delay by 3-6 months We are building in a six-month delay for Phase I and II from current deadlines based on our interaction with industry experts. Post Phase I and II, MSOs and LCOs should be able to finalize the business model which is likely to lead to acceleration in Phase III and IV. We are building in a three-month delay in both Phase III and IV as shown below.

-30%

-10%

10%

30%

50%

70%

90%

10

14

18

22

26

30

Aug

-09

No

v-09

Feb

-10

Ma y

-10

Au g

-10

No

v-10

Feb

-11

Ma y

-11

Au g

-11

No

v-11

Feb

-12

Ma y

-12

Au g

-12

ZEE Premium/discount (LHS)ZEE P/E FY1 (RHS)SUNTV P/E FY1 (RHS)

110

125

140

155

170

185

6.0

6.5

7.0

7.5

8.0

8.5

9.0

3-Ja

n-1

2

24-J

an-1

2

14-F

eb-1

2

6-M

ar-1

2

27-M

ar-1

2

17-A

pr-

12

8-M

ay-1

2

29-M

ay-1

2

19-J

un-1

2

10-J

ul-1

2

31-J

ul-1

2

21-A

ug-1

2

11-S

ep-1

2

FY14 EPS (LHS) FY13 EPS (LHS)Stock price (RHS)

Company Name Ticker Rating Price Market Cap Country EBITDA FY1-

USD Mn FY1F FY2F FY1F FY2F FY3 CAGRSurya Citra Media SCMA IJ Not Rated 10,600 2,158 Indonesia 15.5 12.8 22.0 17.8 19%Sun TV Netw ork Ltd. SUNTV IN Not Rated 338 2,514 India 9.1 8.03 18.3 15.7 17%Zee Entertainment Z IN BUY 184 3,335 India 19.8 13.4 27.9 19.2 36%Television Broadcasts Ltd. 511 HK Not Rated 55 3,132 Hong Kong 8.4 8.0 14.0 13.4 5%Media Nusantara Citra MNCN IJ Not Rated 2,500 3,642 Indonesia 13.9 11.5 21.8 18.1 20%Nippon Television 9404 JP Neutral 1,144 3,604 Japan 4.6 4.1 10.9 10.1 9%BEC World PCL BEC TB Not Rated 59 3,810 Thailand 14.0 12.7 25.3 21.4 9%Fuji Media Holdings Inc. 4676 JT BUY 133,300 3,974 Japan 4.2 4.0 10.2 10.5 2%

10.9 9.1 18.6 15.6 14%

13.6 11.2 21.9 17.8 18%Scripps Netw orks SNI US Neutral 61 9,124 United States 9.3 8.5 18.2 16.1 9%Discovery Communications DISCA US Neutral 59 15,348 United States 8.9 8.0 21.4 17.6 10%CBS Corp (Cl B) CBS US Neutral 36 23,050 United States 7.9 7.4 14.1 12.4 7%Viacom Inc. Cl B VIAB US BUY 54 27,996 United States 8.2 7.9 12.9 11.3 5%New s Corp. Cl A NWSA US BUY 25 58,742 United States 8.7 8.0 14.9 12.5 9%Walt Disney Co. DIS US BUY 53 95,112 United States 9.6 8.6 17.1 15.0 8%

8.2 7.5 16.1 14.0 8%

Asian market cap w eighted Average

US market cap w eigthed average

Asian ex Japan market cap weighted Average

EV/EBITDA P/E


77

Fig. 122: Assumptions - Timeline for different phase of digitization


Gradual shift from analogue to digital – faster execution post Phase 1 We assume a gradual shift from analogue to digital cables/DTH as shown below. Based on our interaction with TRAI, once the deadline for a phase is over and assuming that a substantial portion of analogue subscriber have shifted to digital, the possibility of switching off the analogue signal cannot be ruled out. This will likely prompt the remaining analogue cable subscribers to shift to digital cables/DTH services, in our view.

Fig. 123: Timeline for % of home digitization under different phase


Cable & Satellite (C&S) connection – growth likely to be driven by population/household growth and increase in TV and C&S penetration Growth in total C&S connection should come from following:

• Increase in number of households in India – With population growth of ~1.6% and increasing number of nuclear families (as per the census of India in 2011), we assume 2% y-y growth in the number of households in India.

• Increase in TV penetration – TV penetration in India is very low compared to other countries as shown below. TV penetration in India increased from 48% in 2007 to 61% in 2011 on rising income and discretionary expenditure. We are building in a 1% increase in TV penetration every year.

• Increase in C&S penetration – C&S penetration in India was ~82% in 2011 as shown below. With digitization, increase in aspiration and increasing spending on entertainment, we expect C&S penetration to increase to 95% by 2016F.

Fig. 124: Cable & satellite households – growth to be driven by increase TV and C&S penetration Mn


Distribution of C&S households – DTH households to exceed cable HH by 2014F We estimate that the DTH subscriber base is likely to exceed cable subscribers by 2014F. Based on our interaction with KPMG, MSOs have enough capital for Phase I, and industry experts expect about ~30% of the customers to shift from DTH services to analogue in this phase.

However after the completion of Phase I, MSOs will likely need to beef up their balance sheet which should lead to increased popularity of DTH services, in our view. Some

Phase Impact Region Current Deadline Nomura Assumption Delay Months





1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16

Phase 1 10% 15% 20% 25% 30% - - - - - - - -

Phase 2 - 5% 10% 15% 25% 25% 20% - - - - - -

Phase 3 - - - - - 5% 5% 10% 15% 20% 25% 20% -

Phase 4 - - - - - - 5% 5% 10% 15% 20% 25% 20%

2009 2010 2011 2012E 2013E 2014E 2015E 2016E

Total HHs 223 232 240 245 250 255 260 265

- growth 4% 3% 2% 2% 2% 2% 2%

TV House HHs 134 141 146 151 157 163 168 174

- growth 5.2% 3.5% 3.7% 3.6% 3.6% 3.6% 3.6%

C&S HH 95 108 119 129 139 147 157 165

TV penetration as % of total HHs 60% 61% 61% 62% 63% 64% 65% 66%

C&S penetration as % of total TV HHs 71% 77% 82% 85% 88% 91% 93% 95%


78

market participants like Dish TV expect that ~40% of the analogue households will move to DTH in Phase II and as high as ~70% in Phase III and IV. We conservatively assume 25%, 35%, 40% and 45% churn from analogue cable to DTH in Phase I. II, III, and IV, respectively.

Fig. 125: Distribution of subscriber across analog/digital cable, DTH, IPTV and DD Direct

Source: Dish Presentation, KPMG, Nomura estimates

2009 2010 2011 2012F 2013F 2014F 2015F 2016F


- Analog 69 68 68 63 41 5 - -

- Digital 4 5 6 16 35 59 66 70

DTH subscriber 16 28 37 42 54 73 80 84

DD direct 6 7 8 8 8 9 9 9

IPTV 0 0 0 0 1 2 2 3

Total 95 108 119 129 139 147 157 165


79


80


81

Appendix A-1

Analyst Certification

We, Ankur Agarwal and Lalit Kumar, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures The term "Nomura Group Company" used herein refers to Nomura Holdings, Inc. or any affiliate or subsidiary of Nomura Holdings, Inc. Nomura Group Companies involved in the production of Research are detailed in the disclaimer below.

Issuer name Ticker Price Price date Stock rating Sector rating Disclosures Dish TV India DITV IN INR 82 01-Oct-2012 Buy Not rated Zee Entertainment Enterprise Z IN INR 197 01-Oct-2012 Buy Not rated

Previous Rating Issuer name Previous Rating Date of change Dish TV India Not rated 02-Oct-2012 Zee Entertainment Enterprise Not rated 02-Oct-2012

Rating and target price changes

Ticker Old stock rating New stock rating Old target price New target price

Dish TV India DITV IN Not rated Buy N/A INR 107

Zee Entertainment Enterprise Z IN Not rated Buy N/A INR 214

Dish TV India (DITV IN) INR 82 (01-Oct-2012) Rating and target price chart (three year history)

Buy (Sector rating: Not rated)

Date Rating Target price Closing price 14-May-12 Not Rated 55.70 14-Jan-10 Buy 47.25 14-Jan-10 64.00 47.25

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our 12-month target price of INR107 is based on a DCF valuation methodology. We have assumed 6% terminal growth, risk free rate of 8.16% (10-year Indian government risk free bond), beta of 1.12 and market premium of 6%. Based on these numbers, we have taken cost of equity of 14.9%. Risks that may impede the achievement of the target price Delay in digitization: We have assumed six months’ further delay in phase I & II each of digitization and three months’ delay each in phase III & IV of digitization. Any further delay in digitization would mean slower subscriber additions, which would result in a deviation from our estimates. Change in government regulation: The media industry, which includes cable operators, broadcasters, DTH players, etc., is regulated by government.


82

Any change in government policies, such as tax rate, import duty on STB, etc., can adversely impact our estimates. Competition: Aggressive strategy by a competitor – India’s DTH industry has six players (excluding DD Direct), with Dish being the market leader, with a 29% market share. Currently, there are six DTH players and any aggressive strategy by a competitor to increase its market share can result in an increase in churn rate. This would adversely impact our numbers. Depreciation of INR vs USD: Dish imports STBs from Korea. We assume Dish would add ~13mn gross subscribers over FY13-15F and would need to import ~11.7mn STBs as it only has ~ 1.3mn in STB inventory. Depreciation of INR vs USD would increase the cost of STBs, thereby increasing capex and slower acquisition of new subscribers which would adversely impact our estimates.

Zee Entertainment Enterprise (Z IN) INR 197 (01-Oct-2012) Rating and target price chart (three year history)

Buy (Sector rating: Not rated)

Date Rating Target price Closing price 14-May-12 Not Rated 122.45 01-Mar-11 137.00 120.80 14-Jan-10 Neutral 144.246 14-Jan-10 274.00 144.246 30-Oct-09 292.00 119.073

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value Zee on a DCF basis; our TP of INR238 implies an FY14F EV/EBITDA of 17.7x, falling to 9.1x FY16F. Zee’s historical average is 14.4x, so we think 17.7x is appropriate as we expect an EBITDA CAGR of ~34% and look for ROE to increase from 23% to 34% (excluding goodwill) over FY12-16F. Risks that may impede the achievement of the target price Risks that may impede the achievement of the price target: Downside Risks: a weaker-than-expected recovery in ad-revenue growth poses a risk to our earnings estimates for ZEE; higher-than-anticipated competition in the Hindi GEC space; any deterioration in the ratings of ZEE's flagship channel Zee TV. Upside Risks: Better-than-expected cost management by the company.


83

Important Disclosures Online availability of research and conflict-of-interest disclosures Nomura research is available on www.nomuranow.com/research, Bloomberg, Capital IQ, Factset, MarkitHub, Reuters and ThomsonOne. Important disclosures may be read at http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx or requested from Nomura Securities International, Inc., on 1-877-865-5752. If you have any difficulties with the website, please email [email protected] for help. The analysts responsible for preparing this report have received compensation based upon various factors including the firm's total revenues, a portion of which is generated by Investment Banking activities. Unless otherwise noted, the non-US analysts listed at the front of this report are not registered/qualified as research analysts under FINRA/NYSE rules, may not be associated persons of NSI, and may not be subject to FINRA Rule 2711 and NYSE Rule 472 restrictions on communications with covered companies, public appearances, and trading securities held by a research analyst account. Any authors named in this report are research analysts unless otherwise indicated. Industry Specialists identified in some Nomura International plc research reports are employees within the Firm who are responsible for the sales and trading effort in the sector for which they have coverage. Industry Specialists do not contribute in any manner to the content of research reports in which their names appear. Marketing Analysts identified in some Nomura research reports are research analysts employed by Nomura International plc who are primarily responsible for marketing Nomura’s Equity Research product in the sector for which they have coverage. Marketing Analysts may also contribute to research reports in which their names appear and publish research on their sector. Distribution of ratings (Global) The distribution of all ratings published by Nomura Global Equity Research is as follows: 46% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with this rating are investment banking clients of the Nomura Group*. 43% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 46% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 21% of companies with this rating are investment banking clients of the Nomura Group*. As at 30 June 2012. *The Nomura Group as defined in the Disclaimer section at the end of this report. Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia. Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation. Target Price A Target Price, if discussed, reflect in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.


84

Disclaimers This document contains material that has been prepared by the Nomura entity identified at the top or bottom of page 1 herein, if any, and/or, with the sole or joint contributions of one or more Nomura entities whose employees and their respective affiliations are specified on page 1 herein or identified elsewhere in the document. Affiliates and subsidiaries of Nomura Holdings, Inc. (collectively, the 'Nomura Group'), include: Nomura Securities Co., Ltd. ('NSC') Tokyo, Japan; Nomura International plc ('NIplc'), UK; Nomura Securities International, Inc. ('NSI'), New York, US; Nomura International (Hong Kong) Ltd. (‘NIHK’), Hong Kong; Nomura Financial Investment (Korea) Co., Ltd. (‘NFIK’), Korea (Information on Nomura analysts registered with the Korea Financial Investment Association ('KOFIA') can be found on the KOFIA Intranet at http://dis.kofia.or.kr); Nomura Singapore Ltd. (‘NSL’), Singapore (Registration number 197201440E, regulated by the Monetary Authority of Singapore); Capital Nomura Securities Public Company Limited (‘CNS’), Thailand; Nomura Australia Ltd. (‘NAL’), Australia (ABN 48 003 032 513), regulated by the Australian Securities and Investment Commission ('ASIC') and holder of an Australian financial services licence number 246412; P.T. Nomura Indonesia (‘PTNI’), Indonesia; Nomura Securities Malaysia Sdn. Bhd. (‘NSM’), Malaysia; Nomura International (Hong Kong) Ltd., Taipei Branch (‘NITB’), Taiwan; Nomura Financial Advisory and Securities (India) Private Limited (‘NFASL’), Mumbai, India (Registered Address: Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India; Tel: +91 22 4037 4037, Fax: +91 22 4037 4111; SEBI Registration No: BSE INB011299030, NSE INB231299034, INF231299034, INE 231299034, MCX: INE261299034); NIplc, Dubai Branch (‘NIplc, Dubai’); NIplc, Madrid Branch (‘NIplc, Madrid’) and NIplc, Italian Branch (‘NIplc, Italy’). ‘CNS Thailand’ next to an analyst’s name on the front page of a research report indicates that the analyst is employed by Capital Nomura Securities Public Company Limited (‘CNS’) to provide research assistance services to NSL under a Research Assistance Agreement. CNS is not a Nomura entity. THIS MATERIAL IS: (I) FOR YOUR PRIVATE INFORMATION, AND WE ARE NOT SOLICITING ANY ACTION BASED UPON IT; (II) NOT TO BE CONSTRUED AS AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITY IN ANY JURISDICTION WHERE SUCH OFFER OR SOLICITATION WOULD BE ILLEGAL; AND (III) BASED UPON INFORMATION FROM SOURCES THAT WE CONSIDER RELIABLE, BUT HAS NOT BEEN INDEPENDENTLY VERIFIED BY NOMURA GROUP. Nomura Group does not warrant or represent that the document is accurate, complete, reliable, fit for any particular purpose or merchantable and does not accept liability for any act (or decision not to act) resulting from use of this document and related data. To the maximum extent permissible all warranties and other assurances by Nomura group are hereby excluded and Nomura Group shall have no liability for the use, misuse, or distribution of this information. Opinions or estimates expressed are current opinions as of the original publication date appearing on this material and the information, including the opinions and estimates contained herein, are subject to change without notice. Nomura Group is under no duty to update this document. Any comments or statements made herein are those of the author(s) and may differ from views held by other parties within Nomura Group. Clients should consider whether any advice or recommendation in this report is suitable for their particular circumstances and, if appropriate, seek professional advice, including tax advice. Nomura Group does not provide tax advice. Nomura Group, and/or its officers, directors and employees, may, to the extent permitted by applicable law and/or regulation, deal as principal, agent, or otherwise, or have long or short positions in, or buy or sell, the securities, commodities or instruments, or options or other derivative instruments based thereon, of issuers or securities mentioned herein. Nomura Group companies may also act as market maker or liquidity provider (as defined within Financial Services Authority (‘FSA’) rules in the UK) in the financial instruments of the issuer. Where the activity of market maker is carried out in accordance with the definition given to it by specific laws and regulations of the US or other jurisdictions, this will be separately disclosed within the specific issuer disclosures. This document may contain information obtained from third parties, including ratings from credit ratings agencies such as Standard & Poor’s. Reproduction and distribution of third party content in any form is prohibited except with the prior written permission of the related third party. Third party content providers do not guarantee the accuracy, completeness, timeliness or availability of any information, including ratings, and are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, or for the results obtained from the use of such content. Third party content providers give no express or implied warranties, including, but not limited to, any warranties of merchantability or fitness for a particular purpose or use. Third party content providers shall not be liable for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including lost income or profits and opportunity costs) in connection with any use of their content, including ratings. Credit ratings are statements of opinions and are not statements of fact or recommendations to purchase hold or sell securities. They do not address the suitability of securities or the suitability of securities for investment purposes, and should not be relied on as investment advice. Any MSCI sourced information in this document is the exclusive property of MSCI Inc. (‘MSCI’). Without prior written permission of MSCI, this information and any other MSCI intellectual property may not be reproduced, re-disseminated or used to create any financial products, including any indices. This information is provided on an "as is" basis. The user assumes the entire risk of any use made of this information. MSCI, its affiliates and any third party involved in, or related to, computing or compiling the information hereby expressly disclaim all warranties of originality, accuracy, completeness, merchantability or fitness for a particular purpose with respect to any of this information. Without limiting any of the foregoing, in no event shall MSCI, any of its affiliates or any third party involved in, or related to, computing or compiling the information have any liability for any damages of any kind. MSCI and the MSCI indexes are services marks of MSCI and its affiliates. Investors should consider this document as only a single factor in making their investment decision and, as such, the report should not be viewed as identifying or suggesting all risks, direct or indirect, that may be associated with any investment decision. Nomura Group produces a number of different types of research product including, among others, fundamental analysis, quantitative analysis and short term trading ideas; recommendations contained in one type of research product may differ from recommendations contained in other types of research product, whether as a result of differing time horizons, methodologies or otherwise. Nomura Group publishes research product in a number of different ways including the posting of product on Nomura Group portals and/or distribution directly to clients. Different groups of clients may receive different products and services from the research department depending on their individual requirements. Clients outside of the US may access the Nomura Research Trading Ideas platform (Retina) at http://go.nomuranow.com/equities/tradingideas/retina/ Figures presented herein may refer to past performance or simulations based on past performance which are not reliable indicators of future performance. Where the information contains an indication of future performance, such forecasts may not be a reliable indicator of future performance. Moreover, simulations are based on models and simplifying assumptions which may oversimplify and not reflect the future distribution of returns. Certain securities are subject to fluctuations in exchange rates that could have an adverse effect on the value or price of, or income derived from, the investment. The securities described herein may not have been registered under the US Securities Act of 1933 (the ‘1933 Act’), and, in such case, may not be offered or sold in the US or to US persons unless they have been registered under the 1933 Act, or except in compliance with an exemption from the registration requirements of the 1933 Act. Unless governing law permits otherwise, any transaction should be executed via a Nomura entity in your home jurisdiction. This document has been approved for distribution in the UK and European Economic Area as investment research by NIplc, which is authorized and regulated by the FSA and is a member of the London Stock Exchange. It does not constitute a personal recommendation, as defined by the FSA, or take into account the particular investment objectives, financial situations, or needs of individual investors. It is intended only for investors who are 'eligible counterparties' or 'professional clients' as defined by the FSA, and may not, therefore, be redistributed to retail clients as defined by the FSA. This document has been approved by NIHK, which is regulated by the Hong Kong Securities and Futures Commission, for distribution in Hong Kong by NIHK. This document has been approved for distribution in Australia by NAL, which is authorized and regulated in Australia by the ASIC. This document has also been approved for distribution in Malaysia by NSM. In Singapore, this document has been distributed by NSL. NSL accepts legal responsibility for the content of this document, where it concerns securities, futures and foreign exchange, issued by their foreign affiliates in respect of recipients who are not accredited, expert or institutional investors as defined by the Securities and Futures Act (Chapter 289). Recipients of this document in Singapore should contact NSL in respect of matters arising from, or in connection with, this document. Unless prohibited by the provisions of Regulation S of the 1933 Act, this material is distributed in the US, by NSI, a US-registered broker-dealer, which accepts responsibility for its contents in accordance with the provisions of Rule 15a-6, under the US Securities Exchange Act of 1934. This document has not been approved for distribution in the Kingdom of Saudi Arabia (‘Saudi Arabia’) or to clients other than 'professional clients' in the United Arab Emirates (‘UAE’) by Nomura Saudi Arabia, NIplc or any other member of Nomura Group, as the case may be. Neither this document nor any copy thereof may be taken or transmitted or distributed, directly or indirectly, by any person other than those authorised to do so into Saudi Arabia or in the UAE or to any person located in Saudi Arabia or to clients other than 'professional clients' in the UAE. By accepting to receive this document, you represent that you are not located in Saudi Arabia or that you are a 'professional client' in the UAE and agree to comply with these restrictions. Any failure to comply with these restrictions may constitute a violation of the laws of the UAE or Saudi Arabia. NO PART OF THIS MATERIAL MAY BE (I) COPIED, PHOTOCOPIED, OR DUPLICATED IN ANY FORM, BY ANY MEANS; OR (II) REDISTRIBUTED WITHOUT THE PRIOR WRITTEN CONSENT OF A MEMBER OF NOMURA GROUP. If this document has been distributed by electronic transmission, such as e-mail, then such transmission cannot be guaranteed to be secure or error-free as information could be intercepted, corrupted, lost, destroyed, arrive late or incomplete, or contain viruses. The sender therefore does not accept liability for any errors or omissions in the contents of this document, which may arise as a result of electronic transmission. If verification is required, please request a hard-copy version. Nomura Group manages conflicts with respect to the production of research through its compliance policies and procedures (including, but not limited to, Conflicts of Interest, Chinese Wall and Confidentiality policies) as well as through the maintenance of Chinese walls and employee training. Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright © 2012 Nomura International (Hong Kong) Ltd. All rights reserved.

Nomura Asian Equity Research Group

Hong Kong Nomura International (Hong Kong) Limited 30/F Two International Finance Centre, 8 Finance Street, Central, Hong Kong Tel: +852 2536 1111 Fax: +852 2536 1820

Singapore

Nomura Singapore Limited 10 Marina Boulevard Marina Bay Financial Centre Tower 2, #36-01, Singapore 018983, Singapore Tel: +65 6433 6288 Fax: +65 6433 6169

Taipei Nomura International (Hong Kong) Limited, Taipei Branch 17th Floor, Walsin Lihwa Xinyi Building, No.1, Songzhi Road, Taipei 11047, Taiwan, R.O.C. Tel: +886 2 2176 9999 Fax: +886 2 2176 9900

Seoul Nomura Financial Investment (Korea) Co., Ltd. 17th floor, Seoul Finance Center, 84 Taepyeongno 1-ga, Jung-gu, Seoul 100-768, Korea Tel: +82 2 3783 2000 Fax: +82 2 3783 2500

Kuala Lumpur Nomura Securities Malaysia Sdn. Bhd. Suite No 16.5, Level 16, Menara IMC, 8 Jalan Sultan Ismail, 50250 Kuala Lumpur, Malaysia Tel: +60 3 2027 6811 Fax: +60 3 2027 6888

India Nomura Financial Advisory and Securities (India) Private Limited Ceejay House, Level 11, Plot F, Shivsagar Estate, Dr. Annie Besant Road, Worli, Mumbai- 400 018, India Tel: +91 22 4037 4037 Fax: +91 22 4037 4111

Indonesia PT Nomura Indonesia Suite 209A, 9th Floor, Sentral Senayan II Building Jl. Asia Afrika No. 8, Gelora Bung Karno, Jakarta 10270, Indonesia Tel: +62 21 2991 3300 Fax: +62 21 2991 3333

Sydney Nomura Australia Ltd. Level 25, Governor Phillip Tower, 1 Farrer Place, Sydney NSW 2000 Tel: +61 2 8062 8000 Fax: +61 2 8062 8362

Tokyo Equity Research Department Financial & Economic Research Center Nomura Securities Co., Ltd. 17/F Urbannet Building, 2-2, Otemachi 2-chome Chiyoda-ku, Tokyo 100-8130, Japan Tel: +81 3 5255 1658 Fax: +81 3 5255 1747, 3272 0869

Caring for the environment: to receive only the electronic versions of our research, please contact your sales representative.

initiating coverage of zee and dish at buy; we expect both...

Documents