17 August 2015

1QFY16 Results Update | Sector: Media

SITI Cable Network

Shobhit Khare (Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428

Jay Gandhi (Jay.Gandhi@MotilalOswal.com); +91 22 3089 6693

BSE SENSEX S&P CNX CMP: INR35 TP: INR48 (+37%) Buy 27,878 8,477

Bloomberg SCNL IN

Equity Shares (m) 678.3

M.Cap. (INR b) / (USD b) 23.7/0.4

52-Week Range (INR) 39 / 25

1, 6, 12 Rel. Per (%) 2/2/17

Avg Val(INRm)/Vol ‘000 25/772

Free float 34.0

Financials & Valuation (INR Billion)

Y/E MAR 2016E 2017E 2018E

Net Sales 11.6 15.5 20.4 EBITDA 3.2 3.9 6.7

EBITDA# 1.3 2.7 6.1 Adj. NP 0.2 0.3 2.5 Adj.EPS (INR) 0.3 0.5 3.7 Adj.EPS Gr (%) NA 71.7 678.5 BV/Sh (INR) 4.0 4.5 8.8 RoE (%) 7.3 11.3 55.9 RoCE (%) 8.7 8.7 24.1 P/E (x) 125.5 73.1 9.4 EV/EBITDA(x)* 11.7 10.0 5.4 * Based on attributable EBITDA and subs post minority stake; # (ex-activation)

Estimate change

TP change

Rating change

Box switch-offs impact subscription; recurring EBITDA in line EBITDA (ex-activation) in line: SCNL’s EBITDA (ex-activation) was largely in line at

INR248m as lower opex offset the sharp decline in subscription revenue. All revenue streams decline QoQ, ex-Broadband: SCNL reported an 11% QoQ

decline in revenue (7% below est.) as all revenue streams declined except broadband. To enforce better monetization and collection efficiency from LCOs, SCNL switched off ~0.4m digital subscribers on a rotational basis. Consequently, subscription revenue declined 9% QoQ to INR1.29b (v/s est. INR1.52b). The impact of the switch-off is estimated to be INR100m-120m. Activation revenue declined QoQ—from INR211m to INR109m in 1QFY16 (v/s est. INR80m) as STB seeding remained muted at ~0.2m, taking the digital subscriber base to 5.58m. Carriage revenue remained largely flat QoQ at INR729m (v/s est. INR650m). Broadband revenue grew 14% QoQ to INR90m.

Phase I/II ARPU largely flat; content deals for Phase III tied up: Realizations in Phase I/II have been largely flat at INR100/INR75; the management expects improvement to INR110/INR90 by March 2016. Except Star, all major content deals for Phase III/IV (Zee, Sony, Colors) have been negotiated on a fixed-fee basis.

FY16 gross capex guidance of INR10b; net debt at INR11b: During FY16, SCNL is targeting digital cable subscriber addition of 5.5m and broadband addition of 0.2m. Gross capex guidance is ~INR10b (net capex of ~INR5.5b). Current gross/net debt stands at INR13b/INR11b.

99% underlying EBITDA CAGR over FY15-18; maintain Buy: We expect the digital subscriber base to increase from 5.4m in FY15 to 11m in FY18. Increase in net subscription income in the post-digitization scenario should drive ~99% recurring EBITDA CAGR, with EBITDA (ex-activation) expected to improve from ~INR0.8b in FY15 to ~INR6.1b in FY18. SCNL trades at EV/ EBITDA (ex-activation/ minorities) of 29.8x/14.5x/5.9x FY16E/FY17E/FY18E. Our EBITDA estimates are largely unchanged. Maintain Buy with a DCF-based price target of INR48/sh (unchanged).

Investors are advised to refer through disclosures made at the end of the Research Report.

Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

17 August 2015 2

SITI Cable Network

Earnings call highlights Subscription revenue: QoQ decline led by switch-off of ~4,00,000 digital

subscribers on a rotational basis to enforce better monetization and collection efficiency from Local Cable Operators (LCOs). Subscription revenue receivables remained flat QoQ. Management expects net ARPU for Phase I/II to increase from INR75/INR100 per month currently to INR90/INR110 by March 2016. Subscription revenue unlikely to decline further going forward.

Cable subscriber additions and activation revenue: Target to reach ~11m digital subscribers by March 2016 vs 5.6m currently. Activation per box at ~INR800 per subscriber during 1QFY16.

Broadband: Target to add ~200,000 broadband subscribers in FY16 taking broadband subscriber base to ~2,75,000 by March 2016. Focusing on delivering high service uptime in this business.

Content cost and phase III/IV deals: Expect ~15% growth in content cost in FY16. Phase I/II content cost at ~INR55-60 per subscriber per month. SITI Cable has already completed negotiations with ZEE, Sony and Colors bouquets for content in phase III/IV cities and deal with Star is expected to close by September 2015. Currently these deals would be on a negotiated fixed fee basis.

Capex: Expect ~INR10b gross capex and ~INR5.5b net capex in FY16 including broadband. Cost per box currently at ~INR1,200 for MPEG 2 and INR1,350 for MPEG 4 boxes.

Debt: Gross debt at ~INR13b (including ~INR9b INR debt); net debt at ~INR11b. Exhibit 1: Summary of estimate change (INR b) FY16E FY17E FY18E Cable subscription revenue Old 6.8 10.6 15.6 New 6.0 10.1 15.0 Change (%) -12.2 -5.0 -4.0 Revenue Old 12.4 16.0 21.0 New 11.6 15.5 20.4 Change (%) -5.8 -2.8 -2.7 EBITDA Old 3.2 3.9 6.6 New 3.2 3.9 6.7 Change (%) 2.1 0.8 0.1 EBITDA (ex-activation) Old 1.2 2.7 6.1 New 1.3 2.7 6.1 Change (%) 2.1 0.4 0.0 Adjusted PAT Old 0.2 0.2 2.4 New 0.2 0.3 2.5 Change (%) 1.8 45.7 3.6

Source: Company, MOSL

17 August 2015 3

SITI Cable Network

Exhibit 2: SITI Cable: Consolidated quarterly performance (INR m)

1QFY15 4QFY15 1QFY16 YoY (%) QoQ (%) 1QFY16E vs est (%) Revenue 2,090 2,560 2,281 9 -11 2,451 -7 Operating costs 1,748 2,466 1,924 10 -22 2,110 -9 -Carriage sharing/Pay channel 1,256 1,584 1,357 8 -14 1,400 -3 -Employee cost 111 157 133 20 -15 160 -17 -Other costs 381 725 433 14 -40 550 -21 EBITDA 342 94 357 4 280 341 5 EBITDA margin (%) 16.4 3.7 15.7 -4 326 13.9 173bps EBITDA ex-activation 196 -117 248 26 -312 248 0 EBITDA margin ex-activation (%) 9.4 -4.6 10.9 147bps 1544bps 10.1 74bps Depreciation and amortization 290 339 358 24 6 393 -8.8 Other income 20 227 24 18 -90 76 -68.7 Finance cost 304 311 339 12 9 302 12.4 PBT -231 -328 -317 37 -4 -278 14.1 Tax 70 125 5 -92 -96 74 -92.9 Prior period items 0 0 22 PAT -301 -454 -344 14 -24 -351 -2.2 Minority Interest 16 -112 28 77 -125 6 360 PAT after minority interest -317 -342 -371 17 9 -357 4 Digital subs and revenue break-up

Digital Subs (m) 4.3 5.4 5.6 30 4 6 0.0 Subscription revenue 1,182 1,424 1,290 9 -9 1,523 -15.3 Carriage revenue 617 735 729 18 -1 650 12.2 Activation revenue 146 211 109 -25 -48 80 36.2 Broadband revenue 54 79 90 67 14 99 -8.9 Other operating revenue 91 91 63 -31 -31 100 -37.0

Source: Company, MOSL

17 August 2015 4

SITI Cable Network

Story in charts

Exhibit 3: Platform-wise industry ARPU (FY15E-18E)

FY15E FY16E FY17E FY18E

DTH ARPU (INR) 267 285 305 327 Analogue Cable ARPU (INR) 160 163 165 166 Digital Cable ARPU (INR)

Phase I 250 263 289 318 Phase II 200 210 231 254 Phase III/IV 160 165 181 214 Other Digital ARPU (INR) 200 210 231 254

Source: MOSL

Exhibit 4: India Pay TV subscription revenue split (INR b)

Source: MOSL

Exhibit 5: India: TV and C&S households (m)

Source: MOSL

Exhibit 6: C&S connections mix: Analog v/s Digital (%)

Source: MOSL

Exhibit 7: Phase wise subscribers (FY15-18E)

FY15E FY16E FY17E FY18E

DTH HH (m) 40 48 60 72 Cable HH (m) 99 101 98 94 Analogue Cable (m) 70 61 43 23 Digital Cable (m) 29 40 56 71 -Phase I 8 8 9 9 -Phase II 14 15 15 15 -Phase III/IV 7 17 32 47 Other Digital HH (m) 10 9 8 8 Digital HH 79 97 124 151

Source: MOSL

Exhibit 8: 24% digital subscriber CAGR from 79m to 151m

Source: MOSL

132 128 102 66

67 86 124 180

123 151 198 259

23 24

24 24

346 389

447 529

FY15E FY16E FY17E FY18E

Analogue Cable Digital Cable DTH Other Digital Total Subscription Revenue

236 238 241 243 245 247 249 251

142 148 153 161 169 177 185 193

105 119 130 139 149 158 166 174

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

62 62 53 49 47 38 26 13

5 5 15 18 19 25 33

41

27 26 26 27 27 30 36 41

8 7 7 6 7 6 5 5

FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Analogue Cable (%) Digital Cable (%) DTH (%) Other Digital HH (%)

79

25

47

151

FY15E Digital Market growth Analog phase-off

FY18E Digital

72m net susbcriber adds

17 August 2015 5

SITI Cable Network

Story in charts

Exhibit 9: FY15 revenue break-up

Source: Company, MOSL

Exhibit 10: FY18 revenue break-up

Source: Company, MOSL

Exhibit 11: Net subscription revenue (INR b)

Source: Company, MOSL

Exhibit 12: EBITDA ex-activation/one-offs (INR b)

Source: Company, MOSL

Exhibit 13: Capex and Capex/sales (INR b, %)

Source: Company, MOSL

Exhibit 14: FCFF (INR b)

Source: Company, MOSL

Susbcription 59%

Activation 7%

Carriage 27%

Others 7%

Susbcription 73%

Activation 3%

Carriage 13%

Others 11%

2.8 3.8 4.3

8.3

13.2

FY14 FY15 FY16E FY17E FY18E

0.3 0.8

1.3

2.7

6.1

FY14 FY15 FY16E FY17E FY18E

2.3 2.9 6.2 3.9 2.5

33 32

53

25

12

FY14 FY15 FY16E FY17E FY18E

Capex Capex/Sales (%)

-1.1 -1.8

-0.3

4.1 4.0 4.3

FY15 FY16E FY17E FY18E FY19E FY20E

17 August 2015 6

SITI Cable Network

Exhibit 15: SCNL - Key Operating Metrics FY14 FY15 FY16E FY17E FY18E Phase wise subscriber base (m) Phase I 2.2 2.3 2.4 2.4 2.5 Phase II 1.5 1.6 1.6 1.7 1.8 Phase III/IV 0.3 1.5 5.0 6.5 6.8 Digital 4.0 5.4 9.0 10.6 11.0 Analog 6.0 5.1 1.5 0.2 0.0 Total Universe 10.0 10.5 10.5 10.8 11.0 Phase wise gross ARPU (INR) Phase I 193 199 198 218 240 Phase II 175 184 184 202 222 Phase III/IV 160 160 160 176 194 Analog 150 161 172 184 197 Total Universe 165 172 176 190 209 YoY (%) 4 2 8 10 Phase wise net ARPU (INR) Phase I 63 76 79 96 132 Phase II 40 55 58 93 111 Phase III/IV 16 16 16 53 87 Analog 8 8 8 8 8 Total Universe 23 31 34 65 100 YoY (%) 32 11 92 54 Per susbcriber carriage and content cost (INR) Content cost/subscriber/month 20 24 27 47 57 C& P revenue/sub/month 19 20 22 21 20 Net content cost/sub/month 1 3 5 26 37 Net content cost/net ARPU 3 10 15 40 37 Per susbcriber monthly metrics Gross revenue 165 172 176 190 209 LCO share 142 142 142 125 108 Net revenue 23 31 34 65 100 Net content cost 1 3 5 26 37 Other cost 20 22 20 21 20 Total operating cost 21 25 25 47 57 EBITDA 2 6 9 19 43

Source: Company, MOSL

17 August 2015 7

SITI Cable Network

Exhibit 16: SCNL - Key Financial Metrics FY14 FY15 FY16E FY17E FY18E Key Financials (INR b) Revenue 7.0 9.1 11.6 15.5 20.4 YoY (%) 48 30 29 33 32 EBITDA 1.1 1.4 3.2 3.9 6.7 YoY (%) 56 22 135 20 71 EBITDA margin (%) 16.2 15.2 27.7 25.0 32.6 EBITDA ex activation/one-offs 0.3 0.8 1.3 2.7 6.1 YoY (%) NA 143 64 111 127 EBITDA margin ex activation (%) 4.6 8.5 10.9 17.2 29.6 Capex analysis (INR b) Capex 2.3 2.9 6.2 3.9 2.5 Capex/Sales (%) 33 32 53 25 12 Gross STB adds (m) 1.6 1.5 3.9 2.0 0.9 Net STB adds (m) 1.6 1.4 3.6 1.6 0.4 STB Capex/gross add (INR) 1,200 1,300 1,250 1,250 1,250 Revenue break-up (INR b) Gross subscription revenue (incl LCO share) 19.9 21.2 22.1 24.3 27.4 Net subscription revenue (excl LCO share) 2.8 3.8 4.3 8.3 13.2 Reported subscription revenue (post gross billing) 3.4 5.4 6.0 10.1 15.0 Activation revenue 0.8 0.6 2.0 1.2 0.6 Carriage and placement revenue 2.3 2.5 2.8 2.7 2.6 Other revenue (incl broadband) 0.5 0.6 0.9 1.5 2.3 Total revenue 7.0 9.1 11.6 15.5 20.4

Source: Company, MOSL

17 August 2015 8

SITI Cable Network

Financials and valuations (Consolidated)

Income Statement

(INR Million) Y/E March 2012 2013 2014 2015 2016E 2017E 2018E Revenues 3,428 4,696 6,972 9,059 11,647 15,521 20,432 Change (%) 37.0 48.5 29.9 28.6 33.3 31.6

Total Expenses 3,691 3,973 5,844 7,685 8,418 11,635 13,775

EBITDA -263 724 1,128 1,374 3,230 3,886 6,657 % of Revenue -7.7 15.4 16.2 15.2 27.7 25.0 32.6 Change (%) -375.6 55.8 21.8 135.1 20.3 71.3 Depn. & Amortization 304 563 838 1,328 1,758 2,278 2,602 EBIT -567 161 290 46 1,472 1,608 4,055 Net finance cost 566 864 1,191 1,209 1,373 1,255 1,164 Other Income 214 140 131 311 199 108 108 PBT -919 -563 -770 -852 297 461 2,999 Tax 30 46 64 167 83 87 92 Rate (%) -3.3 -8.2 -8.3 -19.6 28.0 19.0 3.1

Reported PAT -949 -609 -834 -1,019 214 373 2,907 Minority interest -35 32 107 72 25 49 378 Reported Net profit -913 -641 -941 -1,091 189 325 2,529 Adjusted Net profit -913 -641 -941 -1,091 189 325 2,529 Change (%) NA NA NA NA 71.7 678.5

Balance Sheet

(INR Million) Y/E March 2012 2013 2014 2015 2016E 2017E 2018E Share Capital 453 453 521 678 678 678 678 Add. Paid up Capital 4,200 4,200 5,502 9,426 9,426 9,426 9,426 Reserves -5,480 -5,313 -4,900 -8,275 -8,108 -7,783 -5,253 Net Worth -827 -660 1,123 1,829 1,997 2,321 4,851 Minority Interest 100 132 271 678 703 751 1,129 Loans 4,480 9,094 12,673 13,470 12,691 13,724 10,779 Other Liabilities 28 861 405 837 947 1,846 2,910 Deferred Tax Liability 2 29 23 101 101 101 101 Capital Employed 3,784 9,456 14,495 16,914 16,438 18,743 19,770

Gross Block 4,025 7,253 12,059 14,990 21,192 25,114 27,574 Less : Depreciation 2,182 2,741 4,380 5,708 7,466 9,744 12,346 CWIP 123 691 1,702 1,661 825 330 330 Fixed Assets 1,966 5,204 9,381 10,942 14,551 15,700 15,558 Investments 18 16 16 16 16 16 16

Curr. Assets 3,655 6,737 8,832 11,405 8,574 10,578 13,065 Debtors 778 968 1,954 3,283 2,998 4,150 5,609 Cash & Bank Balance 1,483 1,294 3,529 4,337 1,337 1,337 1,337 Other Current Assets 1,395 4,475 3,350 3,785 4,239 5,091 6,119

Curr. Liab. & Prov. 1,855 2,500 3,735 5,449 6,703 7,552 8,870 Creditors 1,357 1,984 2,449 2,614 3,443 3,772 4,492 Other Current Liabilities 498 516 1,286 2,835 3,260 3,779 4,378 Net Curr. Assets 1,800 4,236 5,098 5,956 1,871 3,027 4,195

Appl. of Funds 3,784 9,456 14,495 16,914 16,438 18,743 19,770 E: MOSL Estimates

17 August 2015 9

SITI Cable Network

Financials and valuations (Consolidated)

Ratios

Y/E March 2012 2013 2014 2015 2016E 2017E 2018E Basic (INR) EPS -2.0 -1.4 -1.8 -1.6 0.3 0.5 3.7 Cash EPS -1.3 -0.2 -0.2 0.3 2.9 3.8 7.6 Book Value -1.6 -1.2 2.7 3.7 4.0 4.5 8.8 DPS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Payout %(Incl.Div.Taxes) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Valuation (x)

P/E -19.4 -21.8 125.5 73.1 9.4 Cash P/E

100.2 12.2 9.1 4.6

EV/EBITDA* 31.5 25.8 11.7 10.0 5.4 EV/EBITDA ex-activation * 111.6 46.0 29.8 14.5 5.9 EV/Sales* 5.1 3.9 3.2 2.5 1.8 EV/sales ex-activation* 5.8 4.2 3.9 2.7 1.8 Price/Book Value 13.1 9.5 8.8 7.7 4.0 EV/Sub (INR)* 3,551 3,397 3,599 3,582 3,243

Profitability Ratios (%)

RoE -55.9 7.3 11.3 55.9 RoCE -50.2 -1.1 -0.7 -2.0 8.7 8.7 24.1

Turnover Ratios

Debtors (Days) 83 75 102 132 94 98 100 Asset Turnover (x) 3.46 1.08 0.83 0.85 0.95 1.11 1.42

Leverage Ratio

Net Debt/Equity (x) -4.1 -14.8 6.6 3.6 4.2 4.0 1.6

Cash Flow Statement

(INR Million)

Y/E March 2012 2013 2014 2015 2016E 2017E 2018E Op.Profit/(Loss) bef Tax 724 1,128 1,374 3,230 3,886 6,657 Other Inc/excep. items 140 131 311 199 108 108 Interest Paid -864 -1,191 -1,209 -1,373 -1,255 -1,164 Direct Taxes Paid -20 -70 -89 -83 -87 -92 (Inc)/Dec in Wkg. Cap. -1,793 918 382 1,195 -257 -104

CF from Op.Activity -1,812 916 768 3,167 2,394 5,405

(inc)/Dec in FA + CWIP -3,801 -5,016 -2,889 -5,366 -3,427 -2,460 (Pur)/Sale of Investments 2 0 0 0 0 0 Other investing activity/adj 0 -20 -99 0 0 0 CF from Inv.Activity -3,799 -5,036 -2,988 -5,366 -3,427 -2,460

Issue of Shares 808 2,745 2,212 0 0 0 Inc/(Dec) in Debt 4,614 3,578 797 -778 1,033 -2,945 Others 0 32 19 0 0 0 CF from Fin.Activity 5,422 6,355 3,028 -778 1,033 -2,945

Inc/(Dec) in Cash -189 2,236 808 -2,978 0 0 Add: Opening Balance 1,483 1,294 3,529 4,337 1,337 1,337 Closing Balance 1,294 3,529 4,337 1,359 1,337 1,337 E: MOSL Estimates; * Based on attributable EBITDA and subs post minority stake

17 August 2015 10

SITI Cable Network

Corporate profile: SITI Cable Network

Exhibit 18: Shareholding pattern (%) Jun-15 Mar-15 Jun-14

Promoter 66.0 66.0 72.8

DII 7.8 7.3 1.9

FII 12.7 12.4 5.4

Others 13.4 14.4 19.9

Note: FII Includes depository receipts

Exhibit 19: Top holders Holder Name % Holding

HDFC Trustee Company Ltd A/C HDFC Equity Fund 5.2

Polus Global Fund 3.2

Morgan Stanley Asia (Singapore)Pte 2.5

Swiss Finance Corporation (Mauritius) Limited 1.9

DSP Blackrock Micro Cap Fund 1.7

Citigroup Global Markets Mauritius Pvt Ltd 1.1

Exhibit 20: Top management Name Designation

V D Wadhwa CEO

Vinay Chandok COO Operations

Anil Jham CTO

Exhibit 21: Directors Name Name

B K Syngal Subodh Kumar

Vinod Kumar Bakshi Kavita Kapahi

Suresh Kumar Agarwal

*Independent

Exhibit 22: Auditors

Name Type

Walker Chandiok & Co LLP Statutory

Exhibit 23: MOSL forecast v/s consensus EPS

(INR) MOSL

forecast Consensus

forecast Variation

(%)

FY16 0.3 - - FY17 0.5 - - FY18 3.7 - -

Company description SITI Cable Network Limited (SCNL) is one of India's leading Multi System Operator (MSO). With 61 analog and 15 digital head ends and a network of more than 14,600 Kms of optical fibre and coaxial cable, it provides its cable services in India's 130 key cities and the adjoining areas, reaching out to over 10.5 million cable universe. SCNL is a part of the Essel Group, which is one of India's leading business houses with a diverse portfolio of assets in media, packaging, entertainment, technology-enabled services, infrastructure development and education.

Exhibit 17: Sensex rebased

17 August 2015 11

SITI Cable Network

N O T E S

17 August 2015 12

SITI Cable Network

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Disclosure of Interest Statement SITI CABLE NETWORK Analyst ownership of the stock No Served as an officer, director or employee No

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