India TMT - Religare Capital Markets

Transcription

Digital India
The data revolution starts now!
3 August 2015 | RUMIT DUGAR | +91 22 6766 3444 | rumit.dugar@religare.com
Sector Report
INDIA
TECHNOLOGY, MEDIA, TELECOM
3 August 2015
India TMT
In this report, we explore the evolving trend of data-led mobility
and its impact on key players. We see peaking returns for global
handset/equipment players and prefer to play the boom in
mobile data services through telecom infrastructure, content and
internet platform plays. ROE expansion remains a challenge for
telecom players and hence we retain our cautious stance on
Indian telcos. BHIN, ZEE, INFOE and SHEM are our top picks.
 The Global Mobility Megatrend: Innovation in the mobile
communication supply chain and the resulting boom in data usage (to
grow 10x in five years) is disrupting business models led by smartphones
and IoT. Within the value chain, we expect content and internet/appenabled delivery platforms to capture a bulk of the incremental wallet
share, and traditional players’ returns to be modest unless they
integrate with the content ecosystem (e.g. Apple, Verizon-AOL). Our
analysis indicates that technology players have seen a drop in ROE
(Ericsson – from 26% to 8%) and telco returns have remained stagnant
(AT&T, Verizon). However, internet players are seeing a sizeable
network effect (Netflix, FB) and telecom infrastructure (American
Tower) is seeing steady ROE and growth led by data capex.
 India at the cusp of internet revolution: India will be the biggest
beneficiary of technology commoditisation, led by device affordability
and improving networks (upcoming R-Jio LTE launch). India already has
the third largest internet subscriber base in the world with only 19%
penetration. We expect the country’s smartphone base to grow from
150mn currently to 550mn by CY20 and this should create a large
mobile data-led opportunity across the supply chain. Per our estimates,
India’s telecom data market will grow to US$ 16bn by 2020 from
US$ 4bn in CY15, a CAGR of 35% – though cannibalisation risks to the
traditional US$ 26bn market remain.
REPORT AUTHORS
Rumit Dugar
+91 22 6766 3444
rumit.dugar@religare.com
M cap
US$ mn
CMP
(LC)
TP
(LC)
REC
Bharti Airtel
26,088
419
400
HOLD
Idea Cellular
9,723
173
190
HOLD
13,232
448
550
BUY
2,001
450
575
BUY
78
77
NR
NR
846
586
NR
NR
COMPANY
Telcos
Telecom Infra
Bharti Infratel
Tata Communications
Content
Balaji Telefilms
Eros International
Shemaroo Entertainment
121
285
400
BUY
5,970
399
450
BUY
D-Link India
126
227
NR
NR
Redington
735
118
145
BUY
1,563
833
1100
BUY
Zee Entertainment
Device and Distribution
India Internet
Info Edge
 What to play – Prefer telco capex/content/platforms: Our stock
selection in the supply chain is based on (1) low penetration,
(2) network effect (internet plays) and (3) ROE improvement. While
telcos benefit from low penetration, ROE improvement will be tough
due to high capex. Telco infrastructure (capex proxy), content plays and
internet platforms are our preferred ways to play the data theme.
 Stock picks: We like telecom tower player Bharti Infratel (BHIN: BUY)
as a long-term structural play on data capex. While hardware
commoditisation means limited ROE expansion, rising internet
penetration and a better mix can drive strong growth for handset/
device players such as D-Link (DLINK: Not Rated). We are positive on
the content space and like business models with content ownership –
Zee Entertainment (ZEE: BUY), Shemaroo Entertainment (SHEM: BUY),
Eros International (EROS: Not Rated), or app economy-based
aggregation platforms – Info Edge (INFOE: BUY).
This report has been prepared by Religare Capital Markets Limited or one of its affiliates. For analyst certification and other important disclosures, please refer to the Disclosure and Disclaimer section at the end of
this report. Analysts employed by non-US affiliates are not registered with FINRA regulation and may not be subject to FINRA/NYSE restrictions on communications with covered companies, public appearances, and
trading securities held by a research analyst account.
India TMT
Sector Report
INDIA
Cheatsheet
Stocks to play the Mobility theme
Secular
Content – Movies
Theme
Stocks
IP-driven business model
Multiple distribution channels
Eros International
Rising data penetration to drive monetisation
Hardware – Devices
Commoditised but rising internet penetration play
D-Link
Consumer facing
Play on consumer and enterprise technology consumption
Distribution
Redington
Complex market like India needs distribution
App Economy
Rising data/internet penetration
Platforms (Mostly unlisted)
Rising income and excellent reach of this medium
Just Dial
Aggregation model
Info Edge
Play on telco capex
Telecom Infra
Bharti Infratel
India’s high population density needs denser networks
Commoditisation – Falling ASPs
Handsets
Unlisted
Slowing capex in developed markets
Equipment Capex
Unlisted
Falling ASPs to put pressure on margins
Telecom Operators
Content – Non-Movies
Capex to rise to support data growth
Bharti Airtel
Limited differentiation
Idea Cellular
Risks to pricing
Reliance Communications
Capture shift of viewership to mobiles
Zee Entertainment
Room to expand programming hours
Balaji Telefilms
Source: RCML Research. NR = Not Rated
Fig 1 - Valuations and Recommendations
Price
Market
cap
LC US$ mn
EV Rating
LC mn
Target
Price
EPS
LC FY16
EBITDA
FY17
P/E
EV/EBITDA
ROE
FY16
FY17
FY16
FY17
FY16
FY17
FY16
FY17
Telcos
Bharti Airtel
419
26,088 2,281,749 HOLD
400
16
17 335,319
358,269
26
25
6.8
6.4
10%
10%
Idea Cellular
173
9,723 1,022,293 HOLD
190
10
5 132,102
144,258
18
32
7.7
7.1
14%
7%
Telecom Infra
Bharti Infratel
448
13,232
823,213
BUY
550
12
15 54,730
63,435
37
29
15.0
13.0
14%
17%
Tata Com*
450
2,001
196,654
BUY
575
14
19 31,769
35,886
31
23
6.2
5.5
5%
6%
Eros
586
846
56,832
NR
NR
34
41
4464
5503
17
14
12.7
10.3
18%
19%
Shemaroo
285
121
8,780
BUY
400
21
27
1,011
1,208
13
11
8.7
7.3
15%
16%
Zee
399
5,970
387,601
BUY
450
11
13 13,769
16,448
37
30
28.2
23.6
17%
19%
118
735
61,325
BUY
145
11
12
7,899
8,914
11
10
7.8
6.9
16%
15%
833
1,563
91,495
BUY
1100
13
19
1,796
2,880
63
43
51.0
31.8
9%
13%
1080
1,186
67,975
NR
NR
22
34
1771
2738
49
32
38.4
24.8
22%
28%
16
655
606
NR
NR
0
0
9
18
214
44
67.2
34.5
NM
1%
Content
Distribution
Redington
India Internet
Info Edge #
Justdial
Makemytrip
Source: RCML Research, Bloomberg | *ROCE used instead of ROE; #Standalone
3 August 2015
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Contents
Cheatsheet ............................................................................................................. 2
Executive summary .............................................................................................. 4
Data and the mobility “megatrend”.................................................................................... 4
Mobility – Shifting trends bring shifting returns ................................................................. 5
Returns of traditional players to moderate ........................................................................ 6
What to play – Penetration and ROE expansion............................................................... 6
Mobility – Big picture, big play ............................................................................ 8
Framework – The value chain......................................................................................... 10
Mobility 1.0 – Shifting trends, shifting returns................................................. 13
Traditional world centered on access – “Need to have” .................................................. 13
Telcos and handset players led the way ......................................................................... 13
Mobility 2.0 – Access becomes a utility; content/data takes centrestage .... 19
Data consumption – No boundaries? .............................................................................. 21
Content/platform players come to the fore ...................................................................... 27
Access devices – Key to user experience but at risk of commoditisation .............................. 29
Telecom operators – Diminishing value proposition vs. 1.0 ............................................ 30
Returns through the cycles................................................................................ 38
Where are we now in the cycle ....................................................................................... 39
Valuation and Share price performance ........................................................... 41
Considerable valuation deviations .................................................................................. 41
Winners and losers ......................................................................................................... 41
India Mobility 2.0: Narrowing our focus to the Indian market ........................ 43
Market snapshot ............................................................................................................. 43
Devices – Commoditised but penetration-led growth ...................................................... 44
Government – Raw material monetisation ...................................................................... 46
Telecom operators – Data-led growth but risks to pricing and capex ............................. 47
Capex proxies – Attractive as data capex cycle commences in India ............................. 52
Content/ platform players – battle for screen space in a digital world ............................. 55
App economy to explode; delivery platforms highly scalable .......................................... 64
Conclusion ........................................................................................................... 68
Companies
D-Link India .....................................................................................................................71
Redington India................................................................................................................81
Bharti Airtel ......................................................................................................................87
Idea Cellular ....................................................................................................................91
Bharti Infratel ...................................................................................................................95
Tata Communications ....................................................................................................111
Info Edge .......................................................................................................................116
Balaji Telefilms...............................................................................................................134
Eros International...........................................................................................................143
Shemaroo Entertainment ...............................................................................................153
Zee Entertainment .........................................................................................................167
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Executive summary
Data and the mobility “megatrend”
Over the past 5-7 years, continuous innovation in the mobile communication chain – be it
hardware, device ecosystems or network technology – has boosted wireless access speeds
to a level where consumers can comfortably browse, socialise, shop, play and access
entertainment on their handheld mobile devices. The resulting boom in mobile data usage
is the single biggest consumer shift in mobile technology trends since wireless voice took
the world by storm a couple of decades ago, creating a mobility “megatrend” in the broad
communications sector.
Fig 1 - Megatrends of connectivity
Source: Ericsson
In this report, we examine how the boom in mobile data usage is taking the spotlight
away from voice and what this means for the mobile communication chain, from
network providers (telecom companies) to integrated players like Apple, online content
providers, and device and component makers. We analyse the holistic mobility value
chain and its cycles to determine the upsides one can expect, particularly with respect to
Indian companies, and identify a basket of beneficiaries across the chain that investors
could use to play the mobile data theme.
We identify a basket of beneficiaries
across the chain that investors could
use to play the mobile data theme
Fig 2 - Key players
Enablers
Government
Provides spectrum
Content
Voice / Data / VAS
Equipment vendors
Provides technology
Telecom operators
Distributor
Handset
User Access
Components
Source: RCML Research
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Mobility – Shifting trends bring shifting returns
Returns for mobile providers (equipment, networks, devices and content) are shifting
along with the demand shift toward data, in particular challenging telecom companies
(telcos). Telcos have hitherto enjoyed the benefits of irreplaceable networks and of being
the providers of voice as content, but now find themselves in a scalability bind – forced
to spend and expand networks to support increased data usage, but unable to scale up
pricing to the same extent due to a perceived lack of “value-add” and competitive
pressures. The revenue scalability issue for telcos in this new data-obsessed world is
obvious in their financial/sales performance. As seen in Fig 3, telcos globally have posted
a gradual decline in steady-state ROEs over the past decade.
Telcos globally have seen a gradual
decline in steady-state ROEs over the
past decade
Fig 3 - ROEs of global telecom operators
(%)
AT&T
Verizon
DT
Vodafone
China Mobile
100
80
60
40
20
0
(20)
(40)
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Bloomberg, RCML Research. Note : DT – Deutsche Telecom
This ongoing usage shift to data is likely to push traditional players like telcos into areas
attracting incremental customer wallet share, such as content and delivery platforms. We
foresee telcos moving towards content ownership and focusing on “disrupting”
traditional transaction-oriented business models by offering similar mobile-based
services.

Telcos: Larger telcos with big balance sheets and strong customer bases will be
better positioned to monetise a content-driven strategy.

Handsets: We are likely to see a longer cycle for integrated players (Apple) versus
pure handset vendors. For India-specific players, ASP expansion driven by the mix
change will be the key as smartphone penetration improves.

Devices: While the market remains commoditised, we think that pure penetrationled equipment plays such as DLINK could deliver strong growth but limited ROE
expansion.

Distribution: With rising data network coverage and falling ASPs of devices, we
expect technology penetration to record secular growth. Distribution of technology
(Redington – REDI) is a better way to play the technology penetration theme. Though
alternate delivery channel remains a risk for consumer tech.

Content: We prefer content owners or internet models with a clear intellectual
property-led (IP) advantage and better traffic monetisation opportunities (small screen
size a challenge for advertising); search and online video over online news, and pure
play social networks. We like content owners (e.g. ZEE, SHEM, EROS) and internet
platforms (e.g. INFOE) should benefit from the same.
Usage shift to data could push telcos
into areas offering incremental
revenue share, such as content
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Returns of traditional players to moderate
The industry is seeing a paradigm shift with the move from a voice-centric market, or the
“Mobility 1.0” era, to a data/service-centric market which we christen “Mobility 2.0”.
Voice has worked very well for traditional players such as equipment makers and
network providers (telcos) thus far; however networks are turning into utilities and data
is throwing up multiple challenges (commoditisation of voice, capital-intensive data,
curtailed pricing power). Further, increased competition in certain segments (such as
handsets) is rapidly driving commoditisation in the telco model – necessary for adoption
by consumers but leading to shorter return cycles. The charts below indicate how the
returns profile and business cycles are likely to shift for each industry segment as we
move through this big megatrend.
We discuss the trends and drivers in detail later in the report, but in sum, we believe that
incremental returns will be higher for content owners or integrated players (such as Apple),
while traditional players like telcos and equipment makers will see lower returns in this
cycle. Network providers (telcos) will earn lower incremental returns as voice growth peaks,
value addition in data growth falls and the challenges of upfront capex and scalability
depress margins. Overall though, telcos will maintain their utility status and we expect
initial dips in returns to see some cyclical recovery as data penetration improves.
Fig 4 - Voice-driven model – Returns through the cycle
Fig 5 - Data-driven model – Returns through the cycle
Mobility 1.0
Handset
vendors
Equipment
vendors
Network
operators
Content /
VAS
Government
Handset
vendors
Mobility 2.0
Returns
Network
operators
Returns
Equipment
vendors
Incremental returns from the data
trend will favour content owners and
integrated players like Apple
Time
Source: RCML Research, Company, Bloomberg
Time
What to play – Penetration and ROE expansion
We have already outlined the data + mobility megatrend and we expect this to be
replicated in most markets, including India. That said, different markets are at different
points in the cycle. We think that developed markets are already beyond the initial rampup phase of 3G/device adoption. However, growth is still picking up in emerging markets.
Thus, our preference would be for local over global plays in the value chain.
Segments like equipment and devices tend to be more globally influenced while content
and networks are locally so. As of now, equipment/handset returns appear to have
peaked already and we are likely to see demand growth in emerging markets led by
lower ASPs.
In terms of demand factors, equipment
and devices tend to be more globally
influenced while content and networks
are locally influenced
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Meanwhile, we haven’t seen large upfront investment by network operators in India –
we think capex in India needs to be accelerated as 3G adoption gathers pace led by rising
smartphone affordability.
We like the Telco Infra play within networks given a consolidated market structure, telco
capex to drive growth, high operating leverage drive room for ROE expansion. We like
the telecom towers – BHIN and the third party data center business – TCOM.
On the content front, we are positive on content owners or players with long shelf-life IP.
Traffic monetisation remains the key for mobile-driven internet models as advertising on
mobile-based applications is a challenge given the smaller screen size. With rising data
penetration in India, we think entertainment category (Bollywood) content owners are
likely to see a multifold jump in monetisation opportunities. Companies like SHEM and
EROS are already seeing strong traction from new media (YouTube), and rising
broadband speeds could open up avenues for Netflix-style models.
Content – prefer players with IP. Key
hurdle for mobile content is small
screen space for advertising
We initiate coverage on INFOE (BUY) – internet platform play, SHEM (BUY) – content
owner with cheap valuations, and BHIN (BUY) – play on telco capex. We also like ZEE
(BUY) – content and platform potential, TCOM (BUY) – telco backbone, and REDI
(BUY) – distribution play.
We like the internet segment where there is room to establish clear market leadership.
Within internet, we note that the e-commerce segment has a healthy long-term outlook,
but investments to establish market leadership will have to be frontloaded, putting
pressure on profitability and returns. However, network effect–oriented businesses will
have advantages and a disproportionate share of traffic and industry revenues.
E-commerce – limited entry barriers,
low differentiation; late cycle play
Fig 6 - Current cycle – Where are we?
Mobility 2.0
Network operators
Content / VAS
Government
Returns
Equipment vendors
Handset vendors
Hold
Past
Present
Future
Time
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Mobility – Big picture, big play
In this report, we look at the entire mobility chain as an emerging ecosystem and parse
the investment opportunities that lie within. We live in a digital, networked society
where ever smarter devices are moving the goalposts in terms of consumption and user
behaviour. We will explain how these ongoing transitions are fueling a mobility
megatrend and examine how different participants across the value chain are positioned
to benefit or lose.
In the past, connectivity has been driven by just such megatrends, mostly technology-led,
and with each trend, the ecosystem and revenue opportunities have expanded manifold.
The development of communications/connectivity can be broken down into three
megatrends over the last several decades:
Connectivity has been driven by
technology-led megatrends such as the
ongoing data boom
(1) Connecting places – Basic connectivity,
(2) Connecting places and people – Mobility/Personal connectivity (or the Mobility 1.0
era as we like to call it), and now
(3) Connecting places, people and devices – Networked society (viz. Mobility 2.0).
Fig 7 - Megatrends of connectivity
Source: Ericsson
As we look at the current landscape, basic mobility (devices/networks) has reached
affordable levels across markets and is reaching near-full penetration (Fig 8). In our view,
the big wave of single device-led pure mobility (voice, SMS) is drawing to a close and
we see a clear shift towards value-added mobility (video on-demand, streaming music,
3D gaming, faster web browsing + voice, SMS) as a megatrend. This is being driven by
smarter and multiple-user access devices such as smartphones and tablets coupled with
wireless technologies that are pushing content and service consumption.
Digital ecosystem now goes beyond
network and devices and is about
tangible solutions, information ondemand and always-on services
The digital ecosystem is going beyond network and devices and is now about tangible
solutions, access to information on-demand and always-on services. We see this as an
irreversible trend and with technology fast becoming affordable, we expect a rapid
proliferation of the same in emerging markets. This trend is visible as (1) data growth in
telcos, (2) rising demand for smartphones, tablets and other on-demand devices or
on-demand content, and (3) technology capex for network gear makers, but essentially is
still part of the big megatrend. While markets are at different stages of adoption of the
digitisation megatrend, we think technology affordability will continue to drive this to
the mainstream.
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Although a change in status quo creates significant opportunities on one hand, it also
causes disruption of traditional business models on the other. We identify key success
factors and risks across players, and analyse the challenges each market throws up,
starting with India.
Fig 8 - Mobile penetration
160%
140%
137%
Fig 9 - Smartphone penetration
70%
130%
130%
114%
120%
103%
100%
56%
47%
50%
93%
78%
80%
42%
40%
40%
26%
30%
60%
40%
20%
20%
10%
0%
62%
60%
Brazil
Germany
United
France
Kingdom
US
China
India
Source: CTIA, Bloomberg, RCML Research .
0%
17%
United
Kingdom
US
China
France Germany
Brazil
India
Source: RCML Research, Bloomberg
Fig 10 - Value delivered on the telecom network has been rising with time
Capability bandwidth spectrum
High Speed
Video-OnDemand
Video-OnDemand
Video
Conference
Video
Conference
Streaming
Music
Streaming
Music
Streaming
Music
3D Gaming
3D Gaming
3D Gaming
Customised
Infotainment
Faster Web
Browsing
Faster Web
Browsing
Faster Web
Browsing
Multimedia
Messaging
Full motion
Video
Full motion
Video
Full motion
Video
Web Browsing
Speech, Voice
Mail, SMS, Web
Browsing, MMS,
PTT
Speech, Voice
Mail, SMS, Web
Browsing, MMS,
PTT
Speech, Voice
Mail, SMS, Web
Browsing, MMS,
PTT
3.5G
EVDO Rev B,
HSDPA,
DVBDAB
4G
Wmax, LTE
Push-to-talk
(PTT)
SMS
Voice mail
Caller ID
Speech Only
Conference
Calling
Speech (digital)
Speech, Voice
mail, SMS
Late 1970s- 80s
1990s
1990s
2000s
1G
Analog
Network
2G
GSM
2.5G
GPRS, EDGE
3G
UMTS,
WCDMA,
CDMA 2000
Source: RIL
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Framework – The value chain
While mobility is vast in its scope, we train our focus on the wireless sector and its key
components, and discuss the key value drivers therein. That said, we have taken the
liberty to traverse into other areas as well to identify interesting trends and ideas.
Since mobility is too vast in its scope to
cover in a single report, we focus on
wireless and its related components
The traditional approach of looking at the key enablers on an individual basis has worked
very well in the past given the concentration of value providers, single service focus and
seemingly simple mobility value chain. However, the value chain is becoming more
complex with innovation on devices and content access. This, in our view, will have a
bearing on returns over the medium-to-long term of all players. We therefore break
down the entire chain into a four-legged component framework namely:

Enablers – Equipment providers and Government (raw material)

User Access – Devices and supporting supply chain (components)

Networks and Distributors – Telecom operators (mobile, broadband and Wi-Fi)

Content – User generated and external
Fig 11 - Key players
Enablers
Government
Provides spectrum
Content
Voice / Data / VAS
Equipment vendors
Provides technology
Telecom operators
Distributor
Handset
User Access
Components
The communications value chain has been a combination of enablers and devices/
components coupled with delivery networks. Each of these together forms the bedrock
for delivering “mobility.” The chain is technology-driven which is creating new growth
opportunities but, on the flip side, also exposing most players to technology risks.
However, we believe the various categories of players have different product cycles and
return profiles, thereby offering investment opportunities and varying returns through
the big mobility megatrend.
Communications chain tech-driven,
providing new growth but also new
risks
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Fig 12 - Role and value of various stakeholders
Category
Function/Value
Driver / Category
Positioning Returns
Raw Material/
Technology
Enablers
Government
Spectrum &
Regulation
Eco. Growth / Raw
Material
Equipment
Vendors
Network Equipment Capex / Technology
Low-High
Local
Low-Med
Essentially governs the marketplace and is the
supplier of spectrum. Returns expected from
spectrum monetisation are low
Global
High
Technology enablers in the value chain and act as
plays on technology cycles in the sector. Global
players with large addressable market
Consumption /
Technology
User Access
RCML View / Comments
Low-High
Devices
Handsets / Tablets Consumption /
etc.
Technology
Local &
Global
Low-High
User access devices to the network. Touch points
with the end user, they help deliver the final user
experience in the entire value chain
Components
Suppliers for
devices
Global
Low-Med
Part of the device value chain. Critical for
technology support and affordability
Consumption /
Technology
Technology /
Distribution
Networks
Med
Telecom
Operators
Wireless
Technology /
Distribution
Local
Med
Utility model; tends to enjoy stable returns.
However, operators are also exposed to technology
upgrades and shifting trends
Alternate
Networks
Internet/Broadband, Technology /
Distribution
Wi-Fi
Local
Med
Alternate to traditional operators to access content.
Emergence due to smarter devices and technology
evolution
Content
Consumption /
Content
Low-High
Voice
Basic-User
generated
Consumption / Content Local
Low
Basic demand from telephony, but maturing markets
mean slower growth
Non-Voice
Data/VAS and
Services
Consumption / Content Local Mostly High
Ever expanding device capabilities pushing usage of
data-driven services
We also look at product cycles across the communication value chain – user access
devices and content are the short-cycle plays, led by innovators or limited shelf life for
content and fast-changing fads. Telecom operators and equipment together are the longcycle plays. Of all the components, networks are the most stable given their utility nature
but these also remain at risk when the megatrend shifts. This has been the case with
undersea cable operators of the 90s as well as fixed line operators (though some
successfully moved on to become wireless carriers).
Short-cycle plays: devices and content;
long-cycle plays: telcos and equipment
Traditionally, content has been rather simple and mostly user-generated (voice), and
could be classified as long cycle. While voice continues to enjoy a relatively higher shelf
life, non-voice content is localised, perishable (movies, songs) and could be driven by
passing trends. In effect, it is incrementally shorter cycle as compared to voice. However,
some of the other services which disrupt traditional business models (such as mobile
banking) could be longer cycle (discussed in detail later).
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Fig 13 - Product cycles
Long Cycle
Government
Provides spectrum
Equipment vendors
Provides technology
Short Cycle
Short Cycle
Content
Voice / Data / VAS
Telecom operators
Distributor
Handset
User Access
Components
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Mobility 1.0 – Shifting trends, shifting returns
Voice has been at the heart of all communication technology over the past several
decades, but this is clearly beginning to change. While voice as a service is still
expanding in terms of volumes, revenues are not following suit. Relentless innovation in
the consumer device ecosystem and telecom technologies that support more devices and
services has led to the big shift from connect on-demand to always-connected – in turn
leading to the emergence of new service streams driven by social media and messenger
platforms (e.g. WhatsApp, Twitter).
While voice as a service is still
expanding in terms of volumes,
revenues are not following suit
This is challenging for all players but particularly for telcos who hitherto enjoyed the
benefits of irreplaceable networks and delivery of just voice as content – they must now
deliver data and value added services (VAS), among others, and face scalability
challenges. In this section, we explore how value generation has shifted across the telco
value chain over time and how it is likely to play out going forward.
Traditional world centered on access – “Need to have”
We define Mobility 1.0 as the phase when the market experienced access to basic mobile
communication in the form of voice connectivity. With the advent of Mobility 1.0,
consumers had access to on-the-go personal connectivity for the first time. Compared to
fixed lines which essentially helped connect places, mobile communication helped bring
in highly personalised, round-the-clock connectivity.
In Mobility 1.0, we got basic mobile
communication via voice connectivity
Keywords: ‘Coverage and access’ for
consumers; ‘penetration’ for the
industry
In our view, while technology evolution played a key role in enabling this phase, the
uptake was largely driven by the consumer’s need for personalised communication. From
a consumer’s standpoint “coverage and access” became the key value proposition, and
from the telecom industry’s perspective “penetration” was the key metric.
Telcos and handset players led the way
The mobile telecom industry has essentially evolved from two stakeholders:
(1) equipment providers (the technology providers) and (2) operators (the network
owners). As the industry migrated from the fixed line era to the mobile communications
era and the associated personal connectivity regime, handsets emerged as a specialised
industry, separate from equipment providers. Purely from an industry structure
perspective, we believe that Mobility 1.0 was essentially driven by the technology
enablers (telecom equipment and user handsets) and the distributors (network
operators). Governments in this period basically acted as the facilitators and were less
interested in generating value from the sector.
Fig 14 - Value players in Mobility 1.0
Enablers
Government
Provides spectrum
Equipment vendors
Provides technology
SMS
VOICE
Content
Mostly user generated
Telecom operators
Distributor - Access provider
Handset
User Access
User
Components
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Fig 15 - Value proposition for stakeholders in Mobility 1.0
Product
Enablers
Voice / Basic VAS Equipment providers
Value captured
Value proposition
Product cycle
Competitive
scenario
Breadth across
markets
Distributors
User Access
Government /
Regulator
Telecom Operators
Handsets
*
*****
*
****
****
Largely user
generated and
hence free
Provider of technology
Aids market
development and
provides spectrum
Provides connectivity and
access
Delivers the final user
experience
–
Long cycle
–
Long cycle
Medium cycle
–
Entry of Chinese
players has increased
competitive intensity in
the voice market
–
Global
Global
Local
Initially low competitive intensity Highly competitive as fast
as network/capacity in the
changing user fads lead to
system is limited. Typically,
short product cycles.
markets are consolidated with
"Winner takes it all"
3-4 players
market
Local
Global
Source: RCML Research. Note: * stands for the quantum of value segment captures within this value chain
Fig 16 - Returns across various telecom stakeholders during Mobility 1.0
Mobility 1.0
Network operators
Handset vendors
Returns
Equipment vendors
Time
Before we move to analyse how value shifted in the Mobility 1.0 cycle, we highlight that
equipment and handset makers are exposed to the global macro-economy and broad
technology trends, while others including network operators are exposed to local market
conditions in terms of local consumer spending preferences and government regulations.
Despite the localised nature of business, certain developed market telcos (Vodafone,
Deutsche Telekom, Telefonica) have expanded beyond their home markets (to even
emerging markets), thereby giving them a global presence.
Telecom equipment providers have
been the most exposed to the global
macroeconomic crisis amongst players
While an economic slowdown does temporarily affect performance over a short-tomedium term, we note that broad return trends for equipment providers are still defined
by technology cycles.
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Fig 17 - ROE performance of equipment vendors through global macro cycles
Ericsson
(%)
AT&T
30
25
20
15
10
5
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Company, Bloomberg, RCML Research
Equipment providers the gatekeepers of technology
Equipment providers have essentially been the technology gatekeepers of the telecom
industry. Being key enablers in the industry, equipment providers are the primary value
creators in the supply chain. As a new communication technology era dawns, certain
equipment providers develop an initial lead in the space due to a technological edge –
this helps them capture a significant portion of the value pie during the early-to-mid
phase of the tech cycle, leading to a healthy return profile during this period, especially
when the volume pick-up begins.
Equipment vendors benefited from the
volume pick-up, but lost on the ‘valueproposition’ front
However, as the cycle matures, the technology starts to get commoditised as
standardisation of protocols and equipment allows other players to catch up.
Interestingly, in the 2G voice equipment market, despite strong demand for the product
through the 2000s (as emerging markets including India/China saw significant rollouts),
the market was swiftly commoditised, shrinking the lead enjoyed by Western equipment
makers and raising pricing pressure, especially with the entry of Chinese vendors.
The setting up of communication standards (GSM and CDMA for voice) was a key factor
behind the rapid commercialisation of mobile communication technology, in our view.
Standardisation not only enabled ease of communication across regions and networks
but also enabled equipment suppliers to achieve scale efficiencies derived from
large-scale manufacturing of standardised equipment, and helped set up a large
component ecosystem. Overall, this practice resulted in the establishment of a small set
of large global equipment players including Ericsson, NokiaSiemens and Alcatel Lucent,
who essentially became the key technology gatekeepers.
Standardisation enabled equipment
suppliers to achieve scale and set up
the component ‘ecosystem’
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Fig 18 - EBITDA margin trend of equipment vendors
Ericsson
(%)
Alcatel Lucent
25
20
15
10
5
0
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Company, RCML Research
In the voice 2G market, traditional equipment vendors enjoyed immense pricing power
through the early-to-mid phase of 2G/3G adoption (also seen in the large capex by
developed world telcos). However, as 2G technology matured, equipment became
commoditised, especially with the entry of Chinese vendors including Huawei and ZTE,
and equipment providers lost their pricing power.
Traditional 2G commoditised now
We note that the cost of 2G capex per subscriber even for emerging market telcos has
continued to decline through the 2000s, despite strong demand for the equipment.
Commoditisation of the equipment, in our view, has been partially responsible for lower
capex spends in emerging markets, enabling operators to provide cheaper voice services
at similar return expectations as in developed markets.
Fig 19 - Wireless gross block/subscriber
(US$ / sub)
Overall US market
Indosat
Fig 20 - Emerging market 2G capex/net subscriber addition
China Mobile
180
900
160
800
140
700
120
600
100
500
China Mobile
80
400
60
300
40
200
20
100
0
Bharti
(US$)
1,000
0
1995 / 2005
1996 / 2006
1997 / 2007
1998 / 2008
1999 / 2009
Source: CTIA, Bloomberg, RCML Research. Note: US wireless gross capex/sub
data for 1995-99 and for Asian operators from 2005-09.
2004
2005
2006
2007
2008
2009
2010
2011
Faster access to technology in emerging markets a risk to ASPs
Faster and shorter tech cycles
Historically, communication technology has been long-cycle in nature, typically extending
over 10-year periods or more. Developments within the fixed line era notwithstanding,
we note that fixed line as a mode of communication prevailed for over 40 years, before
being upstaged by mobile services. While mobile voice came on board in the early 90s,
2G as a technology is only ~20 years old and is soon to be replaced by 3G, 4G and other
advanced technologies which deliver both voice and mobile high-speed data. Notably,
the time gap between the arrival of more advanced 4G technology and the previous
generation has shrunk, thereby shortening the communication technology cycle.
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Emerging markets have typically lagged developed markets with regard to access to
technology. The differential was significant in the past (10-20 years in terms of mass
adoption in the fixed line era), but has been shrinking with the advent of the mobile era.
In Mobility 1.0, developed markets saw 2G uptake through the 90s, while emerging
markets saw a pick-up through the 2000s.
EMs could skip a generation of tech
upgrades altogether
3G was introduced in both China and India in 2010/11 after arriving in developed markets
in the mid-2000s, and given the current situation we could see 4G adoption in these
geographies on par with developed markets. In fact, as emerging markets transition from
the voice era to mobile data communications, they could jump straight to HSPA+ or LTE,
skipping one generation (3G) of upgrades altogether. We have seen this in China, where
LTE has seen rapid adoption and is fast catching up with 3G.
In our view, the key advantage of delayed access was that emerging markets typically
received access to end-of-life technology, thereby reducing the cost of technology while
simultaneously ensuring a continued market for the end-of-life products of equipment
providers. Now, the convergence of technology access timelines could mean a faster
decline in ASPs for new technologies (equipment vendors) as opposed to the more
gradual downtrend seen in past cycles.
Tech convergence also implies a faster
decline in ASPs
Fig 21 - Emerging markets getting faster access to technology
2G
Broadband
Access
3G
4G
Developed markets
1985
1990
1995
2000
2005
2010
2015
2020+
India
2G
3G
4G
Network operators – central to “Access”
In Mobility 1.0, network operators were the other key value creators, being central to the
concept of Access. Operators were essentially the network owners and helped set up the
initial networks. We believe that as a market transitions from fixed access to mobilepersonal-access, consumers experience a significant increase in the value of networks,
allowing network operators to take central position in the telco value chain by being the
key to “access”.
“Coverage” then becomes the key value differentiator for operators which allows for
significant pricing power during the early-to-mid cycle. While upfront investments in
laying the basic infrastructure tend to drag down return ratios and profits initially, as the
market matures and hits a penetration sweet point, operators start to see healthy return
ratios and significant free cash flow as capex peaks out by mid-cycle.
Coverage the key value differentiator
in the early-to-mid cycle
However, as the market evolves further, competition in the industry rises as
governments ease the way for entry of new players and technological advancements
allow for newer business models. This has been true of emerging markets, especially in
Asia, where regulators have enabled the entry of new players to induce competition and
lower tariffs. With rising competition and a lack of differentiation in the traditional voice
delivery space (other than coverage, which too is lost over time), the market starts
getting commoditised.
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Fig 22 - ROEs of network operators with the opening up of the sector
(%)
India
Competition leads to commoditisation
of the market, in turn causing pricing
pressures
Indonesia
50
45
40
35
30
25
20
15
10
5
0
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
Source: Company, RCML Research. Note: Bharti and TLKM are taken as proxies for India and Indonesia respectively
Given the low variable cost of delivering incremental minutes of talktime, the industry
starts seeing significant tariff pressures as competition intensifies. Telecom operators
start experiencing dwindling returns towards the mid-to-late cycle as penetration peaks
(implying fewer growth opportunities in traditional services) and commoditisation leads
to pricing pressures.
Fig 23 - ROE vs. penetration in emerging markets during Mobility 1.0
India
China
Indonesia
50%
45%
40%
ROEs
35%
30%
25%
20%
15%
10%
5%
0%
0.0%
10.0%
20.0%
30.0%
40.0%
50.0%
60.0%
70.0%
80.0%
90.0%
100.0%
Penetration
Source: Company, RCML Research. Note: Bharti, China Mobile and TLKM are taken as proxies for India, China and
Indonesia respectively
Bringing us to Mobility 2.0
With diminishing returns, operators start looking to invest in data services to revitalise
growth rates and thereby start moving to Mobility 2.0 – which essentially involves the
integration of mobile voice and internet. As explored in the next section, while Mobility
2.0 brings a much more enhanced value proposition, operators have not really been able
to reap rich rewards on basic data access services thus far.
Due to price pressures brought on by
commoditisation, telcos turned to data
services to inject growth, kicking off
Mobility 2.0
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Mobility 2.0 – Access becomes a utility;
content/data takes centrestage
Fixed line telephony was all about helping people communicate by establishing
connectivity between places. Mobility 1.0 provided personal connectivity (by connecting
people and places via mobile voice services) and Mobility 2.0 essentially serves to
integrate mobile voice and internet. With basic access needs already met, Mobility 2.0
aims to bring with it additional value in terms of better access to information,
entertainment and other services.
Mobility 1.0 was about personal
connectivity; Mobility 2.0 integrates
mobile voice and internet
We believe the entire value proposition of the telco network changes with the new era,
as consumer expectations shift and newer stakeholders come in with radical business
models. In this context, the traditional value players in the industry, largely
telcos/network operators, are most at risk and need to think beyond providing basic
“access” services. Success in this era will be determined by the ability of companies to
adapt to the changing value propositions.
Fig 24 - Evolving value proposition through the communication eras
Era
Beyond
Value stack
Devices connectivity
Services
Mobility 2.0
Infotainment
Mobility 1.0
Fixed line
Players
Personal Mobility
Connectivity
Operators, Handset vendors,
Equipment vendors, Government,
Content/VAS providers,
Alternate networks
Equipment vendors
Equipment vendors
While on the one hand, Mobility 2.0 brings with it a much greater value proposition in
the form of better and more value-added services, the number of stakeholders in the
value chain also increases. Compared to some of the earlier telecommunication eras,
Mobility 2.0 is much more crowded – network operators, handset vendors and
equipment providers are the incumbents in the Mobility 1.0 value chain; now
Mobility 2.0 brings with it additional players such as content/VAS providers, internet
players and alternate network operators. The government too becomes an active player
in the value chain.
Mobility 2.0 – more value, more
stakeholders
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Fig 25 - The Mobility 2.0 supply chain
SMS
Equipment vendors
Provides technology
Government
Provides spectrum
Mobile
Banking
Movies
eCommerce
News/
Information
Content
External / user generated
A
P
P
S
Telecom operators
A
P
P
S
Handset
User Access
User
Games
Mobile Ads
D
A
T
A
Social
Networking
O
F
F
L
O
A
D
I
N
G
Components
Inorganic extensions
Voice
ALTERNATE NETWORKS (Wi-Fi)
Fig 26 - Value proposition for stakeholders in Mobility 2.0
Product
Value captured
Value proposition
Product cycle
Enablers
Distributors
User Access
Content / Platforms
Equipment
providers
Government /
Regulator
Telecom Operators /
Alternate networks
Handsets /
Smartphones/ Tablets
****
***
****
***
****
Provides connectivity
and access
Delivers the final user
experience
Long cycle
Long cycle
Short cycle
Highly competitive as fast
changing user fads lead to
short product cycles.
"Winner takes it all"
market
Local & Global
Data services for
entertainment and
Provider of
Looks to monetise
information, transactiontechnology /
spectrum as basic
based services (mobile
facilitates technology connectivity needs are
banking), aggregationupgrades
met
based services, ecommerce, etc.
Short cycle
Long cycle
Competitive
scenario
External content – IP
oriented
Entry of Chinese
players has
increased the
competitive intensity
in the voice market
NIL
Commoditisation of
Access services
leads to high
competitive intensity
Breadth across
markets
Local (more) & Global
(less)
Global
Local
Local
Source: RCML Research. Note: * stands for the quantum of value segment captures within this value chain
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Fig 27 - Return curve across stakeholders through Mobility 2.0
Data consumption – No boundaries?
Developed markets are well underway on the data cycle but despite good data
penetration, consumption continues to grow. Unlike the voice era where traffic had a
ceiling based on the user’s ability to talk and spare time for voice calls, data consumption
carries no such constraints. Most of the consumption is still led by developed markets,
primarily driven by network rollout. We think this growth would shift to emerging
markets, as device prices move down and the first access to internet for a large chunk of
the populace happens through smartphones.
2014 mobile data traffic was 30x the
size of global internet traffic in 2000
Strong growth in global mobile data traffic
According to the CISCO networking index, mobile data traffic is expected to grow to
24.3EB per month by CY19 – a ten-fold increase over CY14 (representing a 57% CAGR).
This will be primarily led by higher smartphone penetration and a shift of 3G subscribers
to 4G LTE (fourth generation/long term evolution) which is a faster network that has the
capacity to generate far more traffic.
Fig 28 - Global mobile data traffic per month
(EB)
30
24.3
25
20
16.1
15
10.7
10
5
0
6.8
2.5
2014
4.2
2015
2016
2017
2018
2019
Source: CISCO Visual Networking Index
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High migration of device connections towards 4G
Globally, we are already seeing the shift from 3G to 4G at the device level, led by the
rising affordability of smartphones. As per CISCO, mobile device connections on 4G will
grow to 31% of total connections in CY19 from 7% in CY14. Migration towards 3G
connections will also grow from 31% currently to 48% in CY19.
Fig 29 - Global mobile device connection split
2G
70%
3G
4G
62%
60%
50%
48%
45%
40%
31%
38%
30%
31%
21%
20%
7%
10%
0%
17%
2017
2014
2019
As per Ericsson’s mobility report, CY14 saw 800mn smartphone additions globally. It took
five years to reach the first billion smartphone unit sales in CY12, but the next billion came
in two years. As per the report, smartphone users are expected to hit the 6 billion mark by
CY20 and the numbers of smartphones are likely to exceed basic phones by CY16.
Smartphones generate 37 times more
traffic than a non-smart device
Fig 30 - Smartphone additions to be led by Asia
(Mn)
7,000
1,950
6,000
320
80
6,100
5,000
3,000
“80% of smartphone additions during
2015-20 will be from APAC and MEA” Ericsson
710
4,000
2,700
210
130
2,000
1,000
0
Smartphones
- 2014
Western
Europe
Central and Middle East
Eastern
and Africa
Europe
Asia
Latin America
North
America
Smartphones
- 2020
Source: Ericsson Mobility Report, 2015
4G smartphones/tablets followed by Internet of Things (IOT) traffic
An improving device ecosystem, bigger screens, and faster networks are driving data
consumption. While smartphones and tablets remain the key drivers for traffic today, we
see strong growth potential in connected devices. A single smartphone can generate 37
times the traffic of a basic phone and a tablet can generate 94 times the traffic. Average
data usage on a 4G smartphone is poised to grow globally from 2GB/month currently to
~5.5GB/month in CY19.
86% of data traffic for Verizon is on 4G
LTE network
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Fig 31 - Traffic per device usage per month
Device
Non-smartphone
M2M module
Wearable device
Smartphone
2014
2019
22 MB/month
105 MB/month
70 MB/month
366 MB/month
141 MB/month
479 MB/month
819 MB/month
3,981 MB/month
4G smartphone
2,000 MB/month
5,458 MB/month
Tablet
2,076 MB/month
10,767 MB/month
4G tablet
2,913 MB/month
12,314 MB/month
Laptop
2,641 MB/month
5,589 MB/month
Smartphones represented 29% of the
global handsets in use, but 69% of the
global mobile traffic in CY14
As per GSMA, 4G LTE deployments now cover 26% of the world population. However, the
LTE deployments are primarily led by North America, with nearly 95% population
coverage. From a connection perspective, 40% of connections are 4G vs. the global
average of 7%. By 2020 LTE networks in developing nations are expected to cover 60% of
the population.
Fig 32 - Verizon: 4G/LTE subscribers
(LTE Devices
(Mn)
80
Fig 33 - Global: LTE network deployments
Verizon - LTE Devices
% of Retail Postpaid Connections (R)
70
60
50
40
14.9
21.6
26.3
31.1
42.7
53.7
59.4
67.4
80%
400
70%
350
60%
50%
250
30%
200
20%
150
Q1CY15
Q4CY14
Q3CY14
Q2CY14
Q1CY14
Q4CY13
Q3CY13
Q2CY13
Q1CY13
0%
No. of countries (R)
(No.)
140
118
120
97
100
80
62
60
40
23
100
11
50
0
Source: Company, RCML Research, Bloomberg
LTE Network Deployments
300
40%
10%
Q4CY12
0
Q2CY12
10
8.0 10.9
Q1CY12
20
Q3CY12
30
36.0
47.9
(No.)
71.7
17
2010
47
144
256
335
2011
2012
2013
2014
20
0
Further, M2M (machine to machine) or IOT is seeing significant innovation and with
continued improvement in network technology as well as reduction in costs, we expect a
rapid explosion in IOT and connected devices, fuelling demand for data. Though IOT is at
a nascent stage, we note that AT&T already has 25mn connected devices, which is 25% of
its traditional mobile subscriber base.
27%
1,400
25%
10,000
600
400
5,000
Source: Company, Bloomberg
Q1CY15
Q4CY14
Q3CY14
Q2CY14
Q1CY14
Q4CY13
Q3CY13
Q2CY13
0
200
0
21%
22%
23%
23%
25%
23%
22%
22%
19%
17%
15%
Q1CY15
800
Q4CY14
1,000
24%
23%
Q3CY14
1,200
15,000
Connected Devices % of Subs
1,600
Q2CY14
20,000
('000s)
Q4CY13
Net Adds (R)
Q3CY13
AT&T Connected Devices ('000s)
25,000
Q2CY13
('000s)
Fig 35 - AT&T
Q1CY14
Fig 34 - AT&T
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The growth in usage per device is outpacing the growth in number of devices. Usage will
be primarily driven by high-end devices which offer access to 3G/4G networks and flow
into M2M devices. Further, the growth rate of mobile traffic from new devices is 2 to 5
times greater than the growth rate of users. CISCO estimates that the traffic on
smartphones will grow at a 60% CAGR (CY14-CY19) vs. 17% for smartphone shipments.
Fig 36 - Mobile traffic generation split, 2014-19 CAGR
Growth in devices
Growth in Traffic (R)
50%
103%
40%
25%
20%
100%
80%
32%
60%
60%
17%
15%
40%
22%
10%
20%
5%
5%
0%
Traffic growth driven by mobility and
M2M
83%
35%
30%
120%
46%
45%
Smartphone
Tablet
Laptop
M2M module
0%
Rise of the mobile video
Mobile video has emerged as the key growth driver for data. As per Ericsson, mobile
video traffic is forecast to grow at 45% per annum over the next five years. Since video
content has higher bit rates than other mobile content types, it will generate a large
share of traffic through 2020. Mobile internet-based platforms of content owners and
creators will stand to benefit from this shift as consumers look to view more videos on
mobile phones.
Mobile video traffic exceeded 50% of
the total mobile traffic in 2014
Fig 37 - Mobile traffic generation split
File sharing
Audio
Web
Video
100%
90%
80%
70%
55%
72%
60%
50%
40%
30%
20%
10%
0%
36%
19%
8%
2014
1%
7%
2%
2019
From a traffic share perspective, consumption patterns are similar across geographies
though the platforms that users adopt could vary depending on local tastes and
languages. As highlighted in Ericsson’s mobility report, video and social networks form
the key drivers for traffic. In the US, 34% of traffic is social network-led and 27% is videoled. This consumption mix is similar other countries, while the delivery platform might be
different (local vs. global).
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Fig 38 - App traffic dominated by Video and Social Networking
100%
90%
Other, 39%
80%
Other, 33%
Other, 36%
Android Browser, 9%
Android Browser,
11%
70%
60%
Snapchat, 9%
50%
NAVER, 11%
Instagram, 9%
40%
Netflix, 12%
Youtube, 15%
Youtube, 11%
Youtube, 10%
Facebook, 16%
Facebook, 20%
Facebook, 20%
US
Korea
Spain
30%
20%
10%
0%
Instagram, 13%
AfreecaTV, 16%
Chrome, 10%
Source: Ericsson Mobility Report 2015
Display and network speeds supporting video growth
A growing range of video-capable devices along with rising network speeds is fuelling
video growth. As per Ericsson’s study, there is a positive correlation between traffic
consumption per month and the screen sizes and data throughput speeds.
Fig 39 - Traffic consumption by screen display size
(MB/Mnth/Sub)
Positive correlation between traffic
consumption per month and screen
sizes and data throughput speeds
Traffic Volume (MB/Mnth /Sub)
2,500
2,000
1,500
1,000
500
0
240 x 320
320 x 480
480 x 800
720 x 1280
1080 x 1920
Fig 40 - Proportion of video traffic based on network
2G dominated networks
<15%
30-40%
45-55%
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Fig 41 - Impact of speed
Source: Ericsson
Behavioural shifts pushing video further
Traditional television markets are seeing a shift in terms of consumption behaviour. As
per Ericsson, which conducted studies on media behaviour in nine countries, consumer
preference is shifting towards on-demand services that offer cross-platform access to
content such as videos and movies. This is also reflected in M&A activity in the supply
chain, with telcos acquiring video distribution platforms.
Fig 42 - Mobile data traffic already eclipsing voice traffic
Fig 43 - Video disproportionate share of traffic
Source: Ericsson
Source: Ericsson
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Content/platform players come to the fore
Technological developments have made the telco network a more powerful
communication channel by enabling the creation of “disruptive” business models, i.e.
models that alter the way consumers currently access services. The channel has evolved
from delivering just voice communications to now delivering data for entertainment and
information, and value-added services such as e-commerce and mobile banking. This
brings to the fore a new stakeholder in the value chain in the form of content/VAS/
platforms and advertising players.
With the advent of Mobility 2.0, consumers now access entertainment (in the form of
games, movies, songs) on their mobile phones, information through apps, and banking
services through mobile banking, among others. Given the disruptive power of
Mobility 2.0, the value proposition of the telco value chain increases significantly.
While content/platform players are still new to the mobile communications space and
have yet to monetise their investments in a big way, they are already playing a big part in
redistribution of value in the mobile telephony value system. Handset players have had a
first-mover advantage by successfully integrating the content/VAS ecosystem through
their AppStores. This has been one of the key factors behind the loss of value for telecom
operators, with handset vendors capitalising on the opportunity via handset subsidies
being offered for select smartphones.
Handset vendors have successfully
managed to control user experience
through integration of AppStores with
operating systems
Fig 44 - Handset vendors’ integration with content through mobile application stores
Brand
OS
Application store
Content / Services
Apple
iOS
Appstore
iTunes, iCloud, etc. besides 3rd party apps / content
Samsung
Google Android
Android Market
Google Apps (Gmail, Contacts, Docs, Maps, etc.) besides 3rd party apps / content
Samsung
Windows Mobile
Windows Marketplace
Integration of MSFT apps (Zune, Office, etc.) and 3rd party apps / content
HTC
Google Android
Android Market
Motorola
Google Android
Android Market
Blackberry Blackberry OS
Blackberry Appworld
BB services and 3rd party apps / content
Nokia
Windows Marketplace
Integration of MSFT apps (Zune, Office, etc.) and 3rd party apps / content
Windows Mobile
While certain handset vendors (viz. Apple) have managed to become the access providers
to content/VAS through successful integration of AppStores with their handset operating
systems (OS), operators are also making moves into the space through transaction-based
services, content delivery platforms and by acquiring content owners. We believe
operators can create sustainable incremental value by disrupting the existing delivery of
some essential transaction-based services such as entertainment, mobile banking and ecommerce. As such, a new services-led model will be the most aligned to the traditional
utility-type telco business model.
Creation of services-led model the
most aligned to the traditional utilitytype telco business model
Rise of the App economy
Handset and software OS innovations led by Apple and Google are enabling robust
innovation in content/service access and have given rise to an app economy. While
content owners are definitely the beneficiaries given new areas for revenue
monetisation, we note that delivery platforms as aggregators and organisers of content
have tremendous potential.
Delivery platforms as aggregators and
organisers of content have
tremendous potential
Strong innovation in the handset and network ecosystem has enabled bigger and better
screens and allowed users to access more content through mobile phones. At the same
time, this is causing a surfeit of content for the user and the challenge lies in organising
the same. Based on our research and on industry statistics, users in certain markets end
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up uninstalling 70-80% of their apps within 90 days. This is not only a reflection of fatigue
but also of the unorganised nature of the initial app ecosystem, as well as limited screen
and RAM space of users.
We believe that easy of acces and delivery is the key and this is where the app ecosystem
model can really add value. Models that succeed in organising and delivering the requisite
content, product and/or service to users can potentially win the battle for RAM space.
Fig 45 - Apps – Key content bridge
SMS
Equipment vendors
Provides technology
Government
Provides spectrum
Mobile
Banking
eCommerce
Movies
News/
Information
Content
A
P
P
S
Telecom operators
A
P
P
S
Handset
User Access
User
Games
Mobile Ads
O
F
F
L
O
A
D
I
N
G
Social
Networking
D
A
T
A
Components
Voice
App economy – Battle for screen space
With Mobility 2.0, the services portfolio that can be delivered over a telecom network is significantly enhanced. This creates
opportunities for the creation of mobile-enabled delivery platforms – particularly relevant for emerging markets, where wired
broadband penetration is limited. This has already driven a tremendous battle for mobile screen space, particularly in markets
like India, where a large population will be experiencing internet primarily through wireless networks and smartphones. So
far, most of the innovation in the platform ecosystem has come from technology startups. Telecom operators, despite their
close relationship and involvement in the ecosystem, have not been able to capture these platforms. As per Compuware, 8090% of the apps downloaded are uninstalled within three months. Further, studies indicated that only 15-17% of people are
willing to download an app more than twice. In India, we are seeing players incrementally focus on pushing transactions
through apps. Myntra, an Indian fashion apparel site, is now an app-only platform with no web interface.
Mobile Banking – Only area where operators have been successful
Mobile banking is one example of a transactional service offering where operators can deliver sustainable value over the
telecom network. The concept is still new and is being adopted in emerging markets where existing banking channels are
weak. Safaricom, the largest operator in Kenya, has been especially successful in developing a sustainable and steady revenue
stream from this product. Amongst the other EM telcos, we note that Bharti is also investing in mobile banking in a big way
and has already launched Airtel Money in India and several African countries. However these have been met with limited
success so far in India.
Safaricom launched its mobile banking product, Mpesa, in 2007 and by 2015 it contributed 20% of the company’s revenue.
Being a key cash transaction service in Kenya, Mpesa has reached fairly high penetration with over 80% of Safaricom’s
subscriber base already subscribed to this service. The value transacted through this platform is 34% of Kenya’s GDP.
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But transition to challenge business models
The emergence of mobile internet and smartphone penetration is changing the internet
industry through two aspects:
1.
The shift in online consumer behaviour imposes technology and marketing
challenges on all companies. Mobile devices are usually small and portable;
therefore consumers are connected to the web 24/7 and not limited to particular
locations anymore. People’s buying decisions and information acceptance become
random in time and location. Thus, any winning online product offering will have to
be precisely targeted with location-based services (LBS) and content.
2.
In emerging markets, growing internet penetration among rural areas and lowerincome populations is changing the demographics of online consumers. In the past,
the higher cost of a personal computer was the main hurdle for internet adoption in
rural areas. Now, mobile devices provide a cheaper way to access the internet.
Biggest challenge in mobile transition
is that traditional monetisation models
may not work in the mobile space
The biggest challenge in mobile transition of the internet industry is that the traditional
monetisation model may not work in the mobile space. For instance, in e-commerce,
players bank on their ability to build scale and employ significant capital towards
augmenting consumer adoption – but entry barriers are limited and margins are slim.
Consequently, vertical oriented e-commerce companies could face challenges from the
marketplace model.
Access devices – Key to user experience but at risk of commoditisation
With the introduction of smartphones, tablets and the like, we find that the value
proposition of handset players has gone up significantly in the value chain. In
Mobility 2.0, user experience in terms of quality of content and ease of access are
the key value differentiators versus network access and coverage in Mobility 1.0. Handset
players led by Apple and Samsung have successfully integrated the content ecosystem
(through Apps and AppStores) with the mobile OS and hardware to deliver a seamless
user experience. The change in value proposition is also visible from the fact that
operators have been looking to subsidise popular smartphone devices in order to attract
and retain subscribers.
Handset players like Apple have
moved quickly to occupy the content
ecosystem niche
However, as the cycle matures, we expect innovation to start slowing down. Apart from
the transition to 4G (LTE), the introduction of mobile payments (Near Field Technology or
NFT), changes to display (OLED) and wearable devices, few areas are seeing innovation.
This is already leading to commoditisation where price rather than product drives
demand. In our view, innovation is about application more than technology delivery itself.
After 4G or LTE, near field tech and
display improvements, there seem to
be few frontiers left to cross
We have seen this with Samsung hitting HTC’s sales by lowering prices and then the likes
of Xiaomi undercutting Samsung. But for Indian vendors currently operating in the
feature phone market, shrinking entry barriers and access to technology are providing an
opportunity to move up the ASP curve.
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Fig 46 - Nokia operating margins
Fig 47 - HTC operating margins
(%)
16
(%)
20
14
12
Global handset
operating margins
10
15
10
8
5
6
4
0
2
0
FY10
FY11
FY12
FY13
FY14
FY15
(5)
FY10
FY11
FY12
FY13
FY14
FY15
Telecom operators – Diminishing value proposition vs. 1.0
With the coming of Mobility 2.0 and the shift in consumer focus to data, content and
services, the traditional value proposition of telcos, viz. providing access, starts to
diminish. Most markets already have 3-4 established players (India is one of the
exceptions with 9-10) providing a similar level of undifferentiated access-based services.
As basic connectivity is in place and “access” becomes a commoditised offering,
operators need to evolve their business models accordingly. Despite the added value
proposition of data and VAS, operators see limited revenue growth and higher
investments in the early cycle, which tends to depress their return ratios further.
Operators make huge investments in
building data networks, but
incremental revenues are limited
Fig 48 - Typical operator capex cycles
Time
Source: France Telecom, RCML Research
As access services become commoditised and service offerings between operators lack
differentiation, the traditional voice market starts to see pricing pressures. Further, as
variable costs in the system are low and the market is already seeing pricing headwinds,
price differentiation is not a viable option. Most operators with a network heritage
therefore tend to invest heavily in building data capacities in order to create the
differentiation. The net result is continued investments in capex, but tariff pressures in
previous generation technologies lead to limited returns.
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Fig 49 - AT&T – Incremental revenues vs. capex
Incremental Revenue
(USD bn)
Fig 50 - Vodafone – Incremental revenues vs. capex
Capex
15
50
10
40
5
30
0
20
(5)
10
(10)
0
(15)
(10)
Incremental Revenue
(USD bn)
60
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
(20)
2005
2006
2007
2008
2009
Capex
2010
2011
2012
2013
2014
Fig 51 - North America – ARPUs haven’t growth in 10 years
Fig 52 - North America – Data ARPU substituting voice
(USD)
(USD)
53
60
52
50
51
Data ARPU
40
50
30
49
20
48
10
47
46
Voice ARPU
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
0
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
In order to adapt to the sector’s shifting dynamics, operators need to think beyond just
networks and transform into service providers. While mobile data networks may be some
time away from being completely commoditised, we believe operators that can
distribute more services will emerge successful in this era. As mentioned earlier, handset
vendors have already captured a significant portion of the value in Mobility 2.0 from
network operators, in the form of smartphone subsidies.
Operators need to think beyond
networks as an advantage to
service differentiation
Besides just the commoditisation risk, operators run the risk of technological
developments cannibalising traditional revenue streams, namely voice and SMS. To name
a few: (1) VOIP and internet-based voice traffic have been rising steadily which is
affecting overall voice traffic growth on telecom networks and (2) applications like
WhatsApp and Facebook have cannibalised the SMS revenues for telcos. As such,
operators’ traditional markets remain at risk of newer disruptive business models.
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Fig 53 - Voice traffic mix – VOIP gaining share
Source: Telegeography
Fig 54 - Voice traffic impact of Skype
Source: Telegeography
Billing capability – Key strength of operators…
For over a decade, operators have enjoyed control over subscribers given their position
as key value drivers in Mobility 1.0. They particularly benefitted from billing control as all
new services were sold (billed) through them. For instance, Indian operators, who had no
hand in innovating the popular caller ring-back tone (CRBT) product, squeezed a majority
of the value by retaining 60-70% of product revenues while leaving just 30-40% for VAS
players as the product was billed through them.
Operators are slowly but surely losing
their grip over subscribers from a
billing perspective
…but sustaining this edge a challenge in a data world
As users move to a data world, operators are slowly but surely losing their grip over
subscribers from a billing perspective. The billing process is either being captured by
software owners (Apple/Google/Microsoft) or banking channels. Further, even in
emerging markets where banking and card penetration is low, alternate billing platforms
are coming to the fore. While operators still haven’t lost the billing battle entirely, we
think competition from over-the-top (OTT) players is much more intense versus the voice
era. Operators must now leverage on their knowledge of usage and traffic patterns and
invest in big data analytics to sustain their edge in a data world.
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Alternate networks – Wi-Fi / Offloading
The voice-driven penetration story worked perfectly well in population-dense countries
like India and China given their large addressable markets and the scalable nature of
voice. However, data is unlikely to offer the same scale benefits. Further, high coverage
requirements and population density are likely to put pressure on networks in emerging
markets given limited spectrum capacities. Thus, we are likely to see an emerging trend
of alternate networks, which did not exist in Mobility 1.0, as a new business opportunity.
The adoption of alternate networks is being fuelled by the exponential growth of Wi-Fienabled devices such as smartphones, and operators are increasingly looking to offload
data onto alternate networks. There is growing demand for alternate wireless networks
such as Wi-Fi and Femtocells which have wireline support to help offload some traffic.
We have already seen investments in these areas, both organic investments by operators
or in the form of third party networks, and expect this to be a niche area which could
benefit from Mobility 2.0.
Rising demand for alternate wireless
networks like Wi-Fi and Femtocells
Boingo, a US-based Wi-Fi player, grew 20% in FY15 with EBITDA margins going weak over
the last five years. Increasing mobile traffic is prompting a shift from a “coverage” to a
“density” model. In the US, the carrier offload profile has changed dramatically with the
share of US smartphone data traffic through Wi-Fi up from 15% in CY11 to 63% in CY13.
Further growth in Wi-Fi will be driven by offload in public places.
Fig 55 - US smartphone data traffic split
Wifi
(%)
100
Fig 56 - Boingo: Business split
Cellular
Advertising
11%
90
37.0
80
60
50
85.0
40
Military
12%
63.0
30
20
10
0
DAS
33%
Wholesale Wifi
14%
70
Retail
30%
15.0
2011
2013
Source: Company
Source: Company
Fig 57 - Connectivity share for tablets
Wifi
Wifi/2G
Wifi/3G
Wifi/4G
70%
63%
60%
50%
48%
47%
40%
40%
30%
20%
35%
10%
33%
23%
22%
23%
10%
0%
7%
Q1CY14
4%
Q2CY14
7%
Q3CY14
19%
14%
4%
Q4CY14
Source: CISCO
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Government looks to gain fair share
Governments have been one of the key facilitators of telecom evolution during
Mobility 1.0 and have largely refrained from looking at the telecom industry as a major
revenue stream. However, with basic infrastructure in place and basic connectivity needs
being met, governments have begun looking at the telecom industry as a new source of
revenue in Mobility 2.0 – through the sale of spectrum and other forms of monetisation.
Governments, treating data as a
luxury, look to extract maximum value
from spectrum sales
Over the past decade, governments have held a number of auction-based spectrum
allocation drives for 3G and 4G, rather than a centrally planned allocation to efficient
players. In India, the government even monetised the 2G spectrum that came up for
renewal. While auctions are a market-efficient way of distributing spectrum, more often
than not, scarcity of spectrum leads to high bidding from participants, leading to the
transfer of some value from telcos to governments.
Operators end up paying huge sums
for 3G/4G spectrum in auctions
Fig 58 - Spectrum auctions
Country
Year
Number of
licences
Amount raised
(US$ mn)
Payment per
capita (US$)
UK (3G)
2000
5
35,400
610.3
Germany (3G)
2000
6
46,300
566.0
Hong Kong (3G)
2001
4
524
74.9
Taiwan (3G)
2002
5
1,530
65.9
India (3G)
2010
4
15,000
12.5
India (2G+3G)
2015
Multiple
18,000
14.0
Source: Company, DoT, GSMA, RCML Research
Inorganic extensions inevitable
While the value proposition of traditional telecom services is dwindling, the network has
become more empowered, which should allow telcos to service a much greater customer
wallet share. In terms of returns, traditional telco models of “access” services (both voice
and data) could continue to see diminishing returns on incremental capital. The key
returns for investors would be with content right owners or business models/platforms
that can disrupt traditional transaction-oriented models. Already, several telcos across
the world are investing in content or content-related delivery platforms to stay relevant,
differentiate from rivals and drive additional ARPUs.
Telco model of “access” services could
continue to see diminishing returns on
incremental capital
Fig 59 - Who is moving where in the content/delivery space – Telecom operators
Government
Provides spectrum
Mobile
Banking
Equipment vendors
Provides technology
eCommerce
Content
right
owners
Content
A
P
P
S
Telecom operators
A
P
P
S
Handset
User Access
User
Games
Mobile Ads
O
F
F
L
O
A
D
I
N
G
Social
Networking
D
A
T
A
Components
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Verizon – Investment in video delivery and monetisation
2013: Edgecast and upLynk – Content Delivery Networks
Verizon is investing in capabilities to drive live events, linear television and video on demand, and announced the upLynk
acquisition in Nov’13 to drive this technology platform. upLynk streamlines the process of uploading and encoding TV
everywhere for live, linear and video on-demand content. It uses a single video adaptive format across all devices to enable
more agile video workflow and delivery.
Verizon also acquired Edgecast in Dec’13 to build its video delivery and web services capabilities. Edgecast had 6,000 accounts
working with leading web brands for global media delivery and acceleration services. Customers include studios, broadcasters,
retailers and enterprises.
2014: OnCue – Video Delivery Platform
Verizon, in early 2014, acquired the media assets of Intel, primarily dedicated to the development of Cloud TV products and
services, for an undisclosed sum. This involved the acquisition of Intel’s OnCue Cloud TV – a next generation on-demand video
delivery platform.
2015: AOL deal – Media assets and monetisation platform
Verizon bought AOL, the owner of online media properties including the Huffington Post, for a cash consideration of US$ 4.4bn
in order to enhance its video delivery capability on LTE and OTT. AOL is one of the leaders in the digital content and advertising
space. With this acquisition, Verizon moves further into the content space and can exploit the advertising opportunity therein.
Further, AOL provides strong mobile advertising technology and this should enable Verizon to drive revenue monetisation,
besides delivering a digital experience across platforms.
Key AOL assets
- Huffington Post
- TechCrunch
- Engadget
- MAKERS
- AOL.com
Fig 60 - Who is moving where in the content/delivery space – Handset players
Government
Provides spectrum
Mobile
Banking
Equipment vendors
Provides technology
eCommerce
Content
right
owners
Content
A
P
P
S
Telecom operators
A
P
P
S
Handset
User Access
User
Application
driven
services
Mobile Ads
O
F
F
L
O
A
D
I
N
G
Social
Networking
D
A
T
A
Components
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We expect telcos to continue with their forays into high-return revenue streams such as
content, leading to more telco-driven M&A activity. Several telecom operators are
already taking steps to tap into the content/VAS space as a natural extension of their
service offerings. While telecom operator-owned AppStores have failed to make much
impact, we believe that forays into utility-type, transaction-based VAS such as mobile
banking, education/learning and advertising platforms are more likely to be successful.
Nonetheless, the big shift remains that of users moving towards accessing data. While
telecom operators still benefit from rising usage, all this comes at the cost of increased
capex layouts. Given limited customer wallet sizes, incremental ROIs would come
under strain.
While telecom operators still benefit
from rising data usage, this comes at
the cost of increased capex
AT&T – Building a multi-platform content distribution play
DirecTV deal
AT&T acquired DirecTV in a stock-cum-cash deal worth US$ 67bn to enhance its video
delivery capabilities. Given improved network speeds, customers are increasingly looking
to access video on mobile device platforms, even for their Pay TV subscriptions. As
customers look for integrated access, AT&T will aim to provide a bundled offering of TV,
mobile and high-speed internet. Further, the eventual driver for video traffic is content
and this deal should enhance AT&T’s content-owner relationships.
“We will be the company with the
ability to deliver video to any device” –
AT&T, 2014 Annual Report
How AT&T expects its business mix to look in 2016
– Business Services (Wireless and Wired)
– US Consumer TV and Internet Services
– US Consumer Mobility (20%)
- Mexican and Latam TV and Mobility
Airtel’s Wynk platform – an ARPU expansion strategy
Airtel’s free music streaming app Wynk is yet again an example of telcos moving across
the value chain to stay differentiated and capture a larger share of customer wallets. The
app’s pricing is attractive – free for streaming and Rs 60/month for Airtel users. Further,
the app offers multiple payment gateways and, importantly, users can also be billed
through their prepaid/postpaid plans.
Extensions are necessary for telcos to
stay differentiated and participate in
new growth areas
Fig 61 - Airtel – Wynk
Music Service
Wynk
Wynk Plus
Wynk Freedom
Browsing
Free for Airtel customer
Streaming
Data charges apply / Free on Wi-Fi
Data charges apply / Free on Wi-Fi
No data charges
In-app downloads
NA
Rs 120/month and Rs 60/month for
Airtel users
Unlimited streaming and downloads at
Rs 129/month. No data charges
Song/Album Purchase
Rs 5/song onwards
Rs 5/song onwards
Rs 5/song onwards
Hello Tunes
For Airtel customers
Source: Company
With Airtel’s large incumbent user base and attractive app pricing, we see room for the
company to capture this potential ARPU opportunity. However, competition from device
players in the app ecosystem is intense. Apple is soon expected to launch its streaming
music service Apple Music and other device players are likely to follow suit and preload
such apps on their devices.
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Fig 62 - Pricing comparison – Wynk vs. Apple Music vs. Hungama vs. Gaana
Wynk for Airtel Subs
Apple Music
Hungama
Gaana
Rs60/month
Rs120/month
Rs99/month
Rs120/month
NA
NA
NA
Rs129 with no data
charges
Fig 63 - Bharti Airtel – India wireless ARPU vs. Wynk ARPU for Airtel
(Rs/month)
250
200
198
150
100
60
50
0
Bharti ARPU
Wynk
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Returns through the cycles
Fig 64 - Returns through Mobility 1.0
Fig 65 - Returns through Mobility 2.0
Mobility 1.0
Network
operators
Handset
vendors
Network
operators
Content /
VAS
Government
Time
Handset
vendors
Mobility 2.0
Returns
Returns
Equipment
vendors
Equipment
vendors
Time
Equipment vendors
The two charts above appropriately capture the returns across players through the two
eras. Equipment vendors are the most cyclical of the stakeholders – they typically have
higher exposure to the broad tech cycles and enjoy healthy returns early-to-mid cycle. As
the cycle progresses, they run the risk of commoditisation of technology which starts to
put pressure on returns.
For equipment vendors, the shrinking
tech lag between DMs and EMs, with
higher competition, could drive ASP
declines earlier in this cycle
As such, most equipment providers enter a new cycle with little or no baggage from the
previous one, leading to a similar return profile in the new cycle as well. But the
diminishing technology lag between developed and emerging markets along with higher
competition could drive ASP declines earlier in this cycle than before.
Handset vendors
Handset vendors, given their technology dependence, have essentially evolved from
being equipment providers during Mobility 1.0. As a few handset vendors dominate the
global markets, they too are exposed to global tech trends. However, during Mobility 1.0
their returns were skewed as they saw strong volume uptake in the mid-to-later part of
the cycle driven by rising penetration in emerging markets.
Handset players remain at risk of
commoditisation and returns are likely
to be front-loaded
In Mobility 2.0, incumbents were largely upstaged by newer players such as Apple,
Samsung, Xiaomi and HTC, who managed to gain a significant portion of the value pie.
The returns profile for handset vendors has been shifting and the product cycle reducing.
Overall, handset players remain at risk of commoditisation and most of their returns are
likely to be front-loaded towards the early-to-mid cycle. Rapid technological progress
could also shorten the product cycles.
Network operators/telcos
Network operators have been the central part of the telecom value chain. While they
tend to see low returns during the early part of the cycle driven by upfront investments
in the network, they tend to garner high ROEs by mid-cycle when penetration rates hit
the J-curve. Note that the cycle in this case is dependent on when the tech uptake occurs
in the local market.
Telcos will continue to see slipping
returns on traditional voice and data
services and would need to innovate
beyond the traditional model
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As “access” services get commoditised and competition in the sector increases, ROEs
start to taper down and operators look towards Mobility 2.0 as a means to increase their
value proposition. In our view, operators could continue to see slipping returns on
incremental investments in the traditional voice and data fulfillment services and would
need to innovate beyond the traditional model to improve return ratios.
Content/VAS ecosystem
The content/VAS ecosystem is rapidly emerging as a major stakeholder in the telco
ecosystem, especially with the coming of Mobility 2.0. Content is the big data usage
driver, and this is where we believe incremental monetisation opportunities rest. Further,
this business is more IP oriented and thus data-led adoption should drive ROE expansion.
Service-based revenue streams are
likely to offer the most stable returns
with longer cycle lengths
As mobile data penetration grows, especially in low-internet linked markets such as India,
business models will become more stable and return ratios should see marked
improvement. While individual offerings in the content/VAS space could see short product
cycles (due to passing consumer trends), the overall space is likely to capture a significant
portion of the market by the mid-to-late cycle. In our view, IP and service-based revenue
streams are likely to offer the most stable returns in this space with longer cycle lengths.
Where are we now in the cycle
Global macro trends suggest that we have already entered the Mobility 2.0 era with most
developed markets seeing a rapid uptake of mobile data services. Emerging markets
including China and India are also seeing strong demand traction for 3G services, though
penetration remains low.
India seeing strong growth in data – 3G
penetration still low
Fig 66 - Mobile broadband penetration across developed and emerging countries
Developed
(%)
100
World
Developing
90
80
70
60
50
40
30
20
10
0
2007
2008
2009
2010
2011
2012
2013
2014
2015E
Source: ITU World Telecommunication /ICT Indicators database. Note: The developed/emerging country
classifications are based on the UN M49.
We would break the cycle into two components – global and local. From a telcos
perspective, we believe the cycles are very region-specific given the varied timelines of
technology access and adoption. While developed markets have already seen rapid
adoption, some of the emerging markets are still picking up, thus creating opportunities
for local telcos and content companies. For the more global vendors who have higher
concentration in developed markets, such as handsets/equipment providers, we could be
well past the peak capex. Technology maturity in developed markets is likely to drive
lower ASPs, which should aid uptake in emerging markets but could be margin-dilutive
for vendors.
3 August 2015
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India
Fig 67 - Valuations across the supply chain
AT&T
Verizon
•
•
•
•
•
Mkt Cap: 186 USD bn
EV/Sale: 1.9x
EV/EBITDA: 6.3x
ROE: 16.2%
Rev CAGR (FY14-16): 4%
•
•
•
•
•
Mkt Cap: 271 USD bn
EV/Sale: 1.5x
EV/EBITDA: 4.6x
ROE: 12.2%
Ericsson
•
•
•
•
•
Mkt Cap: 195 USD bn
EV/Sale: 2.3x
EV/EBITDA: 6.5x
ROE: 82.5%
•
•
•
•
•
Mkt Cap: 101 USD bn
EV/Sale: 1.9x
EV/EBITDA: 7.1x
ROE: 2.2%
Mkt Cap: 37 USD bn
EV/Sale: 1.3x
P/E: 14.1x
ROE: 12.3%
Rev CAGR (FY14-16): (6%)
•
•
•
•
•
Mkt Cap: 27 USD bn
EV/Sale: 1.3x
P/E: 19.4x
ROE: 12.8%
Vodafone
China Mobile
Cisco
•
•
•
•
•
•
•
•
•
•
Mkt Cap: 146 USD bn
EV/Sale: 2.2x
P/E: 12.7x
ROE: 17.4%
•
•
•
•
•
Mkt Cap: 15 USD bn
EV/Sale: 0.5x
P/E: 17.3x
ROE: 13.6%
Rev CAGR (FY14-16): 12%
ZTE Corp
Nokia
SMS
•
•
•
•
•
Mkt Cap: 27 USD bn
EV/Sale: 2.7x
P/E: 10.2x
ROE: 73.7%
•
•
•
•
•
Mkt Cap: 69 USD bn
EV/Sale: 2.8x
P/E: 17.0x
ROE: 23.1%
Rev CAGR (FY14-16): (3%)
•
•
•
•
•
Mkt Cap: 72 USD bn
EV/Sale: 2.9x
P/E: 15.2x
ROE: 20.1%
Rev CAGR (FY14-16): 7.5%
Mobile
Banking
Movies
eCommerce
eCommerce
Apple
Content
A
P
P
S
A
P
P
S
Telecom operators
User
Social
Networking
Games
Mobile Ads
HTC Corp
•
•
•
•
•
Mkt Cap: 732 USD bn
EV/Sale: 2.3x
P/E: 13.1x
ROE: 37.0%
Rev CAGR (FY14-16): 18%
•
•
•
•
•
Mkt Cap: 173 USD bn
EV/Sale: 0.6x
P/E: 8.0x
ROE: 13.3%
Components
Time Warner
Viacom
Handset
User Access
•
•
•
•
•
Mkt Cap: 2 USD bn
EV/Sale: 0.4x
EV/EBITDA: (2.4x)
ROE: NA
Rev CAGR (FY14-16): (8%)
•
•
•
•
•
Mkt Cap: 16 USD bn
EV/Sale: 0.3x
P/E: 13.5x
ROE: 22.4%
Rev CAGR (FY14-16): 20%
Lenovo
Samsung
O
F
F
L
O
A
D
I
N
G
Mkt Cap: 194 USD bn
EV/Sale: 3.4x
P/E: 20.0x
ROE: 21.5%
Rev CAGR (FY14-16): 10%
News/
Information
D
A
T
A
•
•
•
•
•
Equipment vendors
Provides technology
Government
Provides spectrum
21st Century Fox
WALT DISNEY
Voice
Netflix
•
•
•
•
•
Mkt Cap: 41 USD bn
EV/Sale: 2.9x
P/E: 141.0x
ROE: 11.4%
Rev CAGR (FY14-16): 26%
•
•
•
•
•
Mkt Cap: 246 USD bn
EV/Sale: 9.4x
P/E: 33.5x
ROE: 13.2%
Rev CAGR (FY14-16): 38%
Boingo
Yelp
•
•
•
•
•
Mkt Cap: 3 USD bn
EV/Sale: 4.1x
P/E: 41.3x
ROE: 8.7%
Rev CAGR (FY14-16): 45%
•
•
•
•
•
Mkt Cap: 196 USD bn
EV/Sale: 8.2x
P/E: 29.3x
ROE: 30.8%
Rev CAGR (FY14-16): 30%
•
•
•
•
•
Mkt Cap: 0.3 USD bn
EV/Sale: 1.7x
EV/EBITDA: 7.3x
ROE: NA
Rev CAGR (FY14-16): 19%
•
•
•
•
•
Mkt Cap: 41 USD bn
EV/Sale: 10.1x
EV/EBITDA: 16.3x
ROE: 17.0%
Rev CAGR (FY14-16): 17%
Tencent Holdings
Facebook
Crown Castle
•
•
•
•
•
Mkt Cap: 28 USD bn
EV/Sale: 10.0x
EV/EBITDA: 17.3x
ROE: 7.9%
•
•
•
•
•
Mkt Cap: 16 USD bn
EV/Sale: 12.6x
EV/EBITDA: 19x
ROE: (15.6%)
Rev CAGR (FY14-16): 10%
AAC Tech
•
•
•
•
•
Mkt Cap: 7 USD bn
EV/Sale: 3.3x
P/E: 13.0x
ROE: 27.2%
Rev CAGR (FY14-16): 20%
•
•
•
•
•
Mkt Cap: 3 USD bn
EV/Sale: 1.3x
P/E: 11.8x
ROE: 25.9%
SBA Comm
American Tower
LG Display
•
•
•
•
•
Mkt Cap: 8 USD bn
EV/Sale: 0.4x
P/E: 6.7x
ROE: 10.2%
•
•
•
•
•
Mkt Cap: 5 USD bn
EV/Sale: 0.8x
P/E: 14.4x
ROE: 12.3%
Rev CAGR (FY14-16): 14%
Foxconn
Novatek
Source: RCML Research, Bloomberg, Company
3 August 2015
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Valuation and Share price performance
Through this section, we look at the valuation and share price performance of
representative global players across the supply chain.
Considerable valuation deviations
Growth has been mixed across the supply chain, leading to high valuation deviations.
Clearly, internet/app-economy companies enjoy the highest growth and have the most
premium valuations followed by content and tower plays. Within the device ecosystem,
valuations are not very high despite strong market share (Apple trading at 14x vs. Netflix
at 150x one-year forward earnings). Tower companies occupy the mid-point on the
revenue CAGR and ROE profile – reflecting the strength of the business model.
Fig 68 - Supply chain valuation
Internet/app economy companies
have the most premium valuations
followed by content and tower plays
Winners and losers
Internet/app economy companies have been the best performers in the telecom sector
over the past eight years. Within the telco space, operators have underperformed the
index as well as telecom tower companies. In hardware (devices/equipment/
components), Chinese market-share gainers are best performers – both ZTE and Lenovo
have consistently gained market share in the equipment and hardware space led by an
aggressive pricing strategy.
Operators have underperformed the
index as well as telecom tower
companies
3 August 2015
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Fig 69 - Tower companies vs. S&P 500
Fig 70 - Telecom services have underperformed S&P 500
China Mobile
American Tower
S&P 500
Tower Bersama
Crown Castle
AT&T
Verizon
S&P500
280
480
400
210
320
140
240
160
Netflix
Time Warner
560
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Yelp
Facebook
Tencent Holdings
2500
490
2000
420
350
1500
280
1000
210
140
600
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Fig 73 - Telco infra – Towers have outperformed
Crown caste
Jan-08
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
Boingo
0
Jan-07
500
70
0
Jan-10
Fig 72 - Internet/Apps outperformed
Viacom
21st Century Fox
Jan-09
Source: Company, RCML Research, , Bloomberg
Fig 71 - Content companies outperformed
Disney
0
Jan-08
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
0
Jan-07
70
80
AMT
Fig 74 - Equipment – ZTE only outperformer (mkt share gains)
Ericsson
SBA Comm
Cisco
Nokia
ZTE
675
600
525
450
450
375
300
300
225
150
150
1200
HTC
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Fig 75 - Handsets & Hardware – Lenovo market share gains
Apple
0
Jan-07
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-08
Jan-07
75
Samsung
Fig 76 - Components – AAC tech the only outpoerformer
Lenovo
AAC Tech
LG Display
Novatek
Foxconn
Jan-15
Jan-14
Jan-13
Jan-12
Jan-11
Jan-10
Jan-09
Jan-15
Jan-14
0
Jan-13
0
Jan-12
220
Jan-11
300
Jan-10
440
Jan-09
600
Jan-08
660
Jan-07
900
Jan-08
880
Jan-07
0
3 August 2015
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India Mobility 2.0: Narrowing our focus to the
Indian market
We have laid out our key mobility framework in the previous sections and we now
narrow our focus to the Indian market. Overall, India remains one the largest addressable
markets in the world with a rising middle class and fast growing digitisation. The trend
towards mobility and digitisation is a secular one and we explore a basket approach to
addressing the investment opportunities within this theme in India.
India offers immense potential for
disruption of traditional transactionoriented models
In this section, we explore how each component of our framework is positioned in the
country. For traditional network operators, the shift to a data-driven business throws up
several challenges – technology transition, high population density, risk of cannibalisation
of existing services and limited scalability on data versus voice. Further, the government
becomes an additional party to value share in the entire supply chain.
That said, we think other areas such as content, distribution and devices throw up
interesting opportunities driven by rising data penetration. Additionally, India opens up
immense potential for disruption of the traditional transaction-oriented/service delivery
models and for localised language content, implying interesting investment opportunities.
Market snapshot
The Indian telecom market is estimated at ~US$ 29bn and accounts for ~1.5% of the
country’s total GDP. The telecom industry has grown robustly here in the past decade
driven by rapid uptake of wireless services. While the reported CY14 penetration is
already at 71%, high speed (3G+) data penetration is much lower. India has seen high
demand for data services over the past two years, but penetration is still only 40%
(largely 2G data currently).
Data penetration in India still only 40%
Fig 77 - India telecom market snapshot, 2014
Total telecom market revenues (US$ bn)
Nominal GDP (US$ bn)
% of GDP
Population (mn)
28.7
1,877
1.5
1,270
Wireless Subs (mn)
940
Wireless Penetration - %
71.0
Data Subs (mn) including 2G
370
Data Penetration (including 2G)- %
40.0
Wireline Subs (mn)
27
Wireline Penetration - %
2.1
Broadband Subs
267
Broadband Penetration - %
21.0
Source: DoT, RCML Research
3 August 2015
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Devices – Commoditised but penetration-led growth
Devices remain the most commoditised segment of the market. Further, given the
structure of the device industry, with its split between design, components and assembly,
the entry barriers at the end-device level are now very low. While the segment is
commoditised and makes low ROEs, we believe the structural penetration story from an
Indian context remains strong. This penetration will be led by (1) enterprise tech and
(2) consumer tech – broadband, IOT and wireless devices. On the handset front,
replacement demand and upgrades from feature phones to smartphones will be the
key driver.
Fig 78 - India – Broadband penetration
(%)
Internet penetration
Fig 79 - India – Smartphone shipment share
Broadband penetration
25
Smartphone
Feature phone
100%
90%
20
80%
15
60%
10
40%
5
20%
0
Structural penetration story remains
strong from an Indian context
70%
78%
72%
71%
68%
65%
22%
28%
29%
32%
35%
Q4CY13
Q1CY14
Q2CY14
Q3CY14
Q4CY14
50%
30%
10%
0%
2008
2009
2010
2011
2012
2013
2014
Apart from penetration-led growth, rising affordability will be another key growth trigger
as device prices continue to trend down. The handset and phablet categories have
posted the highest growth in India, while penetration of traditional categories such as
notebooks is low due to a lack of affordability and limited usability given weak internet
penetration. We believe that handsets will remain the fastest growth category followed
by network products, as broadband penetration improves and IOT catches up.
Handsets will remain the fastest
growth category in India followed by
network products
Fig 80 - India – Device segments and key players
Segment
Players
Smartphones
Apple, Samsung, Micromax, Chinese
Phablets
Apple, Samsung, Micromax, Chinese
Notebooks
Apple, Lenovo, Acer, HP, Dell
Dongles and Routers
D-Link, TP Link, Chinese origin
Networking
Cisco, Juniper, D-Link, Chinese
Handset price decline should continue to drive penetration
Declining handset prices are one of the key factors behind strong high-speed data
adoption. In the 2G penetration cycle as well, growth spiked once the price of devices
dropped to sub-US$ 50 and we expect a similar trend in the 3G/4G cycle. The price
decline in the 2G era was slow and chipset makers were relatively reluctant to move
down the price curve, but since then most handset BOM components have been
commoditised and even fabless players such as Qualcomm and Marvel have been
dropping prices and building affordable chips for emerging markets.
3G/4G uptake to increase sharply as
device prices decline
3 August 2015
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Fig 81 - India Smartphones – Feature rich with rising affordability
Specs of Micromax S300
Specs of Micromax Bolt D320
Specs of Xiaomi Redmi 2
3G enabled
3G enabled
4G enabled
1.0GHz processor
1.2GHz dual core processor
1.2GHz Snapdragon processor
4-inch WVGA display
4.5-inch FWVGA display
4.7-inch display
480* 800 Screen Resolution
480*854 Screen Resolution
1280*720 Screen Resolution
1200 mAh battery
1600 mAh battery
2200 mAh battery
512MB RAM; 4GB ROM
512MB RAM; 4GB ROM
1GB RAM; 8 ROM
Android 4.4.3 (KitKat) OS
Android 4.4.2 (KitKat) OS
Android 4.4 (KitKat) OS
0.3MP Fixed Focus rear camera with LED flash;
0.3 MP Fixed Focus front camera
3.2MP Fixed Focus rear camera with LED flash; 8MP Fixed Focus rear camera with LED flash;
0.3 MP Fixed Focus front camera
2 MP Fixed Focus front camera
Preloaded with M! Live, Language Solution,
Snapdeal, Chaatz, Newshunt, Paytm and Quikr
Preloaded with Clean Master, Dr. Safety, Quikr,
–
AskMe, MAD, HotStar, PayTm, M!Live, App
Center
Up to 32GB expandable memory
Video Playback & Recording
Rs 3,300
Rs 4,100
Rs 5,999
Source: Company, Flipkart
Expect Indian smartphone market to grow to 280mn units by 2020
India has over 900mn wireless subscribers but smartphone penetration remains low at
17%. The overall handset market stood at ~257mn units in CY14 and is growing in midsingle digits, but the real shift is from feature phones to smartphones which is driving
volume as well as ASP improvement. This shift is being led by continued price erosion,
the entry of new players and improved distribution reach. As per various reports,
smartphone shipments for CY14 stood at 75-80mn, up ~100% YoY. We expect
smartphone shipments in India to grow at a 20% CAGR to 280mn over CY15-CY20.
Fig 82 - India – Smartphone shipments
Fig 83 - India – Share of smartphones in shipments
(mn)
300
259
250
70%
60%
159
50%
119
40%
30%
82
20%
50
0
90%
80%
191
150
100
281
225
200
Mega shift from feature phones to
smartphones led by price erosion, new
entrants and better distribution
10%
2014
2015E
2016E
2017E
2018E
2019E
2020E
0%
2014
2015E
2016E
2017E
2018E
2019E
2020E
Given that India’s teledensity has already reached 71%, we do not see penetration-led
growth as a driving force behind new shipments. Most telcos already have a population
coverage of 80%+ – hence India is likely to turn into a replacement demand market, with
the big shift from feature phones to smartphones supporting elevated growth for the
next 2-3 years.
India likely to turn into a replacement
demand market
3 August 2015
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Fig 84 - India – Teledensity
Urban
Fig 85 - India – Handset shipments
Rural
(mn)
Overall
400
(%)
180
350
160
140
300
120
250
100
200
80
265
2014
2015E
288
294
300
2016E
2017E
2018E
40
100
20
50
2008
2009
2010
2011
2012
2013
2014
0
Fig 86 - India – Handset market structure
Smartphone
Fig 87 - India – Smartphone market share
Feature phone
90%
Samsung
24%
Others
35%
80%
78%
72%
2020E
India’s handset market could be a
350mn unit opportunity by 2020
100%
70%
2019E
We estimate that by 2020 India’s handset/phablet market will be a potentially 350mn
unit opportunity and hence the battle for market share will be fierce with global, Chinese
and Indian vendors competing for market share. Apple has already made an aggressive
foray here, with India being the first country to have wholesale distributors for iPhones.
60%
351
150
60
0
257
324
71%
65%
68%
50%
40%
30%
20%
10%
0%
22%
28%
29%
32%
35%
Q4CY13
Q1CY14
Q2CY14
Q3CY14
Q4CY14
Source: IDC Press Release – Q4CY14
Motorola
5%
Micromax
20%
Karbonn
8%
Lava
8%
Source: IDC Press Release (Q3CY14)
Government – Raw material monetisation
Governments, across all telecom markets, are the key suppliers of raw material
(spectrum) for operators. Further, it is well acknowledged that telecom infrastructure has
a GDP multiplier effect which eventually benefits broader economic growth. Historically
(in Mobility 1.0), governments were enablers and provided raw material at reasonable
prices. This was essential to push telephony given the virtually lack of access (low
wireline penetration in emerging markets).
However, there has been a growing clamour by political parties in emerging markets to
directly monetise the spectrum asset as governments run large fiscal deficits. India has
seen the evolution from a low spectrum cost model in Mobility 1.0 to auction-based
pricing in Mobility 2.0. In addition to spectrum auction, the Indian government charges
telcos a licence fee and a spectrum fee.
Government in India auctions
spectrum – high cost of raw material
for operators
3 August 2015
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High spectrum costs weigh on Indian telco returns
We think India scores unfavourably on this aspect of our framework as high spectrum
costs are an additional burden and will put pressure on ROEs. Further, the multi-player
market structure and excessive competition has made it difficult to sustain tariff hikes.
Fig 88 - Government revenues from Indian telcos – Recurring + Auction proceeds
Recurring receipts
(Rs bn)
1,200
One-time receipts
Indian telcos pay US$ 3bn annually to
government. In 2015, the govt. raised
US$ 18bn from spectrum auctions
1,069
1,000
800
600
400
200
0
124 92
FY08
139
132
128
4
6
FY09
FY10
FY11
185 216
167
160
14
22
FY12
FY13
FY14
208 223
229 199
FY15E
FY16E
Source: Company, TRAI
Fig 89 - India – Spectrum auction history
Money raised
(US$ mn)
Auction Year
Frequencies (Mhz)
Type
2010
2100, 2300
3G+BWA
2012
900,1800
2G+3G
1,800
2014
900,1800,800,2100
2G+3G
10,000
2015
900,1800,800,2100
2G+3G
18,000
17,000
Source: Company, TRAI, DOT
Fig 90 - Spectrum costs: China vs. India
China
India
Spectrum usage
charge
RMB17mn per MHz p.a. for 900 MHz &
RMB15mn per MHz p.a. for 1800MHz
Works to between 2-6% of
adjusted gross revenue (AGR)
Licence fee
NIL
Slab based between 6-10% of
AGR
Spectrum costs
NIL
Auction determined
Spectrum holding
Concentrated b/w 3 players
Fragmented
Telecom operators – Data-led growth but risks to pricing and capex
India’s broadband penetration is currently at 7% after a surge in growth post-2012. Rising
internet penetration provides a huge untapped opportunity on broadband and mobile
phones. We expect internet use on mobile phones to grow at a faster pace in a country
like India where smartphones and internet connections are fast becoming more
affordable, and tier-2 cities as well as rural areas remain largely untapped. Consequently,
we expect swift growth in 3G subscriber share for Bharti and Idea from current levels of
9% and 12% respectively.
India’s data market still largely
untapped
3 August 2015
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Fig 91 - India’s broadband penetration
(%)
Fig 92 - 3G penetration – Bharti and Idea
(%)
Bharti
14
25
Idea
12
20
10
8
15
6
4
10
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
2014
Q3FY14
2013
Q2FY14
2012
Q1FY14
2011
Q4FY13
2010
Q3FY13
2009
Q2FY13
2008
Source: Company
Q1FY13
0
0
Q4FY12
2
5
Source: Company
High-speed data market – $16bn revenue market potential in next 5 years
India still has a nascent high-speed data (HSD) market, with only ~80mn subscribers or
13-15% of the existing subscriber base using this service. We estimate ~38% CAGR in HSD
subscribers in India over the next five years as operators extend 3G networks and device
prices continue to climb down. This will take HSD users to ~550mn by 2020 and create a
massive internet ecosystem. Growth is likely to be accelerated by technology
development, launch of Reliance Jio and improving device affordability.
Fig 93 - India – High speed data subscriber estimates
High Speed Data Subs ('000s)
('000s)
Fig 94 - India telcos – Revenue market share (Dec’14)
YoY Growth (R)
600,000
70%
500,000
60%
50%
400,000
40%
300,000
20%
100,000
0
2015E
2016E
2017E
2018E
2019E
2020E
BSNL
5%
Vodafone
23%
10%
2014
Bharti
31%
Idea
18%
30%
200,000
Reliance
6%
Others
17%
0%
Source: RCML Research, Company
Fig 95 - China Mobile – LTE Subscriber
Fig 96 - China Mobile ARPU– Voice getting hit
Blended ARPU (RMB)
(Mn)
200.0
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
190
Source: Company
71.0
68.0
67.0
61.0
65.0
60.0
55.0
41
50.0
14
2QCY14
73.0
70.0
90
1QCY14
77.0
75.0
143
3
(RMB)
80.0
45.0
3QCY14
4QCY14
1QCY15
2QCY15
40.0
FY09
FY10
FY11
FY12
FY13
FY14
Source: Company
3 August 2015
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Strong traction in data revenues
Indian telecom players have seen strong traction in data revenues led by rising
smartphone affordability and increased mobile internet usage. 3G subscriber share has
risen from ~2% in CY12 to 8-12% for Bharti and Idea as consumers demand high-speed
internet for video and other use. Data contributes 18% of revenues for both players
(lower than global peers) and holds tremendous scope for growth given the large
untapped opportunity in rural India.
Source: Company
Fig 99 - India – Data market size
Data Revenues ($ Bn)
YoY Growth (R)
70%
16
60%
14
(US$ Bn)
45
30
10
25
8
30%
6
20%
4
2
2015E
2016E
2017E
2018E
2019E
2020E
Source: RCML Research, Company, DoT
Q4FY15
Revenues (ex- Data) ($ Bn)
35
40%
12
Data Revenues ($ Bn)
40
50%
2014
Expect HSD to be a US$ 16bn revenue
opportunity or 40% of total market by
2020
Fig 100 - India – Revenue structure
18
0
Q3FY15
Source: Company
The Indian telecom market is valued at US$ 29bn, including voice and data. Voice still
forms the dominant component at US$ 26bn (87% share), but over the next five years,
we believe growth will be led entirely by the HSD opportunity. Based on our estimates for
smartphone shipments, we expect the HSD market to grow from ~US$ 4bn currently to
~US$ 16bn by FY20 – implying a 35% CAGR from FY15-FY20. In the same period, we
expect the voice revenue market to de-grow at 4% CAGR to US$ 22bn.
(US$ Bn)
Q2FY15
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
0
Q4FY12
2
Q1FY15
4
Q4FY14
6
Q3FY14
8
Q2FY14
10
Q1FY14
12
Idea
Bharti
Q4FY13
(%)
20
18
16
14
12
10
8
6
4
2
0
Idea
Q3FY13
Bharti
14
Q2FY13
(%)
Fig 98 - Data revenue contribution
Q1FY13
Fig 97 - 3G penetration (% of total subs) – Bharti and Idea
20
15
26
22
11
14
16
2018E
2019E
2020E
26
27
27
24
25
10
10%
5
0%
0
3
4
6
2014
2015E
2016E
8
2017E
Source: RCML Research, Company, DoT
But capex still low, more investments needed
Low spectrum footprint and high population density
While the data growth and revenue opportunity remains immense, this can only be
tapped if telcos make large investments in networks. To further complicate matters, India
is a country with high population density and fragmented spectrum holdings. While
spectrum auctions are helping to consolidate holdings, the cost of acquiring spectrum is
high. Moreover, high population density requires denser networks and more investments
(opex/capex) to support HSD growth.
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As per the World Bank, India’s population density is 7.65x the world average. This worked
well for telcos in a voice-led era, as one base transceiver station (BTS) could cover a large
population and the relatively lower bandwidth requirement helped increase capital
efficiency. However, the economics of the business reverse in a data-led scenario given
the lower quantum of spectrum available with operators coupled with higher-bandwidth
data users connecting to a single BTS.
Fig 101 - India population density
421
416
411
406
400
470
460
350
450
300
440
250
430
2008
2009
2010
2011
2012
55
420
410
400
390
2013
Mar-15
2007
54
145
Dec-14
2006
54
53
52
144
143
Sep-14
2005
143
Jun-14
0
52
51
142
Mar-14
50
51
141
Dec-13
50
140
Sep-13
100
140
Jun-13
150
139
Mar-13
200
Dec-12
395
390
385
379
(Rs)
World
Sep-12
400
China
Jun-12
India
(Pop density)
450
Fig 102 - India – MOUs
Significant spectrum locked up in voice minutes
India remains one of the largest markets both from a subscriber as well as traffic
perspective. India’s average minutes of usage (MOU) are in the 450-500mins range,
significantly higher than the global average. Given low pricing, India’s voice traffic
volumes are immense, leading us to argue that a large chunk of spectrum is already
choked with voice minutes, leaving limited room for data. Thus, telcos would need to
invest in additional spectrum as well as building more sites to support network capacity
and quality.
A case in point is Vodafone India which contributes to nearly 54% of the total voice traffic
of Vodafone Plc but just 11% of revenues, reflecting the pricing environment. This
suggests that India is potentially a high volume market and as price points drop, volume
growth explodes.
Bharti Airtel carries 1trillion mins per
annum on its India network
We expect data usage in India to move in line with global trends, led by 3G/4G network
rollouts and affordable smartphones. Vodafone’s India data traffic share is currently at
20% of its subscriber base, lower than its India voice traffic share, and we foresee
substantial growth going ahead.
Fig 103 - Vodafone Plc – Voice traffic share of India
Fig 104 - Vodafone Plc – Revenue share of India
(%)
(%)
12
55
55
11
54
54
10
53
53
9
52
52
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
7
Q2FY13
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
51
Q1FY13
8
51
Source: Company (Bharti Airtel), RCML Research
3 August 2015
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Tough to sustain capex below developed market levels
Given the backdrop of high data growth, high population density, low penetration and
low spectrum footprint, capex requirements for Indian telcos will remain elevated. In the
last two years, the capex/sales ratio for Indian telcos has flat-lined at levels below
developed markets. We don’t think this is sustainable, as developed market capex
dynamics are more favourable than India – (1) low population density, (2) higher
spectrum footprint, (3) coverage capex completed and (4) higher ARPUs. Large global
peers like AT&T and Verizon spend 15-20% of their revenues on capex. Indian players like
Bharti and Idea spend 18% and 13% respectively, and will likely need to invest more to
cater to the strong demand for data services in India.
Fig 105 - Capex/Sales – Bharti and Idea
Fig 106 - Capex/Sales – Global Comps
Bharti Airtel
(%)
32
Idea
(%)
32
27
Verizon
China Mobile
Deutsche Telekom
27
22
22
17
17
12
7
AT&T
12
FY10
FY11
FY12
FY13
FY14
FY15
Source: Company
7
2010
2011
2012
2013
2014
2015
Source: Company
In China, an analysis of China Mobile’s numbers suggests a sharp rise in capex to support
strong data growth. China Mobile’s capex/sales has remained consistently over 20% in
the past five years, and has accelerated to 30% in the last two years led by a sharp pickup in HSD (LTE) subscriber penetration. For India, we expect to see front-loading of capex
from a coverage standpoint to support growth.
Fig 107 - China Mobile – Capex/Sales vs. LTE penetration
Capex/sales
(%)
35
3G penetration
4G penetration
China Unicom
XL Axiata
Advanced Info
Turkcell
(%)
60
30
50
25
China Mobile
Telekomunikasi Indonesia
MTN
America Movil
40
20
30
15
20
10
10
5
0
Fig 108 - Emerging Markets: Capex/Sales
2010
2011
2012
2013
2014
0
FY10
FY11
FY12
FY13
FY14
FY15
3 August 2015
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Capex proxies – Attractive as data capex cycle commences in India
Capital intensity remains high in a data world and more so in markets like India, implying
that proxy capex plays will be beneficiaries of the data uptrend. 3G penetration in India is
still low and operators are expanding their coverage. Additionally, most of the current 3G
tower sites are on loading basis, which is essentially an upgrade of a 2G site to 3G. This
comes at a marginal 10-12% additional tower rental. We think that telecom operators
will initially expand through this model, but would then follow up with full-fledged tower
tenancy requirements. The latter would be a key growth driver for telecom tower
infrastructure players like BHIN. Already, data growth has reached a stage where
operators would need to gradually begin deploying pure 3G sites.
Fig 110 - 3G sites vs. 2G sites – Bharti
Q4FY15
USA
Q3FY15
India
Source: www.ITU.int, RCML Research
Q2FY15
0
Q1FY15
8
10
Q4FY14
20
2G sites
Q2FY14
30
Q3FY13
40
Q2FY13
50
Q1FY13
60
Q4FY12
70
Q3FY12
78
80
3G sites
Q3FY14
(%)
100
90
80
70
60
50
40
30
20
10
0
Q1FY14
(%)
90
Q4FY13
Fig 109 - 3G penetration – India vs. USA
Proxy capex plays will be beneficiaries
of the data uptrend
Source: Company
Traction in data traffic growth pushing up capex
Bharti and Idea have reported data traffic growth in the range of 80-100% YoY over the
last few quarters. Given the strong demand for data services, both Bharti and Idea
surpassed their capex guidance during FY15 and have guided for outlays of Rs 140bn and
Rs 55bn respectively for FY16. These telcos are investing heavily to build new 3G sites
and also to convert their current 2G sites into 3G.
Fig 111 - Data traffic growth of Bharti/Idea
(%)
Bharti
160
Fig 112 - Wireless capex guidance for Bharti/Idea, FY16
(Rs bn)
Idea
160
150
140
140
140
120
130
120
100
110
80
100
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
40
Q2FY14
80
Q1FY14
90
60
70
Telcos are investing heavily to build
new 3G sites and also to convert their
current 2G sites into 3G
65
20
0
Bharti
Idea
Source: Company
Average data consumption in India remains high and has been expanding. While this
could be due to low 3G penetration (possibly an urban phenomenon), data consumption
has gone up even despite the limited drop in tariffs. Given low internet penetration and
plenty of disruptive internet-based business models, India’s data consumption trajectory
should remain high.
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Fig 113 - Bharti – 2G/3G data(MB)/month trend
Fig 114 - Idea – 3G data(MB)/month trend
(mb's)
(mb's)
700
800
600
750
700
500
650
400
600
300
550
500
200
450
100
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
350
Q3FY13
400
Q4FY12
0
Fig 115 - India – Telco infrastructure plays
Segment
Market Structure
Towers
Pricing
 Consolidated
Wi-Fi Offload
 Fragmented-Nascent
Backbone
 Consolidated
Third party data centres
Competition

Indus, Bharti Infratel, Quippo

Bharti Infratel, Ozone
TCOM, RCOM, Global Tier I

 Consolidated
TCOM, Netmagic, Ctrl S, Telcos

Tower infrastructure – Attractive outlook
In our view, tower companies offer an attractive growth outlook and are a compelling
alternate play on the rising data capex in India. We like the tower business for its ROE
expansion profile, strong cash flows and high operating leverage. The market structure of
the tower space remains favourable in India, with BHIN and Indus (42% owned by BHIN)
dominating the market. These two companies also derive natural leverage from their
operator relationships (BHIN is a 72% subsidiary of Bharti, while BHIN, Vodafone and Idea
are co-owners in Indus Towers).
Fig 116 -
India – Operator revenue market share
Others
17%
Reliance
6%
Bharti
31%
Bharti Infratel (BUY) remains our top
pick in this space
Fig 117 - Indus Towers shareholding
Idea Cellular
16%
Bharti Infratel
42%
Idea
18%
Vodafone
23%
BSNL
5%
Vodafone
42%
3 August 2015
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Fig 118 -
Bharti Infratel – Tenancy-led EBITDA growth
Tenancy growth
(%)
EBITDA growth (R)
10
Fig 119 - Bharti Infratel – ROE
(%)
20
9
15
8
7
10
6
5
5
(%)
20
18
17.8
16
14.2
14
12
11.4
10
8
4
0
3
2
(5)
1
0
FY13
FY14
FY15E
FY16E
FY17E
(10)
6
6.3
8.6
4
2
0
FY13
FY14
FY15E
FY16E
FY17E
Data centres – Commoditised but high growth opportunities
Data centres are essentially centralized repositories of information and the market for
these services has historically been dominated by captive enterprise centres and large
telcos in India. Based on industry reports, 90% of the data centre market in India is
captive and only 10% is outsourced to third parties. That said, we are seeing a trend
towards adoption of third party centres. TCOM, a leading player in India with nearly 30%
market share in third party data centres, has recorded 25%+ growth in FY14. Overall,
this market should continue to expand led by capex, digital growth and the shift to third
party services.
Rising trend towards adoption of third
party data centres
A sizeable portion of the data centre market is driven by technology capex, both
government and enterprise. While technology capex in India is beyond the scope of this
report, we think it is imperative to touch upon this segment as the rise of wireless highspeed internet and data adoption will force enterprises to build a strong digital strategy
even in India. Further, the growing reach of on-demand video, social media and
e-commerce will continue to boost demand for data centre management. As per reports,
the Indian data centre market is expected to grow from ~4mn sq ft in CY13 to 6msf in CY17,
a 15% CAGR. The big growth drivers will be traditional areas such as BFSI, IT & Telecom and
Manufacturing and new areas such as Media & Entertainment and Online businesses.
Key growth areas for data centre business:




Enterprise segment, moving from captive to third party
Government – Largely captive or outsourced to National Informatic Center (NIC)
Cloud Services – Amazon, Google and Microsoft
New-age Internet – Internet TV, E-commerce, etc.
Thus far, the key challenges to growth have been high real estate costs and frequent
power disruptions, pushing demand to offshore locations. Further, weak privacy laws in
India provide no regulatory support to onshore third party data centres. On the other
hand, we have the big tradeoff between onshore and offshore in terms of latency and
user experience. In India, most of the internet access is likely to be smartphone-led,
essentially through smaller-screen devices versus desktops/laptops or in the form of
video streaming services. Both of these are very sensitive to latency and can potentially
affect user experience. This could be one of the factors for a push towards local data
centre demand. Another would be an app-based startup ecosystem which cannot afford
a captive data centre and needs the flexibility to scale up.
Latency – 10ms per 1000km
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While some large-scale e-commerce players are running their own centres, we expect a
gradual shift towards third party management. Third party players are also now seeing
strong growth from the enterprise and cloud segments. Overall, with increasing uptake of
the internet-based delivery model, India’s data centre industry could continue to record
20%+ growth for an extended period.
Content/ platform players – battle for screen space in a digital world
India has the fastest growing internet user base in the world, up 14% to 240mn in CY14.
Additionally, India is already the third largest market by number of users, albeit with low
penetration levels of 19% – which represents a wide differential to both developed and
emerging (Russia, Brazil and Nigeria) markets. This puts India’s internet economy on a
strong growth trajectory as networks improve and device prices trend lower.
Interestingly, we think a bulk of India’s internet access will be through smaller devices
such as smartphones or tablets versus traditional desktops. This is likely to heat up the
battle for screen space (or app space) among internet players in India.
Fig 120 - Global – Internet users
Intenet penentration
55
UK
France
India
USA
China
0
Source: internetlivestats.com
46%
38%
19%
India
57
53%
Nigeria
67
59%
China
71
86%
Brazil
84
86%
Russia
108
100
86%
France
109
Nigeria
200
Germany
240
Russia
300
Brazil
280
Japan
400
87%
Germany
500
90%
Japan
600
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
USA
641
UK
700
Fig 121 - Internet penetration – India lowest
Internet Users
(In Mn)
India has the fastest growing internet
user base in the world, heating up the
battle for screen space
Source: internetlivestats.com
High uptake in markets like India is also visible in the mix split of global players, where
most of the growth is coming from the Asia Pacific region. Given that a chunk of the
global population resides in Asia, we expect the market to remain very competitive with
both global and local players vying for their share of the Indian internet economy.
Fig 122 - Facebook – Monthly Active Users
(% Share)
ROW
351
368
390
410
269
272
276
282
289
292
60%
40%
198
199
201
202
204
206
208
210
Q1CY15
307
Q4CY14
301
Q3CY14
296
195
Source: Company
80%
20%
0%
29%
30%
30%
31%
31%
31%
31%
31%
31%
29%
29%
30%
30%
31%
31%
32%
32%
33%
24%
24%
23%
23%
23%
22%
22%
22%
21%
18%
17%
17%
16%
16%
15%
15%
15%
15%
Q1CY15
339
100%
Q4CY14
319
ROW
Q3CY14
376
Asia Pacific
Q2CY14
471
362
Q2CY14
0
449
346
Q1CY14
200
426
327
Q4CY13
400
453
Q3CY13
600
436
Q2CY13
800
423
Q1CY13
1,000
411
395
Europe
Q1CY14
1,400
1,200
US and Canada
120%
Q4CY13
Asia Pacific
Q3CY13
Europe
Q2CY13
US and Canada
Q1CY13
(Mn)
1,600
Fig 123 - Facebook – Share of Asia rising
Source: Company
3 August 2015
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This strong internet adoption is only going to accelerate as lower hardware prices
translate to higher wireless broadband access in India. We see strong prospects for the
internet economy in India comprising (1) transactions, (2) services, (3) subscription and
(4) advertising. Already, companies are allocating more marketing (advertising) and
content development funds to digital/online content delivery.
Digital delivery – Key to the future
Digital advertising revenue grew at a strong 40% CAGR (CY09-CY14) and is poised to grow
at a 30% CAGR over CY14-CY19. Traditional media (television) too has seen double-digit
growth rates due to heavy advertising led by elections and the emergence of
e-commerce (companies like Flipkart, Snapdeal, Jabong, Olx) as a new category in India.
The next wave of growth for the digital industry will be increased adoption of the
internet in rural areas.
For television and digital content producers, video streaming will be the key to success
and competition will lead to better quality content for the audience. Several companies
are already investing to develop entertainment content that is easily accessible over a
smartphone. While the subscription-based revenue model is yet to pick up, rising
smartphone usage and high-speed wireless access should accelerate both subscription
and advertising revenue streams on internet-based content delivery platforms.
Fig 124 - Indian media industry – Segments
CAGR (2009-14)
45%
Fig 125 - Size of the Indian media industry (CY14)
(Rs bn)
CAGR (2014-19)
40%
30%
30%
400
350
263
300
25%
20%
13%
15%
10%
16%
8% 8%
TV
250
18%
14%
200
10%
Print
Films
126
150
7%
100
5%
5%
0%
475
450
35%
15%
500
40%
Radio
Music
Source: FICCI KPMG report 2015
44
50
Digital
advertising
0
TV
Print
Films
Digital
advertising
17
10
Radio
Music
Content owners – The next big opportunity
Content is a unique IP-oriented opportunity that is set to grow given India’s large
population and the emergence of multi-delivery mediums. The content industry in India
has historically been unorganised with inefficient delivery platforms plagued by leakages
and rampant piracy. This has led to suboptimal monetisation for content owners for
several years. But over the past 5-8 years, we have seen significant improvement
in delivery platforms, backed by foreign direct investment, urbanisation and governmentled reforms.
Content owners to be the biggest
beneficiaries of India’s data revolution
Media consumption in India is still via traditional media (television or theatre) and
remains below the global average. We believe that content owners will be one of the
biggest beneficiaries of the data revolution in India, as new digital delivery platforms
offer more opportunities for monetisation of content. Bandwidth speeds in the country
are improving and even large global players are aligning their content delivery platforms
to support local requirements. For instance, YouTube’s offline feature allows users to
download videos and view them offline to adjust for lower bandwidth requirements that
make live streaming difficult.
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For this report, we focus our media content discussion on three brackets: Movies, NonFilm and Music.
Fig 126 - Battle for entertainment time
Consumer Entertainment Options
App economy capable of driving
disruptions across segments – from
entertainment content to retailing to
services
Content Flexibility
Linear TV
Medium
Pay-per-view content
High
DVD watching
Medium
Internet TV
High
Video Games
Medium
Web browsing
High
Reading
High
Source: Netflix
Fig 127 - Shemaroo – New media revenue mix and growth[Incorrect labelling]
New media contribution
(%)
12
YoY growth
(%)
140
120
10
100
8
80
6
60
4
40
2
0
20
FY11
FY12
FY13
FY14
FY15
0
Movies – Getting organised, rising monetisation opportunities
India’s movie industry is one of the largest in the world in terms of number of films
produced. From being highly unorganised and fragmented, the industry is now seeing
consolidation with the entry of international studios. Further, as in the West, we are
seeing the emergence of digital platforms such as video on-demand. While the market in
India for digital content remains small, we expect strong growth ahead given robust
viewership trends and rising access to entertainment on the go via smartphones and
high-speed data networks.
Increased size of Indian movie industry
As per a FICCI-KPMG report, the Indian film industry is poised to grow at a 10% CAGR
(CY14-CY19) to Rs 204bn. Bollywood is the largest contributor followed by South Indian
movies. Various large studios like Warner Bros, Disney, Fox and DreamWorks have
entered Bollywood to co-produce movies. In line with the global trend, Indian producers
have cut down on the number of movies and now focus on quality of content; films are
also shorter in duration.
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Fig 128 - Size of Indian film industry
Film industry
(Rs bn)
YoY growth (R)
(%)
250
Film industry estimated to grow at a
CAGR of 10% (CY14-CY19) to Rs 204bn
25
20
200
15
10
150
5
0
100
(5)
(10)
50
(15)
0
2009
2010
2011
2012
2013
2014
2015P
2016P
2017P
2018P
2019P
(20)
Consolidation ahead as global players plan entry
Global studios keen on tapping the
Indian market
India’s movie industry (including regional movies) is set for consolidation as the entry of
several global movie studios is leading to tie-ups or takeovers of Indian studios. Over the
last few years, best practices of film production from western markets have been adopted
in India, raising industry efficiency. We expect more new players from the West to enter
India in order to tap the country’s high growth opportunity.
Fig 129 - Studios in India
Name of studio
Overview
Year of establishment in India
Fox Star Studio
Subsidiary of global studio 21st Century Fox
2008
UTV Motion Pictures/Disney
Unit of UTV India now sold to Walt Disney Company, USA in 2012
2004
EROS International
India-based movie production and distribution company
1973
Yash Raj
Oldest Bollywood studio founded by Bollywood veteran Yash Chopra
1970
Viacom 18 Motion Pictures
A JV between US based Viacom and TV 18 India
2000
Multi-screen Media
A subsidiary of Sony Pictures worldwide
2013
Emergence of digital platforms
India’s digital advertising industry has grown at a robust 41% CAGR between FY11 and
FY14, wherein the video ad market constitutes ~Rs 3.3bn and that accruing to movies is a
smaller percentage. To tap into this opportunity, many traditional content producers
have set up video on-demand platforms (such as ErosNow) based on freemium or
advertisement-driven models (HotStar). Film-makers are also exploring the option of
releasing movies in digital format at the same time as the theatrical release.
Subscription video on demand (SVoD) which gives audiences access to a wide range of
content on a monthly basis has been on the rise in global markets. Today, 40% of homes
in the US have access to SVoD services. India still remains a very small market for these
services, but with the availability of affordable smartphones, greater access to the
internet and improved telecom infrastructure, we expect consumption of SVoD to grow
apace, benefitting content owners and producers of Indian movies.
Many traditional content producers
have set up video on-demand
platforms
33% of viewing hours on US-based
Netflix are movies
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Fig 130 - India – Video on Demand
Service
Content
Pricing
ErosNow
Movies, TV
Rs249/month
HooQ
Movies, TV
Rs199/month
Spuul
Movies, TV
Rs300/month
BoxTV
Movies, TV
Rs49-Rs199/month
Bigflix
Movies, TV
Rs49/movie
Hotstar
Movies, TV
Free
Ditto TV
Movies, TV
Subscription
Fig 131 - ErosNow one of the largest Indian digital platforms for Bollywood
EROS NOW
Netflix
Ditto TV
Bigflix
Box TV
27,625
58
31,117
147,810
46,216
3,724
11
4,040
27,176
6,762
1.19
5.16
2.68
2.4
3.3
Global Rank
Regional Rank
Daily page views per unique visitor
Daily time on site (mins)
2:53
5:57
3:04
2:52
3:13
Bounce rate
48%
22%
39.5%
35%
33%
% of traffic from a search engine
16%
3%
16%
15%
25%
Source: RCML Research, Alexa.com
Effective windowing key for new content
Traditionally, windowing of new movie content has been one of the key factors in
effective monetisation of the movie business, as early windowing on a certain platform
can lead to cannibalisation of the other. Adding more platforms (including digital) to the
chain below without reducing the overall value monetisation remains one of the key
challenges for the movie industry. Currently, digital content is bundled along with
satellite TV rights and thus windowing of this content is either along with television or
post television.
Fig 132 - Traditional exploitation and distribution of content
Distribution
Platforms
Timing
Music
Release
6-8 weeks
before TR
Theatrical
Release (TR)
0
DTH
DVD
Distribution
1-3 months from TR
Satellite
licensing to
Television
3-6 months
from TR
New Media
and other
3-9 months
from TR
Satellite is one of the largest revenue segments outside theatrical and constitutes
between 15-20% of movie revenues. As new SVOD platforms emerge and subscribers
clamour for new content, it will be tightrope walk for content owners to manage
windowing. If digital rights stay bundled with satellite TV, as is currently, then it would be
manageable. However, in cases where content is being sold to third party/own but pure
internet TV platforms, windowing of SVOD before satellite could impact pricing of the
satellite business. We note that EROS is looking to shift windowing of some content
exclusively from Jul’15 onwards onto their ErosNow platform. Further, this could mean a
release earlier than satellite.
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Fig 133 - Movie revenue streams in India
Revenue Stream
% of Revenues
Domestic Theatrical
58
Overseas Theatrical
15
Music
5
Satellite*
15
Home video
7
Source: RCML Research, Company. Note: Currently Digital rights bundled with satellite
Television – Double-digit growth but shift to Internet TV imminent
The analogue cable industry suffered from severe subscription leakages due to
underreporting, but mandatory digitisation reform in India since CY10 has reduced revenue
leakages for broadcasters and opened up the sector for a subscription-based revenue
model. Cable & Satellite (C&S) penetration is poised to grow from 82% currently to 90% in
CY19 driven by the wave of digitisation (Phase 3 and Phase 4). Thus, despite strong growth
in the internet industry, the television industry continues its double-digit ramp-up led by
stronger subscription (+16%) and advertising (+14%) revenues.
Access to content over the internet
poses a threat to TV viewership
This could change with the emergence of Internet TV or Smart TV that allows users to view
internet-based programmes on their television or mobile devices – this new platform is
garnering a tremendous following in developed markets and could well replicate its
success in India, posing a threat to traditional television viewership.
Fig 134 - TV industry revenue
Subs rev
18%
16%
Ad rev
16%
14%
14%
14%
Sustained growth in traditional TV
industry due to mandatory digitisation
reform in India
12%
12%
10%
8%
6%
4%
2%
0%
CAGR (2009-14)
CAGR (2014-19)
Linear TV and/to Internet TV
Television remains the key medium for viewing content in India and digitisation coupled
with rising demand for entertainment has led to value unlocking for content producers.
In developed markets, Internet TV or television delivered over the internet is seeing
surging popularity and competing directly with linear TV – a trend shift enabled by rapid
screen proliferation, improved data speeds and lower cost of delivery. Apps are
substituting for channels as consumers in these markets move from linear to Internet TV.
Device affordability has been a key factor behind the growth of telecom services in India.
Based on census data from 2001-11, household phone penetration has jumped nearly
15x in rural markets, while television households have nearly doubled in the same period.
Television penetration will continue to rise, but it is the mobile device ecosystem that will
fuel content delivery in India over the next 3-5 years.
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Fig 135 - India: % households having a phone
(%)
2001
Fig 136 - India: % households having a TV
(%)
2011
90
82.0
80
70
50
50
40
40
30
30
23.0
64.3
47.2
33.4
31.6
18.9
20
9.1
0
76.7
80
60
54.3
60
10
3.8
Total
10
Rural
0
Urban
Source: Census of India 2011, RCML Research
Total
Rural
Fig 137 - India – Device affordability
(Rs)
25,000
25,000
5,000
33,000
25,000
10,000
18,000
20,000
Source: Flipkart (Cheapest currently available in each category)
Laptop - 15.6
inch screen
Tablet - 10 inch
screen
Tablet - 9 inch
screen
Tablet - 8 inch
screen
15,000
Tablet - 7 inch
screen
0
4,000
Smartphone - 4
inch screen
5,000
7,800
(Rs)
35,000
30,000
20,000
20,000
Price convergence with traditional TV
would create a value proposition for
Internet TV in India
Fig 138 - India – Drop in Smart TV price curve to help
30,000
15,000
Urban
Source: Census of India 2011, RCML Research
We expect India to witness strong growth in Internet TV as well led by rising device
affordability (gradual convergence of price curve with traditional TV), improved video
delivery capability, better network speeds and growing internet reach. The traditional
model was led by rising television penetration per household. While the traditional
television segment will still grow in India, we expect stronger growth for on-demand
content on personal devices, with more screens per household in the form of
smartphones, tablets or smart TVs. This will create a large subscription opportunity for
Internet TV in India.
10,000
2011
70
63.2
20
2001
90
10,000
5,000
0
Smart TV - 32 inch screen
LED TV - 32 inch screen
Source: Flipkart (Cheapest currently available in each category)
Television viewers in the country numbered 825mn in CY14 and are poised to grow at a
3% CAGR (CY14-CY19), whereas internet users number at 281mn and are poised for a
much faster 18% CAGR. whereas television viewers are expected to remain muted.
India’s internet user base totals 240mn (CY14) which is the third largest after China and
the US, with growth primarily driven by mobile internet penetration. We estimate that
internet users in the country will more than double to 550mn by CY20.
Rising adoption of HSD and govt. focus
on Digital India will enable viewers to
access more content on-demand
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Fig 139 - Viewership across various TV and internet
platforms in India
Fig 140 - Internet penetration – India still has ground
to cover
(mn)
1,200
100%
Tv viewers
1,000
600
420
348
281
87%
86%
80%
70%
800
400
90%
90%
960
938
913
886
857
825
Internet users
570
494
60%
60%
640
53%
50%
46%
40%
30%
19%
20%
200
10%
0
2014
2015P
2016P
2017P
2018P
0%
2019P
UK
USA
Japan
Russia
Brazil
China
India
Fig 141 - Impact of Internet TV (USA) – Netflix vs. DirecTV
Netflix Paid Subs ('000s)
('000s)
Netflix – 10bn hours of viewing per
quarter
DirecTV Subscribers ('000s)
70,000.0
60,000.0
50,000.0
40,000.0
30,000.0
20,000.0
10,000.0
0.0
1Q12
2Q12
3Q12
4Q12
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14
1Q15
Fig 142 - India – Broadband penetration
(%)
Fig 143 - India – Mobile data penetration
25
(%)
10
9
8
20
7
6
15
5
4
10
3
2
5
1
0
2008
2009
2010
2011
2012
2013
2014
0
2008
2009
2010
2011
2012
2013
2014
Digital strategy the key to success
Media companies tied to a single delivery platform (television in India’s case) will need to
diversify and embrace new video delivery platforms to stay relevant. As such, existing
linear networks that can bundle linear TV with Internet TV apps alongside content
differentiation will be able to capture value in a digital world.
Players tied to a single delivery
platform need to diversify and
embrace new video delivery platforms
Large broadcasters in India such as Star TV and ZEE have already started making
investments in this space. HotStar, the Star TV app launched in Feb’15 to provide free
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online access to consumers, has met with great success over the past 3-4 months.
Bandwidth predictability in India remains a challenge and hence these media companies
are also looking to ensure that technology is customised to deliver content at lower speeds.
Fig 144 - India – Dedicated Internet TV platforms
Player
Application
Content
Revenue Model
Google
YouTube
User, Movies, TV, Music
Advertising
Star India
HotStar
Star TV content and Movies
Advertising
Zee Entertainment
Ditto TV
TV content and Movies
Subscription
Eros International
Eros Now
TV and Movies (Own + Third Party)
Subscription
Hungama
Hungama
Music and Movies
Subscription / Micro transaction
Singtel, Sony Pictures Television
and Warner Bros
HOOQ
TV and Movies
Subscription
While the India market remains large, the overseas opportunity is also immense. These
markets are already developed from a device and high-speed ecosystem perspective and
should see strong adoption of subscription-based services in India.
A substantial revenue opportunity
As per industry data, the average content consumption in the US is nearly six hours per
day versus three hours in India. This is partly explained by busy city life in India and, more
importantly, by multi-TV homes in the US versus single-TV homes in India, implying that
individual choices on dedicated television sets leads to higher per-day consumption.
Notably, the share of digital viewing in the time spent watching television per day has
risen from 4% to 22% over CY11-CY15 in the US.
As per Star, the India-Pak cricket WC
match had a reach of 288mn on TV and
25mn views on its digital platform
Content consumption in India too is set to rise, but this will likely be through Internet TV
and digital videos rather than a proliferation of multi-TV penetration within the
household. Thus, in India, Internet TV is likely to complement traditional TV and expand
content consumption. This will create opportunities for broadcasters to expand
programming hours beyond typical primetime viewing on traditional television channels.
Also, as against the current skew towards advertising revenue and limited content
differentiation in the traditional business, Internet TV opens up multiple revenue streams
including subscription-based models that can enable digital content and drive content
differentiation and consumption.
While India is exploring both subscription and advertising-based revenue models, we like
the subscription-based model for digital video delivery given smaller screen sizes,
difficulty in ad delivery and inferior user experience due to patchy networks. Industry
heavyweights ZEE and Star TV have begun with different revenue models – ZEE’s Ditto TV
is subscription-based versus HotStar’s advertising-led strategy.
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Fig 145 - Zee revenue mix
Fig 146 - Netflix subscription revenue mix
Ad revenue
(%)
100
Subscription revenue
90
International Streaming
Domestic DVD
90
80
44
70
47
48
46
46
80
70
60
60
50
50
40
40
30
30
56
20
53
52
54
54
10
0
Domestic Streaming
(%)
100
20
10
FY11
FY12
FY13
FY14
Source: Company (Zee), RCML Research
FY15
0
2011
2012
2013
2014
Source: Company
App economy to explode; delivery platforms highly scalable
In a data-led world, growth will be led primarily by delivery platforms that bring relevant
products, content and services to the end user. These delivery platforms could be webbased; but for the Indian market, where handhelds are likely to be the device of choice
for internet access, we believe the app economy will emerge as a key delivery platform.
As seen below, the app economy becomes the access route and information aggregator
for the user and serves as the primary service/product delivery platform. While this is still
at a nascent stage in India given low device and internet penetration, we note that
growth rates remain very high (Zomato growing at 3x YoY) and the space is seeing
sizeable venture capital activity.
App economy to emerge as a key
delivery platform
Fig 147 - Indian - E-commerce market size
(USD bn)
16
14.0
14
12
10
10.5
8.7
8
6
4
2
0
FY13
FY14
FY15E
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Fig 148 - Apps – A delivery platform
SMS
Equipment vendors
Provides technology
Government
Provides spectrum
Mobile
Banking
eCommerce
News/
Information
A
P
P
S
Content
Movies
A
P
P
S
Telecom operators
Handset
User Access
User
Mobile Ads
Games
D
A
T
A
Social
Networking
O
F
F
L
O
A
D
I
N
G
Components
Voice
Handheld devices for net access not PCs
The primary access device for internet in India is most likely to be a handheld device and
not a traditional desktop/laptop as is the case in developed markets. For INFOE, 35-60%
of traffic, depending on the property, is mobile-led (either app or mobile web). We
reckon this is happening where wireless high-speed internet penetration is 12-13% of
subscribers and this trend should accelerate as new users across various socioeconomic
strata get onto high-speed internet.
Fig 149 - India – Desktop vs. Mobile penetration
80
Fig 150 - % of traffic on mobile for internet properties
(% Mobile
traffic)
(%)
72
70%
70
60
50%
50%
50
40
40%
30
30%
10
10
0
62%
60%
20
Mobile
Use of handheld devices to access
internet in India brings app economy
to the fore
PC
Source: Company , DOT, RCML Research
35%
20%
10%
0%
Jeevansaathi.com
Naukri.com
99acres.com
Source: Company
Internet platforms – Aggregation the key
The traditional world of commerce, particularly in emerging markets, remains cluttered
and unorganised. In India, we have a plethora of unorganised sectors and segments
where information, products and services are unstructured or difficult to access. Now,
internet anywhere and smarter devices are enabling an ecosystem that will help resolve
this clutter. In our view, the greatest value proposition at the platform level will be the
successful aggregation of unstructured information and delivery on-demand. Over the
past five years, India has seen successful aggregation plays across different domains such
as e-commerce (Flipkart, Amazon, Snapdeal), jobs (Naukri), matrimonial (Bharti
Matrimoney), travel (MakeMyTrip).
Successful aggregation of unstructured
information and delivery on-demand
will be the primary value proposition
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Fig 151 - App economy – Unstructured but getting structured
Restaurants
Movies
Travel
Music
Social
Banking
Internet
User
E-commerce
Gaming
Apps
Search
News
Structure data
A
C
B
Aggregate
Sub-segmentation poses risks
While aggregation remains one of the key value propositions, business models with
excessive sub-segmentation are at risk. As per Compuware, 80-90% of the apps
downloaded are uninstalled within three months. Further, their studies indicated that
only 15-17% of people are willing to download an app more than twice. We believe this
risk is higher for models where the key proposition is sub-segmentation or a single brand
that can be substituted. For example a pure electronics/mobile reseller
(mobilestore.com) can be replaced by a bigger marketplace model (Flipkart). Thus,
companies at the universal set aggregation level (product or service) remain a
substitution threat to such models.
80-90% of the apps downloaded are
uninstalled within three months
Further, the substitution of pure vertical-specific platforms becomes possible due to the
reach and network effect and poses risks to models of smaller platforms. However, the
key challenge for bigger players will be to execute at the universal set level, where scale
and customer responsiveness requirements are very high. Horizontal aggregation plays
are more likely to be successful, where the product or service is standardised and they
operate just as a channel and delivery platform (e.g. bookings, branded goods). In areas
where the differential is either in terms of quality of aggregation or service or is built with
a network effect (e.g. ratings and review), vertical-specific players will take the lead.
Winner takes all
The app economy offers tremendous opportunities to disrupt and build new business
models, but it has been a “winner takes all” model so far. The impact of traffic has a big
network effect on these apps/sites, which leads to disproportionately higher
revenue/profit market share, especially as revenue streams are advertising-led. Thus,
traffic growth and revenue growth remain key metrics for internet-based companies as
Traffic growth and hence revenue
growth remain key metrics for
internet-based companies
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the highest traffic share will translate into a disproportionate share of profits (for
example, popular Indian jobs portal Naukri.com currently has 70% share of traffic and
100% of profits in its category). Thus, we think that investments in internet platforms will
have to be heavy and frontloaded given high competition and these players will need to
focus on establishing traffic market share leadership.
Fig 152 - Naukri – Traffic market share
Source: Company (Comscore – April 2015. For desktop/laptop traffic and excludes Linkedin)
Fig 153 - Naukri – Network effect
We get the
most
clients
Benefits
We’ve got the
most jobs
•
Naukri has 100% of industry
profits enabling greater
investment in
o Product innovation
o Engineering
o Brand support
We get
the most
response
o Sales network
We get the
most
traffic
o Servicing back office
o Superior talent
Source: Company (Comscore – April 2015)
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Conclusion
We expect the data + mobility megatrend to be replicated in most markets, including
India. That said, different markets are at different points in the Mobility 2.0 cycle. We
think developed markets are already beyond the initial ramp-up phase of 3G data/device
adoption even as growth is still picking up in India. Thus, our preference would be for
local over global plays in the value chain.
Our preference would be for local over
global plays in the value chain
We initiate coverage with BUY ratings on INFOE – internet platform play, SHEM – content
owner at cheap valuations, and BHIN – play on telco capex. We also like ZEE (BUY) –
content and platform potential, Eros (NR) – movie IP play, BLJT (NR) – content creator,
TCOM (BUY) – telco backbone, and REDI (BUY) – distribution play. Maintain HOLD on
BHARTI and IDEA.

Telcos: Larger telcos with big balance sheets and strong customer bases will be
better positioned to monetise a content-driven strategy. We haven’t yet seen large
upfront investment by network operators in India and think capex must be
accelerated as high-speed data adoption gathers pace. Hence, ROE improvement for
Indian telcos would remain a challenge. This coupled with the entry of new capacity
(through R-Jio) will pose a risk to pricing. Thus, we retain our HOLD rating on Bharti
and Idea. Between the two, we think Bharti has been making the right investments
for data – network capex and investments in content delivery platforms to create
revenue stickiness – while Idea remains heavily underinvested in network capacity.

Telco infrastructure: We find the telco infrastructure space attractive as the speed of
technology shift is slower at the backbone level versus last mile. Further, services
such as tower rental and data centres are poised for strong growth in India and could
see ROE expansion, led by rising high-speed data penetration and internet adoption.
BHIN (BUY) and TCOM (BUY) are picks in the telco infra space.

Handsets: We are likely to see a longer cycle for integrated players (Apple) versus
pure handset vendors. For India-specific players, ASP expansion driven by a mix
change towards smartphones over feature phones will be the key. No listed plays.

Devices: While the market remains commoditised, we believe pure penetration-led
equipment plays such as DLINK (NR) could deliver strong growth but limited
ROE expansion.

Distribution: With rising data network coverage and falling ASPs of devices globally,
we expect technology penetration to record secular growth. Distribution of
technology (REDI, BUY) is a better way to play the technology penetration theme.
Though alternate delivery channels (e-commerce) remain a risk for consumer tech,
this risk is limited in enterprise tech and growth should move in line with GDP
recovery in India.

Content: We prefer content owners with a clear IP advantage and better traffic
monetisation opportunities; search, online video (movies/TV) over online news, and
pure play social networks. We like content owners (ZEE, SHEM, EROS) or creators
(BLJT). ZEE (BUY) and SHEM (BUY) are top picks.

Internet platforms: We have seen hectic funding activity for internet platform space in
the venture capital space. With India likely to emerge as the second largest internet
user base in the world with smartphones as the primary access device, we see room
for tremendous value creation in (1) product commerce, (2) content commerce, (3)
service commerce, (4) payments and (5) network-based (social, ratings/reviews)
delivery platforms. Given that this is a winner-takes-all industry, we expect
BHIN and TCOM are picks in the
attractive telco infra space
ZEE and SHEM are top picks among
content owners
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investments to establish market leadership to be frontloaded, putting pressure on
profitability and returns. We like INFOE (BUY) in this space given its track record and
exciting internet properties portfolio. Additionally, we see room for traditional media
players to establish their content delivery platforms (ZEE, EROS, Star, Viacom).
Fig 154 - Valuations and Recommendations
Price
Market
cap
LC US$ mn
EV Rating
LC mn
Target
Price
EPS
LC FY16
EBITDA
FY17
P/E
EV/EBITDA
ROE
FY16
FY17
FY16
FY17
FY16
FY17
FY16
FY17
Telcos
Bharti Airtel
419
26,088 2,281,749 HOLD
400
16
17 335,319
358,269
26
25
6.8
6.4
10%
10%
Idea Cellular
173
9,723 1,022,293 HOLD
190
10
5 132,102
144,258
18
32
7.7
7.1
14%
7%
Telecom Infra
Bharti Infratel
448
13,232
823,213
BUY
550
12
15 54,730
63,435
37
29
15.0
13.0
14%
17%
Tata Com*
450
2,001
196,654
BUY
575
14
19 31,769
35,886
31
23
6.2
5.5
5%
6%
Eros
586
846
56,832
NR
NR
34
41
4464
5503
17
14
12.7
10.3
18%
19%
Shemaroo
285
121
8,780
BUY
400
21
27
1,011
1,208
13
11
8.7
7.3
15%
16%
Zee
399
5,970
387,601
BUY
450
11
13 13,769
16,448
37
30
28.2
23.6
17%
19%
118
735
61,325
BUY
145
11
12
7,899
8,914
11
10
7.8
6.9
16%
15%
Content
Distribution
Redington
India Internet
Info Edge #
Justdial
Makemytrip
833
1,563
91,495
BUY
1100
13
19
1,796
2,880
63
43
51.0
31.8
9%
13%
1080
1,186
67,975
NR
NR
22
34
1771
2738
49
32
38.4
24.8
22%
28%
16
655
606
NR
NR
0
0
9
18
214
44
67.2
34.5
NM
1%
Source: RCML Research, Bloomberg | *ROCE used instead of ROE; #Standalone
3 August 2015
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Companies
3 August 2015
Page 70 of 181
Company Update
INDIA
HARDWARE
3 August 2015
NOT RATED
D-Link India
DLINK IN
Hardware consumption play driven by data demand
DLINK is one of the global leaders in networking hardware solutions for
homes and enterprises. In India, the company is a market leader for internetbased devices such as routers that enable households to access wireless
internet. About 40% of its revenue comes from consumer and channel sales,
30% from telecom companies and the balance 30% from high-margin SME
turnkey projects. With higher enterprise spending, increased internet
penetration and the rollout of 4G in India, we expect strong demand for
REPORT AUTHORS
Rumit Dugar
+91 22 6766 3444
DLINK’s products. NOT RATED.
 India’s internet consumption poised for strong growth: India had 240mn internet
connections in CY14 which is poised for a 38% CAGR over the next five years, led by
cheaper devices and the push towards high-speed data (wired and wireless). As the
government and consumers continue the move toward widespread broadband
usage and as 4G prevalence grows, the market will require more and better routers,
switches, and products for storage and surveillance. Thus, both at the home and
enterprise level, the demand for network solutions will continue to rise.
 Market leadership in internet-based devices: DLINK is a market leader with 40%
share in WLAN and 30% share in the network switch category, both of which are
growing at a fast pace given the traction in telecom services. The market
opportunity for routers in India is immense – led by Indian domestic IT spends of
Rs 48bn in FY15 and rising consumer demand.
 Internet and IOT to boost demand for hardware: DLINK provides various hardware
products that enable access to wireless internet in households and public places.
We expect a sharp drop in device prices to lend impetus to the push towards
affordability, in turn buoying growth across the networking hardware value chain.
Enterprise tech capex, IOT and Wi-Fi offloads further add to penetration-led device
growth potential. DLINK’s Taiwan parentage should ensure access to product suite
and technology-enabling competitiveness.
 Strong revenue growth with typical hardware margins: DLINK has reported
above-industry revenue growth at a 50% CAGR (FY11-FY15) driven by growing
internet penetration, affordable devices and reach of networking equipment
(enterprise/consumer level) in India. Operating margins have improved consistently
over the last five years to 5.3% in FY15 in line with other hardware companies.
Earnings have clocked a 45% CAGR (FY11-FY15) with an ROE of 15% and should
remain strong driven by penetration-led revenue growth.
PRICE CLOSE (31 Jul 15)
INR 228.05
MARKET CAP
INR 8.1 bln
USD 126 mln
SHARES O/S
35.5 mln
FREE FLOAT
32.11%
3M AVG DAILY VOLUME/VALUE
147 K / USD 0.5 mln
52 WK HIGH
52 WK LOW
INR 251.80
INR 68
(INR)
300
250
200
150
100
50
0
Stock Price
Index Price
9,500
9,000
8,500
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
India’s internet drives growth for IT hardware
Domestic IT spend poised for double-digit growth
As per NASSCOM, domestic IT spends in India have increased 14% YoY in FY15 to
US$ 48bn, primarily underpinned by the e-commerce segment which has grown at a 33%
CAGR over the last two years. This will ramp up growth for hardware products which are
used to access the internet. Despite having muted growth, hardware revenue will
continue to have a healthy 27% contribution to overall domestic IT revenue in FY15.
Growth in the overall economy will fuel the need for domestic IT which will benefit
internet-based hardware players like DLINK in in the near term.
Domestic IT spends in India poised to
grow 14% YoY in FY15 underpinned by
the e-commerce segment
Fig 1 - Strong growth in domestic IT industry
Fig 2 - Share of various segments in domestic IT
(USD bn)
50
100
(%)
48
48
IT services
BPM
Software/ER&D
Hardware
E-commerce
90
80
46
70
60
44
42
42
50
41
40
30
40
20
38
10
36
FY13
FY14
FY15E
Source: NASSCOM
0
FY13
FY14
FY15E
Source: NASSCOM
Single-digit growth in India’s enterprise market
India’s IT infrastructure market is poised to grow at a 4% CAGR to US$ 2.29bn by 2018,
with growth led by data-centre modernisation initiatives to drive better quality services.
Enterprise networking is the biggest segment, with revenue expected to grow at a 3.6%
CAGR. The storage market is likely to grow at a 7% CAGR to US$ 426mn driven by storage
modernisation, consolidation, back-up and recovery of data. Demand for these products
in the domestic market will benefit hardware vendors like DLINK.
IT infrastructure market poised to
grow at a CAGR of 4% led by growth in
storage segment
Fig 3 - Enterprise network equipment
Market Size
($bn)
1,250.0
1,225
1,200.0
1,163
1,150.0
1,100.0
1,118
1,121
2014
2015
1,084
1,055
1,050.0
1,000.0
950.0
2012
2013
2016
2017
Source: Smartlink AR
3 August 2015
Page 72 of 181
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
Additionally IP surveillance is emerging as a high growth market and based on
6Wresearch the Indian IP surveillance market is estimated to be worth US$952bn by
2016 growing at 32% CAGR from 2011-2016.
Mobile phones lead among device shipments in India
Combined shipments of mobile/computing devices in the country are poised to grow at
an 8% CAGR (FY14-FY17) to 341mn units, with mobile phone shipments set for 8.5%
growth over the next three years driven by increased smart phone usage and
affordability. Mobile phone shipments will comprise 95% of the total devices shipped in
India by FY16.
Mobile phones to comprise 95% of the
total devices shipped in India by FY16
Increased internet penetration led by mobile phones
Strong growth in 2G and 3G services has ratcheted up demand for wireless internet in
India. With the adoption of 4G and the government’s focus on Digital India, internet
penetration is expected to increase further as more content becomes accessible on
mobile phones. India’s internet user base totals 240mn (CY14) which is the third largest
after China and the US, with growth primarily driven by mobile internet penetration. We
estimate that internet users in the country will more than double to 550mn by CY20.
Fig 4 - Internet penetration across various countries
100%
90%
90%
87%
86%
86%
86%
Internet penetration in India still low,
but not for long given rising
smartphone affordability
80%
70%
59%
60%
53%
50%
46%
38%
40%
30%
19%
20%
India
Nigeria
China
Brazil
Russia
France
Germany
Japan
USA
0%
UK
10%
Source: FICCI KPMG Report 2015
India offers a huge opportunity for content consumption given its large population and
relatively low reach of smartphones and hence data usage. Smartphone shipment share
in India has grown from 22% in CY13 to 35% in CY14, in turn raising demand for highspeed data. Further, as per Cisco, 72% of the global mobile data traffic will be driven by
videos in CY19, especially HD videos. Heavy video data traffic will enhance demand for
routers and hardware for wireless internet.
Use of smartphones will drive highspeed data usage
Fig 5 - Smartphone shipment share in India
Smartphone
100%
Feature phone
80%
60%
78%
72%
71%
68%
65%
22%
28%
29%
32%
35%
Q4CY13
Q1CY14
Q2CY14
Q3CY14
Q4CY14
40%
20%
0%
Source: IDC press release
3 August 2015
Page 73 of 181
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
DLINK – Focus on India’s retail/SME segments
Niche focus provides opportunity for growth
DLINK has a niche focus on the B2C segment given the higher disposable income and
extensive use of wireless internet in households. The company derives 40% of its revenue
from consumer and channel sales. Telecom companies contribute 30% of revenues
whereas the balance 30% is from SME turnkey projects. The company continues to focus
on the SME segment as it offers attractive margins.
DLINK has a niche focus on the B2C
segment
Fig 6 - Revenue split across segments
D-Link India – Sample product
profile
Consumer
15%
Projects
30%
Channel
25%
Telecom cos
30%
Product
Segment
Cloud Cameras, Cloud
Routers
Consumer
Wifi-3G Dongles
Consumer
Portable multiuser Wi-Fi
Router
Consumer
Switches
Enterprise
Structured cabling
Enterprise
Surveillance & Storage
Enterprise
Source: Company
Data penetration in India will raise demand for hardware products
DLINK provides various hardware products to enable access to wireless internet in
households and in public places. With the advent of 4G in India and emergence of
affordable smartphones (sub-Rs 4000), internet use over mobile phones is poised to
grow rapidly over the next few years. Already, data volumes have grown 97% and 120%
YoY in FY15 for telecom players Bharti and Idea respectively (3G subscribers at 8.6% and
12% of respective subscriber base), and we expect this trend to continue. Rising data
consumption is, in turn, pushing up growth across the hardware value chain.
Fig 7 - 3G penetration as % of total subscribers
(%)
Bharti
14
Fig 8 - Data volume growth
(%)
Idea
Bharti
Idea
160
150
12
140
10
130
8
120
6
110
100
4
90
2
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
70
Q1FY14
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
80
Q4FY12
0
Rising mobile data usage fuelling
demand for wireless hardware
3 August 2015
Page 74 of 181
Company Update
D-Link India
NOT RATED
INDIA
DLINK IN
HARDWARE
DLINK a market leader in high-growth wireless segment
DLINK has witnessed high growth across all product segments (with 42% revenue CAGR
over FY12-FY15) and also continues to grow market share in the switches business where
the market size has remained flattish. The company is a leader in the domestic wireless
networking category with 40% share, which is growing apace given the traction in
telecom services. We note that the market opportunity for routers in India is immense –
Cisco alone sells products worth US$ 1bn annually versus ~US$ 81mn for DLINK (FY15). In
our view, DLINK will be able to maintain its niche for communication products in the
high-growth Indian market.
In the consumer market, the company is focusing on products like Cloud cameras, which
have already gained substantial recognition in the IP surveillance market, and portable or
personal routers designed for mobiles.
Fig 9 - Market share across various product segments
FY13
(%)
45
40
35
FY14
40
37
32
31
30
40
Leader in the domestic wireless
networking category with 40% share
30
25
20
15
10
5
0
Routers
Switches
Wireless
Source: Company
Partnership with Ruijie to compete in high value segment
In 2014, DLINK partnered with Ruijie of China to compete in the big-ticket, high-value
segment addressing data centre and large enterprise domains in India. DLINK’s
traditional strength has been the consumer and SME segments but its product offering
has been limited in the high capacity/value segment. In the high value space, the
company faces stiff competition from large technology players like Cisco and Juniper.
This segment comprises a bulk of the big enterprise market and thus success of the Ruijie
partnership and market share gains will be the key to growth.
Success of Ruijie partnership will be
the key to growth
Ruijie Networks is a network solution provider from China. It has 38 branches with sales
and services covering Asia, Europe, North America, and South America. Currently, it has
more than 3,100 employees, of which 1,600 are R&D engineers working in five R&D
centres located in Fuzhou, Beijing, Shanghai, Chengdu, and Tianjin.
3 August 2015
Page 75 of 181
Company Update
D-Link India
NOT RATED
INDIA
DLINK IN
HARDWARE
Healthy revenue profile with growing margins
Above-industry growth backed by robust demand
DLINK has reported strong double-digit revenue growth at a 42% CAGR over FY12-FY15,
ahead of industry. Growth is being driven by higher IT spends in India, new product
launches in competition with Cisco and Juniper, and its tie-up with Ruije Networks to
provide high-end products in India.
Fig 10 - Revenue growth trend
(Rs bn)
Revenue
7
(%)
90
YoY (R)
80
6
Strong double-digit revenue growth at
42% CAGR over FY12-FY15
70
5
60
50
4
40
3
30
20
2
10
1
0
0
FY11
FY12
FY13
FY14
FY15
(10)
Margin expansion unlikely without market gains in high value segment
DLINK’s EBITDA margins have improved consistently over the last five years to 5.3% in
FY15, in line with most hardware players. The company plans to focus on turnkey
projects for SMEs in India which are high margin in nature. Earnings have clocked a 45%
CAGR (FY11-FY15) and should remain strong driven by penetration-led revenue growth.
Fig 11 - EBITDA margin trend
Plans to focus on consumer and SME
turnkey projects
Fig 12 - Earnings growth trend
(%)
(Rs mn)
6
PAT
(%)
YoY (R)
250
120
100
5.5
5
5.3
5.0
80
60
150
4.5
4
200
40
20
100
(20)
3
50
3.0
2
0
FY11
(40)
(60)
FY12
FY13
FY14
FY15
0
FY11
FY12
FY13
FY14
FY15
(80)
3 August 2015
Page 76 of 181
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
Improved ROE profile but FCF generation still soft
DLINK has witnessed a consistent increase in ROE due to an improved margin profile,
with ROE doubling over the last four years to 18.2%. FCF is negative at Rs 3.9mn due to
higher working capital requirements. Capex is minimal and we expect the model to
remain asset light. Working capital management remains one of the challenges as the
company has grown rapidly over the past few years. We think that a rising share of
consumer business will be the key to improving margins and cash flow profile.
Fig 13 - ROE
Fig 14 - FCF
(%)
20
(Rs mn)
150
18
100
16
50
14
0
12
10
(50)
8
(100)
6
(150)
4
(200)
2
0
ROE has doubled over the last four
years to 18.2%
FY11
FY12
FY13
FY14
FY15
(250)
FY10
FY11
FY12
FY13
FY14
3 August 2015
Page 77 of 181
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
Management team

Mr. A.P. Chen, Chairman, has over 30 years of work experience, and is presently
Director and CFO of D-Link Taiwan.

Mr. Gary Yang, Managing Director, also in charge of the Middle East and African
region for DLINK, has 18 years of experience of which 15 years have been with
the company.

Mr. Rajaram Ajgaonkar, Director, is a Chartered Accountant with 30 years of
experience. He has also done his LLB from GLC in Mumbai.

Mr. Satish Godbole, Director, is a Chartered Accountant with a 28-year practice and
is specialized in Company Law, Mergers & Amalgamation and FEMA.

Mr. C.M. Gaonkar, Executive Director and CFO, is a Chartered Accountant with 25
years of experience. He was instrumental in the successful launch of the IPO in 2001.

Mr. Tushar Sighat, CEO, has over 20 years of experience. Prior to DLINK, he has
worked with Elitecore Tech Ltd as Senior VP for India and SAARC.
Shareholding pattern
Fig 15 - D-Link Mauritius holds 51% stake
Others
39%
Promoter Foreign
51%
FII
0.1%
Mutual Funds
10%
3 August 2015
Page 78 of 181
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
Income Statement
Y/E 31 Mar (INR mln)
FY11A
FY12A
FY13A
FY14A
FY15A
1,281
2,231
3,537
4,876
6,240
EBITDA
41
112
195
254
330
EBIT
32
96
178
237
313
Net interest income/(expenses)
0
2
2
8
5
Other income/(expenses)
4
1
1
6
0
(14)
(5)
(5)
32
(16)
EBT
50
101
182
204
324
Income taxes
16
30
59
68
111
Extraordinary items
0
0
0
0
0
Min. int./Inc. from associates
0
0
0
0
0
34
70
123
136
213
Total revenue
Exceptional items
Reported net profit
Adjustments
0
0
0
0
0
34
70
123
136
213
FY11A
FY12A
FY13A
FY14A
FY15A
177
441
607
802
1,145
14
23
33
74
108
Provisions
0
0
0
0
0
Debt funds
0
0
0
0
0
Other liabilities
5
7
7
10
5
Equity capital
265
265
265
265
71
Reserves & surplus
455
511
617
732
1,274
Shareholders' fund
720
777
882
997
1,345
Total liabilities and equities
916
1,248
1,529
1,883
2,603
Cash and cash eq.
116
58
17
31
2
Accounts receivables
212
479
815
945
1,408
Inventories
272
420
442
632
781
61
45
26
43
11
0
0
0
0
165
Adjusted net profit
Balance Sheet
Accounts payables
Other current liabilities
Other current assets
Investments
Net fixed assets
222
213
203
197
195
CWIP
0
0
0
0
0
Intangible assets
0
0
0
0
0
Deferred tax assets, net
0
0
0
0
0
Other assets
34
33
25
35
41
Total assets
916
1,248
1,529
1,883
2,603
FY11A
FY12A
FY13A
FY14A
FY15A
43
86
140
153
230
Interest expenses
0
0
0
0
0
Non-cash adjustments
1
6
1
(8)
0
Changes in working capital
(43)
(138)
(162)
(139)
0
Other operating cash flows
0
0
0
0
0
Cash flow from operations
1
(46)
(21)
7
230
(217)
(8)
(6)
(10)
0
145
86
(15)
15
0
Other investing cash flows
0
1
(0)
(0)
0
Cash flow from investing
(71)
79
(21)
5
0
0
0
0
35
0
(35)
(10)
(14)
(18)
0
(35)
(10)
(14)
17
0
(106)
23
(56)
29
230
Cash Flow Statement
Net income + Depreciation
Capital expenditures
Change in investments
Equities issued
Debt raised/repaid
Interest expenses
Dividends paid
Other financing cash flows
Cash flow from financing
Changes in cash and cash eq
3 August 2015
Page 79 of 181
NOT RATED
Company Update
D-Link India
INDIA
DLINK IN
HARDWARE
Per Share Data
Y/E 31 Mar (INR)
FY11A
FY12A
FY13A
FY14A
FY15A
Reported EPS
1.1
2.3
4.1
4.5
6.2
Adjusted EPS
1.1
2.3
4.1
4.5
6.2
DPS
0.3
0.4
0.5
0.6
0.0
FY11A
FY12A
FY13A
FY14A
FY15A
0.6
0.5
0.3
0.2
0.8
EV/EBITDA
19.3
14.1
6.8
4.2
14.8
Adjusted P/E
14.5
20.4
11.6
6.8
23.8
1.5
1.0
1.1
1.0
3.2
FY11A
FY12A
FY13A
FY14A
FY15A
EBITDA margin
3.2
5.0
5.5
5.2
5.3
EBIT margin
2.5
4.3
5.0
4.9
5.0
Adjusted profit margin
2.7
3.2
3.5
2.8
3.4
Adjusted ROAE
4.8
9.4
14.9
14.5
18.2
--
9.6
15.0
14.8
18.0
Revenue
3.2
5.0
5.5
5.2
5.3
EBITDA
2.5
4.3
5.0
4.9
5.0
Adjusted EPS
2.7
3.2
3.5
2.8
3.4
Invested capital
4.8
9.4
14.9
14.5
18.2
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
Profitability & Return Ratios (%)
ROCE
YoY Growth (%)
Working Capital & Liquidity Ratios
Receivables (days)
60.2
56.6
66.7
65.9
68.8
Inventory (days)
--
--
--
--
--
Payables (days)
--
--
--
--
--
Current ratio (x)
3.5
2.2
2.0
1.9
1.8
Quick ratio (x)
1.7
1.2
1.3
1.1
1.1
Gross asset turnover
10.7
10.3
17.0
24.3
31.8
Fixed asset turnover
1.4
2.1
2.5
2.9
2.8
264.1
59.8
99.3
29.0
67.4
0.0
0.0
0.0
0.4
0.2
Turnover & Leverage Ratios (x)
Net interest coverage ratio
Adjusted debt/equity
3 August 2015
Page 80 of 181
Company Update
INDIA
INFORMATION TECHNOLOGY
3 August 2015
BUY
Redington India
TP: INR 145.00
 23.0%
REDI IN
Play on India’s hardware consumption
We like REDI as a play on the domestic IT hardware theme. With rising
affordability, still-low penetration and increasing government spends on IT
infrastructure, we expect the IT hardware market to grow at a 12-15% CAGR
REPORT AUTHORS
over the next three years. REDI should benefit from the strong growth in
smartphone demand in India as well as potential new OEM signings, alongside
growth in Apple. We expect the company to deliver 14% EPS growth over the
next two years, which could accelerate as data penetration grows. BUY.
Rumit Dugar
+91 22 6766 3444
 Smartphone segment driving growth: While the enterprise segment has been weak
due to macro conditions, REDI’s non-IT business including smartphones (Apple-led)
accounted for 27% of its India revenues in FY15, growing at 7%. With falling
smartphone prices and likely efforts by new entrants to build deeper distribution
within India, we believe REDI could be a distributor of choice for OEMs. Apple
continues to build market share.
 Online competition to remain intense: REDI has the reach, but we note that heavy
discounting by online portals is eating into its potential market share. That said, we
still think that large OEMs would look for both online and offline distribution
models, and thus REDI should still benefit from the data growth.
 Enterprise capex play: While consumer tech spending remains upbeat, REDI has
seen a slowdown due to weak enterprise tech capex in India. With a recovery in
the macro climate and pick-up in GDP, we expect growth in the enterprise business
to rebound.
 View: We expect REDI to deliver 14% revenue and EPS CAGR over the next two
years. Any new contracts in the smartphone segment would be a key growth
catalyst. We maintain BUY with a Sep’16 TP of Rs 145, valuing REDI at 11x
forward earnings.
INR 117.90
MARKET CAP
INR 47.1 bln
USD 735.9 mln
SHARES O/S
399.6 mln
FREE FLOAT
39.3%
0.5 mln / USD 0.9 mln
52 WK HIGH
52 WK LOW
INR 147.75
INR 86.90
Financial Highlights
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
279,349
315,483
343,655
389,058
440,521
EBITDA (INR mln)
6,501
6,878
7,899
8,914
10,054
140
Adjusted net profit (INR mln)
3,366
3,836
4,339
4,844
5,558
120
Adjusted EPS (INR)
8.4
9.6
10.8
12.1
13.9
Adjusted EPS growth (%)
3.9
13.7
13.1
11.6
14.7
DPS (INR)
0.9
0.0
0.0
0.0
0.0
ROIC (%)
13.3
13.1
13.4
14.6
15.7
Adjusted ROAE (%)
18.4
17.0
16.0
15.3
16.0
Adjusted P/E (x)
14.0
12.3
10.9
9.7
8.5
EV/EBITDA (x)
9.6
8.6
7.5
5.8
5.1
P/BV (x)
2.3
1.9
1.6
1.4
1.3
Revenue (INR mln)
(INR)
100
80
60
40
Stock Price
Index Price
29,410
24,410
19,410
14,410
BUY
Redington India
Company Update
TP: INR 145.00
 23.0%
REDI IN
INDIA
Fig 1 - REDI’s India revenue growth vs. GDP growth
(%)
Fig 2 - India revenue growth ex-Apple & BB vs. GDP growth
10
(%)
50
9
40
GDP growth
REDI India revenue growth (R)
15%
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
(10)
(20)
7%
4%
3%
5%
0%
FY12
FY11
FY13
Fig 3 - India non- IT revenue Growth
Fig 4 - India Apple revenue contribution
50
30
25
45
40
0%
FY14
25.8
27.0
25
20
35
20
30
15
10
20
10
15
10
5
5
0
0
5
FY13
FY14
FY15
FY17
FY16
14.0
15
25
0
1%
(%)
(%)
YoY growth
2%
7.3%
6.2%
India Non IT
5%
13.0%
(Rs bn)
6%
4.7%
4.5%
10%
0
5
4
8%
10
6
10%
9%
23.6%
6.3%
20
7
India GDP growth
9.5%
20%
30
8
India Rev growth (Ex Apple & BB)
25%
4.9
1.7
2.3
FY10
FY11
FY12
FY13
FY14
H1FY15
Fig 5 - One-year fwd P/E vs. GDP growth
One yr fwd PE
(x)
16
15
14
9.3
GDP growth
(%)
10
9.5
8.3
15.4
9
6.9
12.7
6.3
13
5.5
12
4.5
12.0
11
4.7
10.4
9
9.6
7
FY09
FY10
FY11
FY12
7
6
5
3
9.2
2
1
7.5
FY08
8
4
9.7
8
6
6.3
11.2
10
REDI’s valuation correlates with India’s
GDP growth
FY13
FY14
FY15E
FY16E
0
3 August 2015
Page 82 of 181
BUY
Redington India
Company Update
TP: INR 145.00
 23.0%
REDI IN
INDIA
Fig 6 - One-year fwd P/E
(x)
REDI 1yr fwd PE
+1 Stdev
Average
Currently trading at 9.7x FY17E
earnings
-1 Stdev
23
18
13
Jun-15
Jun-14
Jun-13
Jun-12
Jun-11
Jun-10
Jun-09
3
Jun-08
8
3 August 2015
Page 83 of 181
BUY
Redington India
Company Update
TP: INR 145.00
 23.0%
REDI IN
INDIA
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
8.4
9.6
10.8
12.1
13.9
Adjusted EPS
8.4
9.6
10.8
12.1
13.9
DPS
0.9
0.0
0.0
0.0
0.0
50.6
62.5
73.3
85.4
88.4
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
FY18E
EV/Sales
0.2
0.2
0.2
0.1
0.1
EV/EBITDA
9.6
8.6
7.5
5.8
5.1
Adjusted P/E
14.0
12.3
10.9
9.7
8.5
2.3
1.9
1.6
1.4
1.3
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
2.3
2.2
2.3
2.3
2.3
EBIT margin
2.2
2.0
2.2
2.2
2.2
1.2
1.2
1.3
1.2
1.3
Adjusted ROAE
18.4
17.0
16.0
15.3
16.0
ROCE
12.3
12.0
11.3
11.4
11.9
Revenue
15.6
12.9
8.9
13.2
13.2
EBITDA
2.1
5.8
14.8
12.8
12.8
Adjusted EPS
3.9
13.7
13.1
11.6
14.7
Invested capital
2.6
12.3
(4.5)
12.6
(1.3)
Receivables (days)
48
48
47
44
41
Inventory (days)
29
32
30
27
25
Payables (days)
41
44
43
40
37
Current ratio (x)
2.1
2.0
2.2
2.2
2.3
Quick ratio (x)
0.1
0.1
0.3
0.3
0.4
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
110.1
149.0
147.2
147.4
157.8
Total asset turnover
4.0
4.0
4.0
4.1
4.4
3.4
3.9
4.7
5.0
5.3
0.6
0.5
0.2
0.1
0.1
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
FY18E
Tax burden (Net income/PBT)
69.4
69.4
64.6
64.1
64.1
Interest burden (PBT/EBIT)
79.3
85.6
90.4
89.6
90.5
2.2
2.0
2.2
2.2
2.2
Asset turnover (Revenue/Avg TA)
403.9
402.1
398.6
412.2
435.6
Leverage (Avg TA/Avg equities)
377.8
347.1
317.4
297.2
290.8
18.4
17.0
16.0
15.3
16.0
EBIT margin (EBIT/Revenue)
Adjusted ROAE
3 August 2015
Page 84 of 181
BUY
Redington India
Company Update
TP: INR 145.00
 23.0%
REDI IN
INDIA
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
279,349
315,483
343,655
389,058
440,521
EBITDA
6,501
6,878
7,899
8,914
10,054
EBIT
6,116
6,452
7,426
8,434
9,582
(1,817)
(1,638)
(1,570)
(1,688)
(1,823)
552
711
861
808
909
0
0
0
0
0
4,851
5,524
6,716
7,554
8,667
(1,272)
(1,450)
(2,149)
(2,455)
(2,817)
0
0
0
0
0
(213)
(239)
(228)
(255)
(293)
Reported net profit
3,366
3,836
4,339
4,844
5,558
0
0
0
0
0
3,366
3,836
4,339
4,844
5,558
FY14A
FY15A
FY16E
FY17E
FY18E
Accounts payables
33,977
40,009
39,214
44,385
43,661
0
0
0
0
0
Provisions
0
0
0
0
0
Debt funds
16,652
17,447
17,447
18,947
20,447
2,260
2,629
2,629
2,629
2,629
799
799
799
799
799
Reserves & surplus
19,414
24,194
28,532
33,376
34,569
Shareholders' fund
20,213
24,993
29,332
34,176
35,368
73,102
85,078
88,622
100,137
102,105
Total revenue
Exceptional items
EBT
Income taxes
Extraordinary items
Adjustments
Adjusted net profit
Balance Sheet
Other liabilities
Equity capital
Cash and cash eq.
4,846
5,314
12,617
14,313
17,560
39,257
44,189
44,116
49,933
49,118
Inventories
22,853
28,543
25,489
28,850
28,379
3,212
2,789
3,040
3,441
3,385
0
0
0
0
0
2,082
2,152
2,519
2,759
2,822
CWIP
0
0
0
0
0
Intangible assets
0
0
0
0
0
115
103
103
103
103
Investments
Net fixed assets
Other assets
738
738
738
738
738
Total assets
73,102
83,828
88,622
100,137
102,105
Cash Flow Statement
FY14A
FY15A
FY16E
FY17E
FY18E
3,751
4,262
4,812
5,323
6,030
Interest expenses
1,817
1,638
1,570
1,688
1,823
0
0
0
0
0
(1,696)
(4,156)
2,081
(4,408)
618
213
239
228
255
293
4,086
1,983
8,692
2,858
8,763
529
(497)
(840)
(720)
(535)
(81)
0
0
0
0
0
0
0
0
0
448
(497)
(840)
(720)
(535)
(4,365)
Equities issued
859
944
0
0
Debt raised/repaid
(3,247)
795
0
1,500
1,500
Interest expenses
(1,817)
(1,638)
(1,570)
(1,688)
(1,823)
Dividends paid
(419)
0
0
0
0
116
131
(228)
(255)
(293)
(4,508)
232
(1,799)
(443)
(4,981)
25
1,718
6,053
1,695
3,248
4,846
6,564
11,367
14,313
17,560
Closing cash and cash eq
3 August 2015
Page 85 of 181
India TMT
Sector Report
INDIA
Telcos
3 August 2015
Page 86 of 181
Company Update
INDIA
TELECOM
3 August 2015
HOLD
Bharti Airtel
TP: INR 400.00
 4.5%
BHARTI IN
A story of competition, capex and capital allocation
Low data penetration remains the key driver for Bharti given its leadership
in the segment. We, however, restate HOLD on the stock with a Sep’16 TP of
Rs 400 given (1) risks to data pricing and voice ARPU post R-Jio’s launch,
REPORT AUTHORS
(2) bad capital allocation (Africa), (3) rising capex to upgrade network
quality and data volumes, and (4) the need to expand its ARPU base to new
data platforms (content/transaction/services). Valuations at 6.3x EBITDA are
reasonable; telcos structurally are unlikely to outperform in this value chain.
 India – Data penetration key driver, capex to remain elevated: High-speed data
penetration in India is low at 13% and represents a key opportunity for Bharti. The
segment, however, would be capex-heavy as compared to voice services due to
spectrum auction costs and high site density, which is likely to push up the company’s
capex/sales ratio from 9% in FY14 to 16% in FY17. Also, with risks to data pricing, the
sensitivity to volumes and thus capex will remain high. We expect 10%/9%/29%
revenue/EBITDA/EPS growth for Bharti in the next two years.
 Expansion of voice RMS to data RMS key challenge: Bharti has an enviable 31%
revenue market share (RMS) in the voice business. But despite a stronger balance
sheet and better spectrum assets to capture data market share, RMS expansion
would be a key challenge for the company due to its limited first-mover advantage
and fierce competition from Vodafone, Idea and R-Jio. Further, for long-term ROE
expansion, we think telcos need to move up the supply value chain to gain greater
consumer wallet share and better pricing power.
 View – Neutral: The entry of R-Jio continues to pose near-term risks and, over the
longer term, data capex-revenue dynamics remain unfavourable. Although
valuations are not expensive, we would wait for the launch of R-Jio and more
effective capital allocation towards high-growth areas before turning more
constructive on the stock. Maintain HOLD with a Sep’16 SOTP-based TP of Rs 400.
Rumit Dugar
+91 22 6766 3444
INR 418.80
MARKET CAP
INR 1,674.1 bln
USD 26.1 bln
SHARES O/S
3,997.4 mln
FREE FLOAT
34.6%
52 WK HIGH
52 WK LOW
INR 452.45
INR 335.80
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
857,461
920,394
954,854
1,030,652
1,118,725
EBITDA (INR mln)
276,596
312,276
335,319
358,269
389,085
27,727
51,160
63,683
68,311
54,459
7.0
12.8
15.9
17.1
13.6
17.0
82.5
24.5
7.3
(20.3)
DPS (INR)
1.0
2.0
5.0
5.0
5.0
280
ROIC (%)
3.2
5.8
6.3
6.4
6.1
230
Adjusted EPS (INR)
Adjusted ROAE (%)
5.0
8.4
9.8
9.9
7.4
Adjusted P/E (x)
59.7
32.7
26.3
24.5
30.7
EV/EBITDA (x)
8.4
7.5
6.7
6.2
5.6
P/BV (x)
2.8
2.7
2.5
2.3
2.2
(INR)
430
380
330
Stock Price
Index Price
30,400
28,400
26,400
24,400
22,400
20,400
18,400
16,400
14,400
HOLD
Bharti Airtel
Company Update
TP: INR 400.00
 4.5%
BHARTI IN
INDIA
TELECOM
Fig 1 - Our sum-of-parts price target for Bharti Airtel is Rs400/share
EV/EBITDA
Multiple (x)
1. EV of Core business
Rs bn
Rs/share
1,979
495
Africa
4.5
257
64
India - Ex Infratel
7.0
1,722
431
756
189
Equity Value - Bharti Airtel
1,223
306
2. Bharti Infratel - Equity Value @71.81% stake
771.7
193
Net Debt - Ex Infratel
50% Holding company discount
Total equity value
Basis of valuation/comments
EV/EBITDA 4.5x
EV/EBITDA 7x
Based on our TP of Rs550
97
403
Sep-16 Target Price
3 August 2015
Page 88 of 181
HOLD
Bharti Airtel
Company Update
TP: INR 400.00
 4.5%
BHARTI IN
INDIA
TELECOM
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
7.0
12.8
15.9
17.1
13.6
Adjusted EPS
7.0
12.8
15.9
17.1
13.6
DPS
1.0
2.0
5.0
5.0
5.0
151.1
156.4
167.3
179.4
188.0
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
FY18E
EV/Sales
2.7
2.5
2.4
2.1
1.9
EV/EBITDA
8.4
7.5
6.7
6.2
5.6
Adjusted P/E
59.7
32.7
26.3
24.5
30.7
2.8
2.7
2.5
2.3
2.2
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
32.3
33.9
35.1
34.8
34.8
EBIT margin
14.0
17.1
18.4
17.0
15.7
3.2
5.6
6.7
6.6
4.9
Adjusted ROAE
5.0
8.4
9.8
9.9
7.4
ROCE
3.0
5.7
6.4
6.4
5.9
8.5
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Revenue
6.8
7.3
3.7
7.9
EBITDA
11.4
12.9
7.4
6.8
8.6
Adjusted EPS
17.0
82.5
24.5
7.3
(20.3)
4.1
6.6
0.3
(0.5)
0.3
26
Invested capital
Receivables (days)
27
26
26
26
Inventory (days)
1
1
1
1
1
Payables (days)
175
187
204
199
198
Current ratio (x)
0.4
0.3
0.4
0.4
0.5
Quick ratio (x)
0.2
0.2
0.2
0.2
0.3
1.3
1.6
1.6
1.7
1.7
0.5
0.5
0.5
0.5
0.5
2.5
3.2
3.2
3.6
2.6
1.1
0.9
0.8
0.7
0.6
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
FY18E
38.0
47.4
52.8
54.1
51.0
60.7
68.7
68.6
72.1
61.0
14.0
17.1
18.4
17.0
15.7
48.9
48.6
48.4
50.9
53.3
318.4
310.0
305.0
292.4
285.9
5.0
8.4
9.8
9.9
7.4
Adjusted ROAE
3 August 2015
Page 89 of 181
HOLD
Bharti Airtel
Company Update
TP: INR 400.00
 4.5%
BHARTI IN
INDIA
TELECOM
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
Total revenue
857,461
920,394
954,854
1,030,652
1,118,725
EBITDA
276,596
312,276
335,319
358,269
389,085
EBIT
120,100
156,965
175,733
175,137
175,296
(47,206)
(49,098)
(55,199)
(48,834)
(68,446)
0
0
0
0
0
Exceptional items
0
0
0
0
0
72,894
107,867
120,534
126,303
106,851
(48,449)
(54,046)
(60,467)
(61,781)
(55,597)
0
0
0
0
0
3,282
(2,661)
3,616
3,789
3,206
27,727
51,160
63,683
68,311
54,459
0
0
0
0
0
27,727
51,160
63,683
68,311
54,459
EBT
Income taxes
Extraordinary items
Reported net profit
Adjustments
Adjusted net profit
Balance Sheet
Accounts payables
FY14A
FY15A
FY16E
FY17E
FY18E
283,981
339,670
352,387
380,361
412,864
88,721
75,030
77,931
79,805
83,929
Provisions
0
0
0
0
0
Debt funds
775,808
678,782
653,672
654,520
655,227
Other liabilities
57,291
187,901
187,901
187,901
187,901
Equity capital
143,101
143,329
143,329
143,329
143,329
Reserves & surplus
454,459
481,681
525,377
573,702
608,174
Shareholders' fund
597,560
625,010
668,706
717,031
751,503
1,831,772
1,957,819
1,987,381
2,064,861
2,134,130
112,073
104,559
114,820
167,203
194,692
62,441
67,252
69,770
75,308
81,744
1,422
1,339
1,390
1,500
1,628
47,921
41,796
43,315
46,658
50,542
Cash and cash eq.
Inventories
Investments
0
0
0
0
0
596,429
579,157
604,278
624,525
658,286
CWIP
0
0
0
0
0
Intangible assets
0
0
0
0
0
62,627
59,502
59,502
59,502
59,502
Other assets
892,157
1,057,956
1,048,050
1,043,909
1,041,480
Total assets
1,831,772
1,957,818
1,987,381
2,064,861
2,134,130
Net fixed assets
Cash Flow Statement
Interest expenses
FY14A
FY15A
FY16E
FY17E
FY18E
184,223
206,471
223,270
251,444
268,249
48,380
50,055
56,171
49,806
69,418
0
0
0
0
0
(4,779)
143,291
(9,412)
18,382
20,270
(3,282)
2,661
(3,616)
(3,789)
(3,206)
224,542
402,478
266,413
315,842
354,731
(193,403)
(250,606)
(169,994)
(188,667)
(232,837)
0
0
0
0
0
0
0
0
0
0
(193,403)
(250,606)
(169,994)
(188,667)
(232,837)
Equities issued
71,203
(8,408)
0
0
0
Debt raised/repaid
29,351
(95,286)
(10,000)
(5,000)
(5,000)
Interest expenses
(48,380)
(50,055)
(56,171)
(49,806)
(69,418)
(3,955)
(7,995)
(19,987)
(19,987)
(19,987)
(297)
0
0
0
0
47,922
(161,744)
(86,158)
(74,793)
(94,405)
Dividends paid
79,061
(9,872)
10,261
52,383
27,489
163,808
102,201
114,820
167,203
194,692
3 August 2015
Page 90 of 181
Company Update
INDIA
TELECOM
3 August 2015
HOLD
Idea Cellular
TP: INR 190.00
 9.6%
IDEA IN
Data growth to hinge on capex, balance sheet strength
Idea has been the best execution play among Indian telcos with strong RMS
gains in voice. Nonetheless, we maintain HOLD with a Sep’16 TP of Rs 190 as
Idea (1) needs to strengthen its balance sheet to compete with big boys in the
data club, (2) faces risks to data pricing and voice ARPU post R-Jio’s launch,
REPORT AUTHORS
and (3) would need higher capex investments to upgrade network quality and
Rumit Dugar
data volumes. While Idea is a pure play on India’s wireless segment, we think
estimates on FCF led by higher margins and lower capex are overly optimistic.
 Needs to carry strong voice execution over to data: Over the last five years, Idea
has expanded its revenue market share by 610bps led by solid voice execution. We
believe the company needs to carry the same execution to data-led sector growth,
but faces challenges in the form of poor data spectrum footprint, a levered balance
sheet and underinvestment in the data network. In the past two years, Idea has
seen margin expansion led by higher data but lower network costs, as data volumes
were accommodated by loading sites. Margins thus are not sustainable in our view.
 Highly levered balance sheet: As of FY15, Idea had total debt of Rs 269bn on its
balance sheet and Rs 233bn towards spectrum liability. This implies a net
debt/EBITDA of 3.4x, leaving limited room for aggressive expansion. Additionally,
the company’s capex/sales ratio has been low at 13%, and needs to be increased to
keep pace with competition to above 20% (ex-spectrum). Additionally we think
ROEs will remain under pressure for Idea, unless they de-lever through asset sales
(own towers or Indus IPO).
 View: Overall, we think balance sheet strengthening and aggressive capex are the
key to support industry-leading growth for Idea. Near-term risks remain from the
entry of new player R-Jio and, over the longer term, data capex-revenue dynamics
are unfavourable. Maintain HOLD with a Sep’16 TP of Rs 190 set at 6.5x one-year
forward EV/EBITDA.
+91 22 6766 3444
INR 173.35
MARKET CAP
INR 623.8 bln
USD 9.7 bln
SHARES O/S
3,544.1 mln
FREE FLOAT
57.7%
52 WK HIGH
52 WK LOW
INR 204.00
INR 138.10
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
265,188
315,708
371,990
412,208
447,002
EBITDA (INR mln)
83,336
108,188
132,102
144,258
148,841
19,677
31,660
35,532
19,638
7,955
5.9
8.8
9.9
5.5
2.2
94.4
48.9
11.8
(44.7)
(59.5)
DPS (INR)
0.0
0.0
0.0
0.0
0.0
ROIC (%)
7.4
9.2
10.6
8.3
5.3
Adjusted ROAE (%)
12.7
16.0
14.3
7.1
2.7
Adjusted P/E (x)
29.2
19.6
17.6
31.8
78.4
EV/EBITDA (x)
8.9
7.5
5.7
4.9
6.0
P/BV (x)
3.5
2.5
2.2
2.0
1.9
Adjusted EPS (INR)
(INR)
Stock Price
Index Price
200
29,410
150
24,410
100
19,410
50
14,410
HOLD
Idea Cellular
Company Update
TP: INR 190.00
 9.6%
IDEA IN
INDIA
TELECOM
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
5.9
8.8
9.9
5.5
2.2
Adjusted EPS
5.9
8.8
9.9
5.5
2.2
DPS
0.0
0.0
0.0
0.0
0.0
50.1
69.8
80.5
86.5
88.9
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
FY18E
EV/Sales
2.8
2.6
2.0
1.7
2.0
EV/EBITDA
8.9
7.5
5.7
4.9
6.0
Adjusted P/E
29.2
19.6
17.6
31.8
78.4
3.5
2.5
2.2
2.0
1.9
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
31.4
34.3
35.5
35.0
33.3
EBIT margin
14.4
17.5
16.7
15.0
10.6
7.4
10.0
9.6
4.8
1.8
12.7
16.0
14.3
7.1
2.7
7.5
8.2
8.5
7.1
4.6
Revenue
18.1
19.1
17.8
10.8
8.4
EBITDA
38.8
29.8
22.1
9.2
3.2
Adjusted EPS
94.4
48.9
11.8
(44.7)
(59.5)
Invested capital
35.8
0.4
(2.8)
56.6
(0.5)
11
P/BV
Financial Ratios
Y/E 31 Mar
Adjusted ROAE
ROCE
YoY Growth (%)
Receivables (days)
12
10
10
11
Inventory (days)
2
1
1
6
9
Payables (days)
141
140
135
135
136
Current ratio (x)
0.5
1.7
1.3
1.3
1.1
Quick ratio (x)
0.0
1.1
0.8
0.8
0.6
0.7
0.8
0.7
0.6
0.5
0.6
0.6
0.6
0.6
0.6
5.0
5.3
5.1
1.7
1.2
1.2
0.6
0.3
1.0
0.9
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
FY18E
64.6
64.5
65.0
65.0
65.0
79.8
88.9
88.1
48.9
25.8
14.4
17.5
16.7
15.0
10.6
64.0
59.0
63.5
60.2
55.8
268.0
270.6
236.1
248.6
276.6
12.7
16.0
14.3
7.1
2.7
Adjusted ROAE
3 August 2015
Page 92 of 181
HOLD
Idea Cellular
Company Update
TP: INR 190.00
 9.6%
IDEA IN
INDIA
TELECOM
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
265,188
315,708
371,990
412,208
447,002
EBITDA
83,336
108,188
132,102
144,258
148,841
EBIT
38,142
55,152
62,082
61,795
47,496
(7,700)
(10,452)
(12,274)
(36,458)
(40,145)
0
4,355
4,897
4,897
4,897
Exceptional items
0
0
0
0
0
30,442
49,056
54,706
30,235
12,248
Total revenue
EBT
Income taxes
(10,765)
(17,396)
(19,174)
(10,597)
(4,293)
Extraordinary items
0
0
0
0
0
0
0
0
0
0
19,677
31,660
35,532
19,638
7,955
Reported net profit
Adjustments
0
0
0
0
0
19,677
31,660
35,532
19,638
7,955
FY14A
FY15A
FY16E
FY17E
FY18E
Accounts payables
74,046
84,996
92,731
105,993
116,301
Adjusted net profit
Balance Sheet
0
0
0
0
0
Provisions
1,777
1,777
1,777
1,777
1,777
Debt funds
206,350
268,591
187,338
391,338
367,338
Other liabilities
18,133
19,015
19,015
19,015
19,015
Equity capital
33,196
35,975
35,975
35,975
35,975
Reserves & surplus
132,073
194,314
229,846
249,484
257,439
Shareholders' fund
165,269
230,289
265,821
285,459
293,414
465,575
604,668
566,682
803,581
797,845
Cash and cash eq.
4,036
130,804
96,081
106,944
93,717
8,006
9,789
11,534
12,781
13,860
683
710
837
5,647
6,123
42,636
56,563
56,563
56,563
56,563
Inventories
Investments
0
0
0
0
0
Net fixed assets
295,959
355,336
350,201
570,180
576,116
CWIP
114,194
51,405
51,405
51,405
51,405
61
61
61
61
61
0
0
0
0
0
Other assets
0
0
0
0
0
Total assets
465,575
604,668
566,682
803,581
797,845
FY14A
FY15A
FY16E
FY17E
FY18E
64,872
84,696
105,552
102,101
109,300
7,700
10,452
12,274
36,458
40,145
0
0
0
0
0
8,211
(4,787)
5,863
7,205
8,753
Intangible assets
Cash Flow Statement
Interest expenses
6,953
882
0
0
0
87,736
91,242
123,689
145,763
158,198
(154,997)
(49,624)
(64,885)
(302,442)
(107,281)
0
0
0
0
0
0
0
0
0
0
(154,997)
(49,624)
(64,885)
(302,442)
(107,281)
Equities issued
1,376
33,360
0
0
0
Debt raised/repaid
65,913
62,241
(81,253)
204,000
(24,000)
Interest expenses
(7,700)
(10,452)
(12,274)
(36,458)
(40,145)
Dividends paid
0
0
0
0
0
0
0
0
0
0
59,589
85,149
(93,527)
167,542
(64,145)
(7,673)
126,768
(34,723)
10,864
(13,228)
4,036
130,804
96,081
106,944
93,717
3 August 2015
Page 93 of 181
India TMT
Sector Report
INDIA
Telecom
Infrastructure
3 August 2015
Page 94 of 181
Company Initiation
INDIA
TELECOM
3 August 2015
BUY
Bharti Infratel
TP: INR 550.00
 22.9%
BHIN IN
Unique proxy data play – initiate with BUY
We initiate coverage on BHIN with BUY and a Sep’16 TP of Rs 550. We
believe the company’s telecom tower business is the best proxy play on
burgeoning data growth in India given (1) BHIN’s market leadership (38%
market share), (2) data-led tower tenancy growth, (3) 550bps ROE expansion
in the next two years, (4) strong balance sheet with low leverage of 0.1x D/E,
and (5) high dividend payout (100% of EPS). We find premium valuations
justified and value the stock on DCF to arrive at our TP of Rs 550.
REPORT AUTHORS
Rumit Dugar
+91 22 6766 3444
 Market leader in tower space: BHIN (Indus Towers included) is the market leader in
telecom tower infrastructure in India with 38% market share. Backed by its ownership
structure and robust tower portfolio, BHIN shares a strong relationship with telcos
Bharti, Vodafone and Idea, who together form 72% of the telecom revenue market
share and are key tower tenancy drivers as India moves from a voice to a data world.
 Proxy data play: We expect tower tenancy demand to grow steadily led by (1) rising
data penetration (9% currently) in India which will drive both coverage and capacity
expansion, (2) the need for denser coverage due to low spectrum and high
population density in India and (3) launch of services by new operator R-Jio.
 ROE expansion to continue: BHIN should post strong ROE expansion of 550bps to
17% over FY15-FY17E led by stronger margins. We expect new capex needs to be
moderate and tenancy-led growth to bolster profitability over the next two years.
Leverage is low for a tower company and consolidation of tenancies in India could
further boost ROE.
INR 447.65
MARKET CAP
INR 848.9 bln
USD 13.3 bln
SHARES O/S
1,890.4 mln
FREE FLOAT
27.0%
 Initiate with BUY: BHIN remains a unique data penetration play – we expect it to
deliver 15%/23% EBITDA/EPS CAGR over FY15-FY17. At 12x FY17E EV/EBITDA,
valuations are not cheap compared to Indian telcos and utilities, but it is still trading
at a 20% discount to US-listed peers. We have a TP of Rs 550 for BHIN based on DCF.
52 WK HIGH
52 WK LOW
INR 505.00
INR 243.20
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
108,267
116,683
125,572
141,104
159,367
EBITDA (INR mln)
44,118
50,108
54,730
63,435
73,156
15,189
19,936
23,030
28,723
35,586
(INR)
420
8.0
10.5
12.2
15.2
18.8
320
42.9
31.2
15.5
24.7
23.9
220
DPS (INR)
3.7
8.9
12.2
15.2
18.8
ROIC (%)
6.2
8.1
10.0
12.6
15.7
Adjusted EPS (INR)
Adjusted ROAE (%)
8.6
11.4
13.5
16.9
20.9
Adjusted P/E (x)
55.7
42.5
36.8
29.5
23.8
EV/EBITDA (x)
19.0
15.9
14.5
12.6
10.8
4.7
5.0
5.0
5.0
5.0
P/BV (x)
120
Stock Price
Index Price
27,010
22,010
17,010
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Investment thesis
Telco capex play
India – At the cusp of explosive data growth
The Indian wireless market is experiencing a massive increase in adoption of mobile data
services. As discussed in our thematic section, India’s internet penetration remains very
low and affordable devices coupled with rising disposable incomes are likely to drive
wider internet usage. Commoditization of the handset ecosystem is driving strong
growth in smartphone adoption in India, which will translate into data growth. India’s
smartphone shipment share has grown from 22% in CY13 to 35% in CY14 and is still low.
Rising affordability of smartphones to
propel data growth
Fig 1 - Smartphone shipment share in India
Smartphone
Feature phone
100%
90%
80%
70%
72%
71%
68%
65%
28%
29%
32%
35%
Q1CY14
Q2CY14
Q3CY14
Q4CY14
78%
60%
50%
40%
30%
20%
22%
10%
0%
Q4CY13
Source: IDC
Already, rising smartphone adoption has led to a 97% jump in data volumes (Bharti
Airtel) in FY15 over FY14 for most large operators. However, high speed data (3G+)
penetration is still low and thus provides massive room for growth. The expansion of 3G
and 4G telecom networks will require more active infrastructure and these data services
would require higher tower density compared to voice services.
Fig 2 - 3G penetration (% of total subs)
(%)
Bharti
14
High speed data (3G+) penetration still
low in India
Fig 3 - 3G penetration (% of data subs)
(%)
Idea
Bharti
60
12
Idea
50
10
40
8
30
6
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
0
Q2FY13
0
Q1FY13
10
Q4FY12
2
Q1FY13
20
4
Source: : RCML Research ,Company
3 August 2015
Page 96 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Fig 4 - Data volume growth (YoY)
(%)
Bharti
Idea
150
140
130
120
110
100
90
80
70
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Fig 5 - Data revenues (% contribution)
(%)
Bharti
20
Idea
18
16
14
12
10
8
6
4
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
0
Q1FY13
2
India – Capex to remain elevated
Data growth requires large investments in building new technology coverage and
providing capacity to satisfy the burgeoning demand. India’s data capex needs will be
driven by the factors listed below:

High population density – More tower tenancies needed for seamless coverage

Low 3G coverage – Need for coverage and capacity expansion

Low spectrum holdings – Expensive spectrum has kept holdings low

Rising data consumption – Direct jump to wireless internet (wired internet hasn’t yet
reached India’s smaller cities and towns)
Large data capex requirement raises
growth visibility for telecom tower
tenancies
These very factors will be the big drivers for growth in telecom tower tenancies, which
positions BHIN favourably vis-à-vis telecom players.
3 August 2015
Page 97 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
As per World Bank data, India’s population density is 7.65x the world average. This
worked very well for telcos in a voice-led era, as one base transceiver station (BTS) could
cover a large population and the relatively lower bandwidth requirement helped increase
capital efficiency. However, the economics of the business reverse in a data-led scenario
given the lower quantum of spectrum available with operators coupled with more
bandwidth-hungry data users connecting to a single BTS. In order to supply high-speed
data capacity, telecom operators would have to make higher capex investments to either
buy more spectrum or to introduce denser site/tower coverage.
Fig 6 - India’s population density (people per sq. km of land area ) is very high
(Pop density)
India
450
400
High population density and low
spectrum mean telecom operators will
need to rent more tenancies/sites
World
421
416
411
406
400
395
390
385
379
China
350
300
250
200
100
2005
2006
52
51
2007
143
142
141
140
51
50
50
0
140
139
150
2008
2010
2009
54
53
52
145
144
143
2011
55
54
2012
2013
We note that 3G penetration is still low and operators are expanding their coverage.
Additionally, most of the current 3G sites are on loading basis, which is essentially an
upgrade of a 2G site to 3G. This comes at a marginal 10-12% additional tower rental. We
think that telecom operators will initially expand through this model, but would then
follow up with full-fledged tower tenancy requirements. The latter would be a key
growth driver for BHIN. Already, data growth has reached a stage where operators would
need to gradually begin deploying pure 3G sites.
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
2G sites
Q3FY14
Q1FY14
Q3FY13
Q2FY13
Q1FY13
Q4FY12
3G sites
Q3FY12
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
100
90
80
70
60
50
40
30
20
10
0
Q2FY14
(%)
2G sites
Q3FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
Q4FY12
Q3FY12
3G sites
Q2FY14
(%)
100
90
80
70
60
50
40
30
20
10
0
Fig 8 - Idea – 3G sites vs. 2G sites
Q4FY13
Fig 7 - Bharti – 3G sites vs. 2G sites
Data growth at a stage where
operators need to begin deploying
pure 3G sites vs. 2G upgrades
3 August 2015
Page 98 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Average data consumption in India remains high and has been expanding. While this
could be due to low 3G penetration (possibly an urban phenomenon), we note that data
consumption has gone up even despite the limited drop in tariffs. Given low internet
penetration and plenty of disruptive internet-based business models, we believe data
consumption would remain high for India.
Fig 9 - Bharti – 2G/3GData(Mb)/month trend
Fig 10 - Idea – 3G data(Mb)/month trend
(mb's)
(mb's)
700
800
600
750
700
500
650
400
600
550
300
500
200
450
100
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
350
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
400
Q4FY12
0
Average data consumption in India
remains high
Entry of R-Jio to add to growth
While the Indian telecom market has become largely consolidated in the hands of the
top 3 players – Bharti, Vodafone and Idea, we note that R-Jio is preparing to launch an
LTE-based data network. This should provide additional tower tenancy opportunities for
BHIN given its reach. Further, BHIN has already signed a master services agreement with
R-Jio for tower sharing.
R-Jio launch provides additional tower
tenancy opportunities for BHIN
Fig 11 - R-Jio spectrum footprint
Circle
800Mhz
900Mhz
Andhra Pradesh
Assam
5
Bihar
5
1800Mhz
2300Mhz
11.6
20
10.8
20
20
Delhi
Gujarat
10.8
20
12
20
Haryana
5
4
20
Himachal Pradesh
5
5.4
20
J&K
5
20
Karnataka
10
20
Kerela
10
20
Kolkata
15
20
12.8
20
10
20
MP
5
Maharashtra
Mumbai
5
13.2
20
North East
5
12.8
20
Orissa
5
10
20
Punjab
20
Rajasthan
TN
UP (East)
3.75
10
20
13
20
3
20
UP (West)
20
West Bengal
Total
48.75
0
11.2
20
185.6
440
Source: Company, DoT, TRAI
3 August 2015
Page 99 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
New service offerings – Wi-Fi offloading
As noted earlier, the voice-driven penetration story worked perfectly well in high
population density countries like India and China given their large addressable markets
and the scalable nature of voice services. However, data services are unlikely to derive
the same scale benefits. Further, high coverage requirements and population density are
likely to put pressure on networks in emerging markets. As data usage explodes,
operator networks are being strained given limited spectrum capacities. Thus, we are
likely to see an emerging trend of alternate networks, which did not exist in Mobility 1.0,
as a new business opportunity
The adoption of alternate networks is being driven by the exponential growth of Wi-Fienabled devices such as smartphones. Operators too are increasingly looking to offload
data onto alternate networks, leading to rising demand for networks such as Wi-Fi and
Femtocells which have wireline support to help offload some traffic. BHIN is investing in
building white labelled solutions for operators that could potentially allow them to
offload their customers from wireless data to faster and more affordable Wi-Fi.
Rising demand for alternate wireless
networks like Wi-Fi and Femtocells
Undisputed market leadership
Market share of 38%
BHIN, along with Indus Towers (42% owned), is the largest pan-India tower company
based on the number of towers. BHIN owns and operates 37,196 towers in 11 circles
while Indus has 115,942 towers spread across 15 circles. Both put together cover all 22
circles in India with 4 overlapping circles.
Largest pan-India tower company
covering all circles in India
Fig 12 - Bharti Infratel and Indus footprint
Source: Company
3 August 2015
Page 100 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Tenancies led by key operators – Bharti, Vodafone and Idea
BHIN enjoys market leadership and is well supported by the fact that parent Bharti Airtel
is the leader in India’s wireless market with 31% revenue market share (RMS). Further,
Vodafone and Idea are co-owners in Indus Towers. Bharti and Vodafone lead subscriber
market share at 32% and 26% respectively, while Idea comes in third at 22%, which is
more than its RMS due to expansion in rural India where realisations are low.
Fig 13 - Indian telecom – revenue market share (Dec-14)
Fig 14 - India telecom – GSM subscriber market share
Videocon
1%
MTNL
Telewings
0%
Aircel
7%
12%
Reliance
6%
Others
17%
Parent Bharti Airtel a leader in India’s
wireless market; Vodafone and Idea
co-own Indus Towers
Bharti Airtel
32%
Bharti
31%
Idea
18%
IDEA
22%
Vodafone
26%
BSNL
5%
Vodafone
23%
Source: RCML Research, TRAI
Source: RCML Research, COAI
Net-cash balance sheet – room to leverage
Sound balance sheet
BHIN has healthy net cash of Rs 51bn led by higher FCF generation. We believe improved
tenancy ratios will lead to improved margins and free cash generation which will be used
towards expansion and paying dividends. Cash per share is Rs 27 as on FY15.
Fig 15 - Bharti Infratel – Net cash
Fig 16 - Bharti Infratel – Net D/ E
70
(x)
0.3
60
0.2
50
0.1
40
0.0
30
(0.1)
20
(0.2)
10
(0.3)
(Rs bn)
0
FY13
FY14
FY15
FY16E
Source : RCML Research, Company
Healthy cash generation helped by
improved margins
FY17E
FY18E
(0.4)
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
ROE low but scope to improve
BHIN’s strong margin and earnings growth provides scope for improved return ratios. We
expect ROE to grow from 11.4% currently to 17% by FY17 driven by higher operating and
net margins. EBITDA margin is poised to grow at a CAGR of 15% (FY15-FY17).
3 August 2015
Page 101 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Fig 17 - Scope for sharp uptick in ROE
Upside to ROE from higher operating
and net margins
(%)
18
16.9
16
13.5
14
11.4
12
10
8.6
8
6.3
6
4
2
0
FY13A
FY14A
FY15A
FY16E
FY17E
Dividend to remain high
The company has consistently paid healthy dividends led by improvement in profits over
the last few years. Dividend yield is expected to go up from 2% currently to 3.5% in FY17.
FY15 saw a dividend payout of 100% as the company has a healthy cash balance and
does not require a large amount of capex, unlike telecom operators.
Fig 18 - Dividend yield
Fig 19 - Dividend payout ratio
(%)
(%)
4.0
3.6
3.5
104
100
100
FY16E
FY17E
80
2.5
2.0
2.0
60
1.5
0.7
57
46
40
0.8
20
0.5
0.0
120
100
2.9
3.0
1.0
100% dividend payout in FY15
FY13A
FY14A
FY15A
FY16E
FY17E
0
FY13A
FY14A
FY15A
EBITDA growth to translate into FCF growth
Margins to expand led by tenancy growth
BHIN has witnessed consistent improvement in margins led by higher tenancy ratios over
the last three years from 37% in FY13 to 43% in FY15. EBITDA margins are set to improve
further to 45.3% in FY17 led by growth of 8% and 9% respectively in the tenancy ratio for
FY16 and FY17.
EBITDA margins expected to improve
free cash generation
3 August 2015
Page 102 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Fig 20 - Higher EBITDA driven by operating efficiency
(%)
EBITDA margin
(%)
Tenancy growth (R)
50
10
9
8
45
7
6
40
5
4
3
35
2
1
30
FY13A
FY14A
FY15A
FY16E
0
FY17E
Expect FCF growth of 37% over the next three years
FCF has remained positive except in FY13. We model for a strong 37% CAGR (FY14-FY17)
driven by healthy margin improvement.
Fig 21 - Strong FCF growth
We model for 37% CAGR (FY14-FY17)
in FCF
(Rs bn)
40
30
20
32
29
27
FY15A
FY16E
12
12
10
0
(10)
(20)
(30)
(24)
FY12
FY13A
FY14A
FY17E
Fig 22 - FCF yield
Fig 23 - Dividend yield
5
(%)
4.0
4
3.5
3
3.0
(%)
2
2.8
2.4
2.5
1
2.0
0
1.5
(1)
1.0
(2)
0.7
0.8
FY13
FY14
0.5
(3)
(4)
3.5
FY13
FY14
FY15
FY16E
FY17E
0.0
FY15
FY16E
FY17E
3 August 2015
Page 103 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Margin expansion to provide higher ROE
BHIN has witnessed expansion in margins driven by higher tenancy ratios on the back of
demand for telecom towers in India, whereas global peer AMT (American Tower Corp)
has seen margins declining over the last three years. We expect BHIN’s margins to
improve further over the next two years, pushing up ROE.
Fig 24 - EBITDA growth – BHIN vs. AMT
(%)
Bharti Infratel
EBITDA margins expected to improve
further to 45% in FY17
Fig 25 - ROE – BHIN vs. AMT
(%)
American Tower Corp
Bharti Infratel
25
35
30
American Tower Corp
20
25
20
15
15
10
10
5
5
0
FY13
FY14
FY15
Source: Bloomberg, Company, RCML Research
FY16E
FY17E
0
FY13
FY14
FY15
FY16E
FY17E
3 August 2015
Page 104 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Financial snapshot
Fig 26 - Revenue growth
(Rs mn)
Fig 27 - EBITDA growth
Revenue
(%)
Growth (%) (R)
180,000
160,000
140,000
18
12
70,000
16
60,000
14
8
80,000
6
40,000
20,000
0
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
12
50,000
10
40,000
8
30,000
4
20,000
2
10,000
0
0
6
4
2
FY12
FY13
FY14
Fig 28 - EBITDA margin
Fig 29 - PAT growth
(%)
(Rs mn)
48
45
46
42
46
36
FY16E
FY17E
FY18E
Growth (%) (R)
60
50
40
25,000
41
30
20,000
15,000
37
FY12
FY13
20
10,000
37
10
5,000
FY14
FY15
FY16E
FY17E
0
FY18E
FY12
FY13
FY14
Fig 30 - Return ratios
Fig 31 - Net debt/Equity
(%)
ROCE
25
0
(%)
40,000
30,000
40
38
PAT
FY15
35,000
44
43
44
(%)
Growth (%) (R)
80,000
100,000
60,000
EBITDA
14
10
120,000
(Rs mn)
FY15
FY16E
FY17E
FY18E
0
(x)
0.3
ROE
0.2
20
0.1
15
0.0
(0.1)
10
(0.2)
5
0
(0.3)
FY13
FY14
FY15
FY16E
FY17E
FY18E
(0.4)
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
3 August 2015
Page 105 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Valuation
BHIN trades at a 20% discount to global peers despite a strong earnings profile (15%
CAGR over FY15-FY17E). We believe the company merits premium valuations given
healthy revenue growth and margin expansion going ahead. India provides a large
market for data usage which will trigger the need for telecom towers and in turn benefit
BHIN. We initiate coverage on the stock with a Sep’16 DCF-based target price of Rs 550.
Fig 32 - Global peers
Mkt Cap EBITDA CAGR
ROE (%)
EV/EBITDA (x)
(FY15-17)
Bharti Infratel
14
14.9
11.4
14.2
17.8
16.5
14.6
12.5
43.1
35.6
28.3
American Tower Corp
40
10.3
16.3
17.0
22.6
18.4
16.4
15.1
45.5
35.3
30.0
Crown Castle International Corp
27
5.2
6.7
7.9
12.7
18.3
17.6
16.5
65.4
53.8
45.9
3
17.0
30.6
25.9
25.0
16.6
13.9
12.1
26.7
21.1
18.1
Tower Bersama Infrastructure Tbk PT
FY15 FY16E FY17E
PE (x)
US$ bn
FY15 FY16E FY17E
FY15 FY16E FY17E
Discount has narrowed sharply against global peer (AMT)
BHIN has traded at an average EV/EBITDA of 9x one-year forward over the last two years
since its listing, and the discount to its global peer AMT has narrowed from 52% in FY13
to 19% currently. We expect this gap to narrow further as growth in the tower business is
expected to pick up in India on the back of demand for data services.
Fig 33 - EV/EBITDA – one-year forward
EV
(Rs mn)
8x
11x
Fig 34 - EV/EBITDA – Premium/discount to AMT
14x
17x
1,200,000
0%
(10%)
1,000,000
(20%)
800,000
(30%)
600,000
May-15
Jan-15
Mar-15
Nov-14
Jul-14
Sep-14
May-14
Jan-14
Mar-14
Nov-13
Sep-13
Jul-13
Mar-13
May-13
May-15
Jan-15
Mar-15
Nov-14
Sep-14
Jul-14
Mar-14
May-14
Jan-14
Nov-13
(70%)
Jul-13
(200,000)
Sep-13
(60%)
May-13
0
Jan-13
(50%)
Mar-13
200,000
Jan-13
(40%)
400,000
3 August 2015
Page 106 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Key risks
Reduced demand for tower infrastructure in India
BHIN is into building, acquiring and owning tower infrastructure. A decrease in demand
for telecom services, deterioration in the financial condition of telecom service providers
or consolidation among them may affect demand for the company’s tower infrastructure
services. Delay in deployment of 3G/4G networks will also pose challenges to demand for
the company’s towers.
Increased competition could lead to pricing pressure
The tower infrastructure business in India is highly competitive. Established telecom
service providers such as BSNL and MTNL have their own tower portfolios and are
contemplating transferring these to independent tower companies. Others like Reliance
Communications and Tata Teleservices have demerged their towers into separate tower
companies. In addition, BHIN and Indus face competition from independent tower
infrastructure companies as well as from power transmission operators such as Power
Grid, who may let their existing infrastructure be utilised for installation of active
telecom equipment. Increased competition could raise pricing pressure for the company.
Change in regulations for tower sharing
Mandatory sharing of in-building solutions and distributed antenna systems could result
in increased competition and reduce the demand for new towers. In addition, permitting
the sharing of active infrastructure could incentivize operators to utilise each other’s
active infrastructure at existing towers rather than requesting new towers. Further, the
changes recommended to the Universal Service Obligation rural development promotion
scheme may limit the overall development of towers and related assets within areas that
are subject to the scheme. This could limit opportunities for BHIN to expand business.
Changing regulations and licence
approval delays pose key risks to the
business
Difficulty in getting licences for building new towers
The rollout of towers requires multiple approvals or permits from various regulatory
authorities, including no-objection certificates from the local or municipal authorities,
environmental approvals from pollution control boards and approvals from the Airports
Authority of India when towers are located near airports. Delays in securing or renewing
approvals could affect the business. Further, the absence of a uniform national policy for
granting permission to deploy towers has resulted in policies that vary widely across civic
authorities and from state to state, creating significant uncertainty.
3 August 2015
Page 107 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Management profile

Mr. Akhil Gupta, Chairman, joined the company in March 2008 as Director. He is a
Chartered Accountant and has completed an advanced management program at
Harvard Business School; he has 29 years of work experience.

Mr. Devender Singh Rawat, Managing Director and CEO, joined the company in
2010 as CEO. He holds a Bachelor’s Degree in Electronics and Communication
Engineering and has 25 years of work experience.

Mr. Pankaj Miglani, Chief Financial Officer, joined the company in August 2011. He is
a Chartered Accountant, certified Cost and Works Accountant and certified Company
Secretary. He has 19 years of work experience.

Mr. Biswajit Patnaik, Chief Sales and Marketing Officer, joined the company in 2008.
He has a Bachelor’s Degree from Behrampur University and a Diploma in Sales and
Marketing Management from National Institute of Sales. He has 21 years of work
experience.

Mr. Dhananjay Joshi, Chief Operations Officer, joined the company in 2014. He has a
Bachelor’s Degree in Electronics and Telecommunication Engineering from Mysore
University and has 27 years of work experience.
Fig 35 - Shareholding pattern – FIIs have 22% stake
FII
22%
Others
5%
Mutual Funds/FI
1%
Promoter
72%
Source: Company
3 August 2015
Page 108 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
8.0
10.5
12.2
15.2
18.8
Adjusted EPS
8.0
10.5
12.2
15.2
18.8
DPS
3.7
8.9
12.2
15.2
18.8
95.5
90.0
90.0
90.0
90.0
FY14A
FY15A
FY16E
FY17E
FY18E
7.7
6.8
6.3
5.6
5.0
EV/EBITDA
19.0
15.9
14.5
12.6
10.8
Adjusted P/E
55.7
42.5
36.8
29.5
23.8
4.7
5.0
5.0
5.0
5.0
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
40.7
42.9
43.6
45.0
45.9
EBIT margin
21.1
24.2
25.7
28.9
31.8
14.0
17.1
18.3
20.4
22.3
Adjusted ROAE
8.6
11.4
13.5
16.9
20.9
ROCE
7.3
9.4
11.4
14.4
17.8
BVPS
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Revenue
5.4
7.8
7.6
12.4
12.9
EBITDA
15.8
13.6
9.2
15.9
15.3
Adjusted EPS
42.9
31.2
15.5
24.7
23.9
3.7
(12.5)
0.0
0.4
(0.5)
14
Invested capital
Receivables (days)
20
10
13
14
Inventory (days)
0
0
0
0
0
Payables (days)
39
13
10
10
10
Current ratio (x)
2.2
1.7
1.7
1.6
1.6
Quick ratio (x)
1.8
1.3
1.3
1.3
1.2
NA
NA
NA
NA
NA
0.4
0.4
0.5
0.5
0.6
0.0
0.0
0.0
0.0
0.0
(0.3)
(0.3)
(0.3)
(0.3)
(0.4)
FY14A
FY15A
FY16E
FY17E
FY18E
65.4
65.3
66.0
66.0
66.0
101.7
108.0
107.9
106.7
106.3
21.1
24.2
25.7
28.9
31.8
38.4
41.8
46.2
51.3
56.5
159.9
159.1
159.7
161.6
165.7
8.6
11.4
13.5
16.9
20.9
DuPont Analysis
Y/E 31 Mar (%)
Adjusted ROAE
3 August 2015
Page 109 of 181
BUY
Bharti Infratel
Company Initiation
TP: INR 550.00
 22.9%
BHIN IN
INDIA
TELECOM
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
108,267
116,683
125,572
141,104
159,367
EBITDA
44,118
50,108
54,730
63,435
73,156
EBIT
22,859
28,261
32,313
40,785
50,703
373
2,254
2,560
2,712
3,188
0
0
0
0
0
Exceptional items
5
6
7
8
9
EBT
23,232
30,515
34,873
43,496
53,891
Income taxes
Total revenue
(8,053)
(10,591)
(11,857)
(14,789)
(18,323)
Extraordinary items
0
0
0
0
0
0
0
0
0
0
15,184
19,930
23,023
28,715
35,577
Reported net profit
Adjustments
Adjusted net profit
5
6
7
8
9
15,189
19,936
23,030
28,723
35,586
FY14A
FY15A
FY16E
FY17E
FY18E
1,894
1,342
1,376
1,546
1,746
39,265
47,884
48,165
54,122
61,127
Balance Sheet
Accounts payables
Provisions
0
0
0
0
1
Debt funds
26,836
17,131
17,211
17,403
17,628
Other liabilities
37,979
34,990
34,990
34,990
34,990
Equity capital
18,893
18,938
18,938
18,938
18,938
Reserves & surplus
161,489
151,262
151,262
151,262
151,263
Shareholders' fund
180,382
170,200
170,200
170,200
170,201
286,356
271,547
271,942
278,261
285,693
76,458
67,942
66,906
72,210
78,230
3,075
3,532
5,161
5,799
6,549
0
0
0
0
0
12,774
13,257
13,417
15,463
17,465
Cash and cash eq.
Inventories
Investments
0
0
0
0
0
154,732
150,381
150,023
148,354
147,013
CWIP
0
0
0
0
0
Intangible assets
0
0
0
0
0
0
0
0
0
0
Other assets
39,317
36,435
36,435
36,435
36,435
Total assets
286,356
271,547
271,942
278,261
285,691
FY14A
FY15A
FY16E
FY17E
FY18E
36,438
41,771
45,433
51,358
58,021
Interest expenses
0
0
0
0
0
0
0
0
0
0
1,160
(1,350)
(229)
(2,430)
(193)
(1,782)
(2,392)
2,457
2,323
1,918
35,816
38,029
47,662
51,251
59,746
(15,813)
(20,781)
(22,060)
(20,980)
(21,112)
(35,977)
8,143
0
0
0
28,313
3,264
0
0
0
(23,477)
(9,374)
(22,060)
(20,980)
(21,112)
0
Net fixed assets
Cash Flow Statement
Equities issued
0
490
0
0
Debt raised/repaid
(4,233)
(7,601)
0
0
0
Interest expenses
(3,805)
(3,010)
(2,457)
(2,323)
(1,742)
Dividends paid
(35,568)
(7,003)
(16,822)
(23,016)
(28,707)
36
(4,933)
0
0
0
(15,005)
(31,876)
(25,473)
(31,031)
(37,310)
(2,666)
(3,221)
129
(760)
1,325
1,395
1,329
3,671
4,237
9,673
3 August 2015
Page 110 of 181
Company Update
INDIA
TELECOM
3 August 2015
BUY
Tata Communications
TP: INR 575.00
 27.7%
TCOM IN
Backbone infra play – Data at the heart of growth
TCOM is an attractive play on the global telecom infrastructure space. While
pricing in the traditional business has been a challenge, we note that the
revenue mix is shifting towards high-growth and asset-light services.
REPORT AUTHORS
Further, we see India’s data centre market as an attractive opportunity
against the backdrop of rising internet users and market share gains within
the enterprise space. Valuations at 5.3x FY17E EV/EBITDA are cheap – we
maintain BUY with an SOTP-based Sep’16 TP of Rs 575.
Rumit Dugar
+91 22 6766 3444
 A data backbone player: TCOM is an interesting backbone infrastructure player in
the global telecom space. While the traditional voice business has been a challenge,
the mix is shifting towards the higher-growth, higher-margin data segment. The
voice: data EBITDA split (ex-Neotel) for the company has moved to 20:80 in FY15E
from 37:63 in FY14 and we expect this trend to continue. We believe that TCOM
can deliver an EBITDA CAGR of 15%+ over the next 2-3 years.
 Data centre business – solid potential: TCOM has ~30% market share in India’s
third-party data centre business, and has been growing at 25%+ with revenues of
Rs 7.6bn in FY14. We believe that internet penetration and enterprise solutions
would continue to boost demand for TCOM’s data centre business.
 Capital intensity to be moderate: Management expects capex to remain at
US$ 250mn-300mn, largely in line with depreciation. We think a greater
contribution from managed services should support higher FCF and improved ROC.
Higher FCF and asset sales should help de-lever the balance sheet.
 Maintain BUY: We like TCOM’s unique data positioning on networks as well as the
solid potential for cloud infrastructure services. This should translate into higher
data mix/growth, which in our view deserves a higher multiple. Maintain BUY with
an SOTP-based Sep’16 TP of Rs 575.
INR 450.45
MARKET CAP
INR 128.4 bln
USD 2.0 bln
SHARES O/S
285.0 mln
FREE FLOAT
25.0%
52 WK HIGH
52 WK LOW
INR 505.80
INR 336.10
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
196,659
199,090
209,003
222,894
239,372
EBITDA (INR mln)
30,880
29,897
31,769
35,886
38,778
1,014
13
4,091
5,507
6,386
3.6
0.0
14.4
19.3
22.4
330
(116.3)
(98.7)
31614.7
34.6
16.0
230
19,410
DPS (INR)
0.0
0.0
0.0
4.6
4.6
130
14,410
ROIC (%)
0.7
1.5
5.0
6.3
7.6
9.1
0.2
91.4
71.4
52.8
126.6
9,951.8
31.4
23.3
20.1
Adjusted EPS (INR)
Adjusted ROAE (%)
Adjusted P/E (x)
EV/EBITDA (x)
P/BV (x)
7.0
7.4
6.2
5.3
4.7
16.1
39.9
22.4
13.3
8.9
(INR)
430
Stock Price
Index Price
29,410
24,410
BUY
TP: INR 575.00
 27.7%
Company Update
Tata
Communications
INDIA
TELECOM
TCOM IN
Fig 1 - Tata Communications – Services approach
Content / Cloud
Access
Mobile
messaging
exchange &
data roaming
service
Tata communications
signaling network and
global data mobility
platform
Mobile operators
Software as a service
partners
Enhanced
IP
Tata communications
and Partner IP network
Tata
communications’
QoS internet
Infrastructure/
Platform as service partner
Cloud
connect
Tata communications
MPLS network
Data centre partner
Private data
centre
connectivity
Mobile content owners
Public
Public
Tata communications
Ethernet network
Enterprises
Hybrid
Private
International
mobile access
Global VPN
global Ethernetcloud connect
Private
Source: Company
Fig 2 - SOTP- based target price of Rs 575
EV/EBITDA
Multiple (x)
1. EV of Core business
Rs bn
Rs/share
202.9
712
Voice
4.5
23.3
105
EV/ EBITDA 4.5x
Data
6.5
179.6
630
EV/ EBITDA 6.5x
Net Debt in Core Business
79.1
278
123.8
434
2. Neotel
41.5
146
Net Debt in Neotel
27.0
95
Equity Value in Core Business
Equity Value @ 67% Stake for TCOM
3. Surplus real estate
Total equity value
At Vodacom Purchase Price of US$ 670mn
9.8
34
29.9
105
Our estimated market value
163.5
574
Sep-16 Target Price
3 August 2015
Page 112 of 181
BUY
TP: INR 575.00
 27.7%
Company Update
Tata
Communications
INDIA
TELECOM
TCOM IN
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
3.6
0.0
14.4
19.3
22.4
Adjusted EPS
3.6
0.0
14.4
19.3
22.4
DPS
0.0
0.0
0.0
4.6
4.6
28.1
11.3
20.1
34.0
50.9
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
FY18E
EV/Sales
1.1
1.1
0.9
0.9
0.8
EV/EBITDA
7.0
7.4
6.2
5.3
4.7
126.6
9,951.8
31.4
23.3
20.1
16.1
39.9
22.4
13.3
8.9
FY14A
FY15A
FY16E
FY17E
FY18E
Adjusted P/E
P/BV
Financial Ratios
Y/E 31 Mar
EBITDA margin
15.7
15.0
15.2
16.1
16.2
EBIT margin
5.1
4.2
5.0
5.9
6.1
0.5
0.0
2.0
2.5
2.7
Adjusted ROAE
9.1
0.2
91.4
71.4
52.8
ROCE
0.8
1.7
5.5
6.8
7.5
7.4
YoY Growth (%)
Revenue
14.3
1.2
5.0
6.6
EBITDA
49.9
(3.2)
6.3
13.0
8.1
(116.3)
(98.7)
31614.7
34.6
16.0
1.1
(22.5)
(2.0)
(3.0)
(10.4)
46
Adjusted EPS
Invested capital
Receivables (days)
55
48
45
46
Inventory (days)
0
0
1
1
1
Payables (days)
170
190
210
211
210
Current ratio (x)
1.1
0.8
0.8
0.8
0.9
Quick ratio (x)
0.4
0.3
0.3
0.3
0.4
0.8
0.7
0.7
0.7
0.7
0.8
0.8
0.9
0.9
0.9
1.3
1.1
1.7
2.2
2.6
11.6
21.2
10.7
5.6
2.7
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
FY18E
26.8
0.3
49.0
49.2
49.2
37.9
57.8
79.5
85.5
88.8
5.1
4.2
5.0
5.9
6.1
80.9
81.4
85.8
89.0
92.3
2185.5
4364.8
5441.7
3249.7
2144.6
9.1
0.2
91.4
71.4
52.8
Adjusted ROAE
3 August 2015
Page 113 of 181
BUY
TP: INR 575.00
 27.7%
Company Update
Tata
Communications
INDIA
TELECOM
TCOM IN
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
196,659
199,090
209,003
222,894
239,372
30,880
29,897
31,769
35,886
38,778
9,966
8,286
10,513
13,097
14,603
(7,617)
(7,508)
(6,167)
(5,906)
(5,640)
1,433
4,008
4,008
4,008
4,008
0
0
0
0
0
3,782
4,786
8,354
11,199
12,971
(3,433)
(3,705)
(4,177)
(5,599)
(6,486)
662
(1,052)
0
0
0
3
(17)
(86)
(92)
(100)
1,014
13
4,091
5,507
6,386
0
0
0
0
0
1,014
13
4,091
5,507
6,386
FY14A
FY15A
FY16E
FY17E
FY18E
Accounts payables
76,362
99,603
104,562
111,512
119,756
0
0
0
0
0
Provisions
0
0
0
0
0
Debt funds
119,763
93,313
90,063
86,813
83,563
46,247
Total revenue
EBITDA
EBIT
Exceptional items
EBT
Income taxes
Extraordinary items
Reported net profit
Adjustments
Adjusted net profit
Balance Sheet
Other liabilities
44,588
46,247
46,247
46,247
Equity capital
2,850
2,850
2,850
2,850
2,850
Reserves & surplus
5,145
365
2,888
6,828
11,646
Shareholders' fund
7,995
3,215
5,738
9,678
14,496
248,769
242,437
246,670
254,308
264,121
Cash and cash eq.
26,739
25,096
28,438
32,306
44,495
27,339
24,870
26,681
29,065
31,869
0
264
264
264
264
31,726
27,411
28,757
30,644
32,881
Inventories
Investments
7,538
8,790
8,790
8,790
8,790
141,853
141,939
141,584
141,084
133,666
CWIP
6,182
5,724
5,724
5,724
5,724
Intangible assets
6,185
3,848
3,848
3,848
3,848
0
0
0
0
0
Other assets
1,208
2,583
2,583
2,583
2,583
Total assets
248,769
240,526
246,670
254,308
264,121
FY14A
FY15A
FY16E
FY17E
FY18E
21,928
21,624
25,347
28,296
30,561
7,617
7,508
6,167
5,906
5,640
0
0
0
0
0
1,936
28,593
1,802
2,679
3,202
Net fixed assets
Cash Flow Statement
Interest expenses
(3)
17
86
92
100
31,478
57,741
33,402
36,974
39,502
(24,310)
(21,697)
(20,900)
(22,289)
(16,756)
2,539
1,084
0
0
0
0
0
0
0
0
(21,771)
(20,613)
(20,900)
(22,289)
(16,756)
Equities issued
0
0
0
0
0
Debt raised/repaid
17,013
(26,449)
(3,250)
(3,250)
(3,250)
Interest expenses
(7,617)
(7,508)
(6,167)
(5,906)
(5,640)
0
0
0
(1,568)
(1,568)
(7,282)
(4,813)
257
(92)
(100)
2,114
(38,771)
(9,160)
(10,816)
(10,557)
11,822
(1,643)
3,342
3,868
12,189
26,739
25,096
28,438
32,306
44,495
Dividends paid
3 August 2015
Page 114 of 181
India TMT
Sector Report
INDIA
India Internet
3 August 2015
Page 115 of 181
Company Initiation
INDIA
TELECOM
3 August 2015
BUY
Info Edge
TP: INR 1,100.00
 32.1%
INFOE IN
Diversified online classifieds business – initiate with BUY
We initiate coverage on INFOE with BUY and a Sep’16 TP of Rs 1,100. INFOE
offers online classified services across diverse verticals such as recruitment,
matrimony, real estate and education in India and internationally. Digital
advertising and higher internet penetration in India will trigger higher traffic on
REPORT AUTHORS
its portals. We model for 25%/7% CAGR in revenue/earnings over FY15-FY17
Rumit Dugar
led by its recruitment portal Naukri (poised to grow in double-digits backed by
economic recovery) and subsidiary restaurant-search portal Zomato.
+91 22 6766 3444
 Opportunity in online classifieds market: India’s digital advertising industry is poised
to grow at a 30% CAGR over CY14-CY19. Internet penetration in the country stands at
only 20% and higher internet usage will drive growth of e-commerce. India’s online
classifieds market is thus expected to grow at 21% CAGR to Rs 59.4bn by CY19 with
close to 100%/50%/10% of the jobs/matrimony/real estate classifieds moving online.
 Economic recovery to aid growth in Naukri: INFOE’s Naukri.com portal is the market
leader for online recruitment in India, with 70% traffic share and a résumé base of
41mn (12% CAGR FY12-FY15). Naukri has grown at 2.5-3.5x India’s GDP growth in the
last five years. 99acres.com (real estate) is facing a slowdown, but we see this a
property where INFOE can create traffic leadership over the long term.
 Zomato – tops growth among investees: INFOE has invested Rs 5.2bn in several
companies operating in allied business verticals. While these incurred an overall loss
of Rs 2.3bn, the largest investee Zomato is poised to grow at 250% CAGR (FY15-FY17)
led by expansion in smaller cities in India and a move toward foreign markets.
 Initiate with BUY: Naukri, INFOE’s cash cow, is posed for double-digit growth with
healthy margins. This coupled with revenue diversification across verticals will
support revenue/earnings CAGR of 25%/7% through FY17. We value Naukri at Rs 760,
other verticals at Rs 44, and investees at Rs 289 to arrive at a Sep’16 TP of Rs 1,100.
INR 832.70
MARKET CAP
INR 100.3 bln
USD 1.6 bln
SHARES O/S
120.6 mln
FREE FLOAT
47.0%
52 WK HIGH
52 WK LOW
INR 1,015.00
INR 685.00
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
5,058
6,115
7,390
9,029
11,092
EBITDA (INR mln)
1,666
1,817
1,796
2,880
3,594
1,288
1,941
1,633
2,371
3,201
810
16.5
2.4
13.2
19.2
26.0
610
146.1
(85.6)
458.5
45.3
35.1
410
DPS (INR)
0.0
0.0
0.0
0.0
0.0
ROIC (%)
89.2
24.6
21.2
52.0
51.4
Adjusted ROAE (%)
18.0
16.0
9.5
12.6
15.0
Adjusted P/E (x)
50.5
351.4
62.9
43.3
32.0
EV/EBITDA (x)
58.7
54.0
54.3
31.8
25.1
P/BV (x)
12.8
6.1
5.7
5.1
4.5
Adjusted EPS (INR)
(INR)
1010
210
Stock Price
Index Price
29,410
24,410
19,410
14,410
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Rising demand for online services in India…
…led by growing internet penetration and mobile data consumption
Strong growth in 2G and 3G telecom networks has driven up wireless internet demand in
India. With the ongoing adoption of 4G technology that offers faster mobile internet
speeds coupled with the government’s focus on Digital India, internet penetration is
expected to increase further as viewers can access more content on mobile phones.
India’s internet users currently total 240mn (CY14) which is the third largest after China
and the US, with growth primarily driven by mobile internet penetration. We estimate
that internet users in the country will more than double to 550mn by CY20.
Fig 1 - Internet penetration
100%
90%
90%
87%
86%
86%
Adoption of 4G services could drive
wider mobile internet use in India
86%
80%
70%
59%
60%
53%
50%
46%
38%
40%
30%
19%
20%
India
Nigeria
China
Brazil
Russia
France
Germany
Japan
USA
0%
UK
10%
Internet penetration in India stands at 20% which is the lowest among Asian countries
and significantly low among developed nations (85%+ penetration). We believe
adoption of 4G services has the scope to drive wider internet use and reach in India in
the near term.
Strong growth in digital advertising
The digital advertising industry has posted rapid growth at a 40% revenue CAGR (CY09CY14) and is poised for a 30% CAGR over CY14-CY19. Traditional media too has witnessed
double-digit growth rates in recent years due to heavy advertising led by elections and the
emergence of e-commerce as a new category in India (companies like Flipkart, Snapdeal,
Jabong, Olx). We believe INFOE will be one of the key beneficiaries of the growing digital
shift due to growth in internet adoption and advertisement demand on its properties.
Digital advertising industry poised for
30% CAGR over CY14-CY19
The next wave of growth for the digital industry will be from increased adoption of the
internet in rural areas – as more people access the internet on smartphones, advertising
will continue to grow strongly on the digital/internet platform.
3 August 2015
Page 117 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 2 - Advertising revenue across segments
CAGR (2009-14)
45%
CAGR (2014-19)
40%
40%
35%
30%
30%
25%
20%
15%
12%
16%
14%
10%
18%
10% 10%
10% 10%
5%
0%
Print
TV
Radio
OOH
Digital advertising
Opportunity in India’s online classifieds market
India’s online classifieds market is poised to grow at a 21% CAGR (CY14-CY19) to
Rs 59.4bn. Close to 100% of job classifieds are online, 50% of matrimony classifieds, 10%
of real estate classifieds and 10-15% of education classifieds have moved online.
Interestingly, major companies in this business claim to have nearly 50% of their traffic
from tier-2 and tier-3 cities.
Fig 3 - India’s online classifieds market
(Rs bn)
70
59.4
60
50.6
50
42.5
40
30
Close to 100% of job classifieds and
50% of matrimony classifieds have
moved online
35.1
28.8
22.8
20
10
0
2014
2015
2016
2017
2018
2019
3 August 2015
Page 118 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
INFOE a leading online classifieds play in India
INFOE is an online classifieds company in the areas of recruitment, matrimony, real
estate, education, and related services in India and internationally. The company has
witnessed strong growth in its core online recruitment business (Naukri.com, 73% of
revenue), even as its real estate portal (99acres.com, 16% of revenue) is also performing
well. Matrimony and education form a small part of its business and are yet to deliver
meaningful growth. INFOE also has several subsidiaries, the largest of which is restaurant
search portal Zomato.com, which is set to grow revenues three-fold in FY16E. By offering
a wide bouquet of services, INFOE reduces dependence on a single vertical and also
broadens its reach in a large untapped market.
INFOE offers a wide bouquet of online
classified services, thereby reaching
out to a large untapped market
Fig 4 - Business areas (Standalone company excluding subsidiaries investments)
Website
Area of operation
Recruitment
Naukri.com
Online recruitment classifieds to job seekers and corporate customers
Naukrigulf.com
Online recruitment classifieds in the Middle East
Quadranglesearch.com
Offline executive search site
Brijj.com
Professional networking site
Firstnaukri.com
Fresher hiring site
Matrimony
Jeevansathi.com
Online matrimony classifieds; also has 14 offline Jeevansathi Match
Points
Real Estate
99acres.com
Online real estate classifieds with listing of properties for sale, purchase,
and rent
Allcheckdeals.com
Real estate brokerage services housed in a subsidiary named
(www.allcheckdeals.com) India Private Limited
Education
Shiksha.com
Online education classifieds
Naukri the biggest revenue contributor
Highest traffic share among peers
Naukri is the market leader for online recruitment in India and continues to increase its
market share. It commands 70% of online traffic share in the recruitment segment as on
Apr’15 and has consistently held in excess of 60% share over the last two years. In
contrast, other players in the business have posted steady declines over the last few
months and none of them has a share over 10%. We believe Naukri will maintain its edge
over competitors given its strong positioning and branding.
Naukri has 70% of online traffic share
in India’s recruitment segment
3 August 2015
Page 119 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 5 - Traffic share of Naukri vs. peers
Source: Company
Mobile phones a key component of traffic generation
As smartphone penetration in India picks up driven by rising affordability and the
convenience of internet access on the go, traffic for websites via mobile internet is
poised to grow at a smart clip. Smartphone shipment share in India has expanded from
22% in CY13 to 35% as on CY14. For Naukri.com, 50% of its traffic has been from mobile
phones in Q4FY15 vs. 39% in Q3FY15. The company has launched almost all its website
features on the mobile application for convenience and easy viewing. We expect its
traffic share to increase further led by smartphone and mobile data penetration in India.
Fig 6 - Traffic share split across mobile phones and
desktop computers
(%)
Android
iOS
Smartphone
26
23
21
20
15
Fig 7 - India’s smartphone shipment share
HTML5 site
30
25
18
16
13
50% of Naukri’s traffic came from
mobile phones in Q4FY15 vs. 39% in
Q3FY15
Feature phone
100%
90%
80%
70%
17
78%
72%
71%
68%
65%
22%
28%
29%
32%
35%
Q4CY13
Q1CY14
Q2CY14
Q3CY14
Q4CY14
60%
50%
13
40%
10
30%
20%
5
0
0
Q1FY15
1
1
1
Q2FY15
Q3FY15
Q4FY15
10%
0%
Source: Company
Source: IDC
Healthy volume growth
Naukri has a strong base of 41mn résumés which has grown at a 12% CAGR (FY12-FY15).
As many as 11,000 résumés are added daily to the portal which helps attract more
customers, thereby providing growth and visibility in the recruitment business. Naukri
relies heavily on the IT and Infrastructure sectors which drive 29% and 17% of revenues
respectively; BFSI is another key vertical, contributing 5% of revenues. Naukri has
increased its exposure to the IT sector over the last five years by ~4%.
11,000 résumés get added daily to the
portal
3 August 2015
Page 120 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 8 - Résumé base and YoY growth
(mn)
Resumes added daily (R) (nos.)
16,000
41
Resumes on Naukri.com
45
37
40
35
12,000
25
25
10,000
21
Others
49%
8,000
17
BFSI
5%
6,000
15
10
4,000
5
2,000
0
0
FY09
IT services /
ITeS
29%
14,000
33
29
30
20
Fig 9 - Vertical split – FY15
FY10
FY11
FY12
FY13
FY14
FY15
Infrastructure
17%
Growth of jobs portal highly correlated to economy
Naukri’s growth is closely correlated to India’s GDP growth as hiring typically picks up in a
healthy economy and vice versa. Naukri has grown at 2.5-3.5x GDP growth over the last
five years. We have assumed a multiplier of 2.8x for FY16 and FY17 which translates into
high double-digit growth.
Naukri grew at 2.5-3.5x India’s GDP
growth over the last five years
The Naukri Job Speak Index, one of the leading indicators of hiring in India across sectors,
has witnessed healthy double-digit growth over the last one year due to political stability
and improved health of the Indian economy. The index is based on job listings added to
the site every month (Jul’08 taken as the base). Campaigns like Make in India are
expected to have a positive impact on the overall hiring in India.
Fig 11 - Naukri Job Speak Index
(%)
20
4
3
10
2
0
FY17E
FY16E
FY15
FY14
FY13
FY12
FY11
FY10
FY09
FY08
(10)
1
0
15%
10%
5%
0%
(5%)
Apr-15
5
Mar-15
30
20%
Feb-15
6
Jan-15
7
40
25%
Dec-14
8
50
30%
Oct-14
9
YoY growth
Nov-14
60
Job speak Index
2,000
1,800
1,600
1,400
1,200
1,000
800
600
400
200
0
Sep-14
10
Aug-14
70
Jun-14
India GDP growth (R)
Apr-14
Growth in Naukri
May-14
(%)
Jul-14
Fig 10 - GDP growth in India vs. growth in Naukri
(10%)
99acres provides scope for market leadership in real estate
Cutthroat competition among portals
99acres.com is among the top two real estate portals in India in terms of traffic
congestion, with 30% traffic share. It faces tough competition from Magicbricks.com,
whose traffic share is almost at par, and also from relatively new entrant Housing.com.
Consequently, its traffic share has declined by ~600bps over the last one year. Despite
this, 99acres maintains a competitive edge in terms of inventory size and has the highest
inventory among real estate portals.
99acres.com among the top two real
estate portals in India
3 August 2015
Page 121 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 12 - Traffic share of 99acres vs. peers
Source: Company
Strong growth in inventory and end transactions
The number of paid listings on 99acres has grown at a 47% CAGR (FY12-FY15) to 34.2mn
as on FY15 and the number of paid transactions too has grown at a robust 33% CAGR.
The website has seen strong traction for the residential property business (primary &
secondary sale/rental) and intends to develop this further to cater to audiences for
commercial property. The company is popular among the broker community (75% of
customers are brokers). Management plans to expand its presence and build tie-ups with
builders who provide higher realisations for their listings.
Fig 13 - Paid listings on 99acres.com
(000's)
Paid listings
Fig 14 - Paid transactions on 99acres.com
YoY growth (R)
80%
4,000
3,500
3,000
80
60%
70
40%
30%
2,000
(000's)
90
70%
50%
2,500
60
50
20%
40
1,500
10%
30
1,000
0%
20
(10%)
500
0
(20%)
FY10
FY11
FY12
FY13
Paid listings on 99acres grew at 47%
CAGR over FY12-FY15
FY14
FY15
(30%)
10
0
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
Mobile traffic relatively lower but growing
99cares derives 45% of its traffic from mobile phones which has grown from 30% in
Q3FY15. The reason for its relatively low share of mobile traffic is that property
photographs are better viewed on a desktop computer than a mobile phone screen.
However with increase screen sizes and smartphone penetration we expect the mobile
traffic to pick up.
3 August 2015
Page 122 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 15 - Traffic share split across mobile phones and desktop computers
(%)
25
Android
iOS
HTML5 site
20
20
20
18
15
10
Share of mobile traffic to remain low
for real estate portals
22
12
10
9
8
5
0
1
1
1
1
Q1FY15
Q2FY15
Q3FY15
Q4FY15
99acres – potential for traffic leadership after Naukri
While Naukri has been the core revenue generator for INFOE, the company is also
witnessing strong growth in non-recruitment segments. As on FY15, Naukri contributed
73% of the company’s revenue followed by 99acres at 16% and matrimonial website
Jeevansathi at 6%. Naukri has clocked a lower revenue CAGR of 13.4% (FY12-FY15) as
compared to 42% for 99acres. However, 99acres continues to report operating losses.
We expect these losses to remain high in the near-term as market remains competitive
and real estate slowdown hurts 99acres. That said, we believe that real estate remains an
attractive segment and does give Infoedge and opportunity to create traffic leadership.
However this remains a hotly contested category and could weigh on near-term
performance.
Fig 16 - Revenue contribution and split
Recruitment (Naukri)
100%
90%
14%
16%
Fig 17 - Revenue growth versus company growth
Company revenue
Other verticals
17%
19%
23%
26%
35%
30%
60%
25%
86%
84%
83%
81%
77%
30%
74%
20%
73%
15%
20%
10%
10%
5%
0%
Other vertical revenue
40%
27%
70%
40%
Recruitment revenue
45%
80%
50%
99acres clocked revenue CAGR of 42%
(FY12-FY15) vs. 13% for Naukri
FY09
FY10
FY11
FY12
FY13
FY14
0%
FY15
FY11
FY12
FY13
FY14
FY15
Muted growth in matrimonial and education portals
Flat contribution from Jeevansathi and Shiksha despite investments
Jeevansathi is INFOE’s matrimonial portal and it has an attractive market opportunity as
450mn people in India are below the age of 21. The concept of arranged marriage is
widely prevalent in India and Jeevansathi caters to this market. But despite the large
opportunity, Jeevansathi’s profile listings have witnessed a declining trend over the last
two years. Jeevansathi and education portal Shiksha contribute just 10% of INFOE’s total
revenues and this has remained in a narrow range of 9-11% over the last five years.
3 August 2015
Page 123 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 18 - Volume & realisation growth on Jeevansathi
(%)
30
Profiles growth
Fig 19 - Revenue contribution and split
(%)
Average realisation growth
8
25
7
7
7
6
6
4
4
FY14
FY15
5
15
4
10
3
2
5
0
8
7
7
20
Shiksha and others
Jeevansaathi
9
9
1
1
FY10
FY11
FY12
FY13
FY14
0
FY15
FY09
2
FY10
3
3
FY12
FY13
2
FY11
Moderating revenue growth with operating losses for both
Jeevansathi and Shiksha have had volatile revenue growth in the last few years.
Jeevansathi’s growth has in fact dipped to single-digits from double-digit growth over the
last three years. Despite investments in both portals, they continue to run substantial
operating losses of Rs 44mn (Jeevansathi) and Rs 68mn (Shiksha).
Fig 20 -
Tapering revenue growth
(%)
Jeevansaathi
Fig 21 - Heavy losses at operating profit level
(%)
Shiksha/others
30
(Rs mn)
90
60
(40)
50
15
(60)
40
10
(80)
30
20
5
10
FY10
FY11
FY12
FY13
FY14
FY15
0
Shiksha/others
(20)
70
20
Jeevansaathi
0
80
25
0
Jeevansathi and Shiksha running heavy
operating losses
(100)
(120)
FY10
FY11
FY12
FY13
FY14
FY15
Zomato – Key performer among investee companies
Subsidiaries diversified across various verticals
INFOE has invested Rs 5.2bn in subsidiaries across several verticals – of the six largest
subsidiaries, two have the highest contribution to revenue: Applect Learning (Rs 216mn)
and Zomato (Rs 967mn). In the next one year, Zomato is expected to exhibit strong
three-fold growth in revenue base in FY16 as it expands to regions outside India. The
company also has a focus on niche businesses such as Happilyunmarried.com (unique
gifts), Policybazaar.com (web aggregator for insurance) and Mydala.com (online coupons
and deals), which are in the investment phase but provide opportunity for strong growth
over the long term.
Zomato expected to exhibit three-fold
growth in revenue base in FY16
3 August 2015
Page 124 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Fig 22 - Various subsidiaries of INFOE
Zomato and Applect the largest of
INFOE’s subsidiaries
Applect Learning systems
(www.meritnation.com)
invested Rs 718mn for
56% stake
Etechaces Marketing &
Consulting
(www.policybazaar.com)
18% stake
Zomato Media Pvt Ltd
(www.Zomaro.com)
invested Rs 3,283mn for
50% stake
Investee
companies
Canvera Digital Tech
(www.canvera.com)
32% stake
Kinobeo Software
(www.mydala.com)
45% stake
Happily unmarried marketing
(www.happiluinmarried.com)
27% stake
Investee companies growing well but yet to turn profitable
On a consolidated basis, all of INFOE’s subsidiaries have grown at a strong CAGR of 75%
over the last three years. Zomato has exhibited the strongest growth with 250% revenue
CAGR (FY12-FY15) due to its rapid expansion and popularity. Among others, education
portal Meritnation has grown at a 73% CAGR (FY12-FY15). Operating losses on a
consolidated basis for all the investee companies stood at Rs 2.3bn in FY15 of which
Zomato’s loss alone is Rs 1.4bn. We expect these losses to mount as all of these
subsidiaries are still in an investment phase and will take time to break even.
Fig 23 - Revenue growth (CAGR FY12-FY15)
300%
Fig 24 - Operating losses (EBITDA)
Zomato
(Rs mn)
Meritnation
Others
0
257%
250%
(200)
(400)
200%
(600)
150%
(800)
100%
73%
(1,000)
57%
50%
0%
Subsidiaries still in investment phase
and will take time to break even
(1,200)
(1,400)
Zomato
Meritnation
Others
(1,600)
FY12
FY13
FY14
FY15
3 August 2015
Page 125 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Revenue for Zomato poised to grow 3x in FY16
After strong growth over the last three years, Zomato is poised to grow its revenue base
three-fold in FY16. Its monthly visitors have increased from 11mn in CY13 to 35mn in
CY14. The number of restaurants listed on Zomato has increased from 4,000 in 2008 to
384,000 in 2015 backed by strong expansion in all major cities across India and various
countries outside India. The expansion has been driven by various rounds of funding over
the years. Most recently, the company raised US$ 50mn in Apr’15 at an EV of US$ 1bn.
Fig 25 - Number of restaurants listed on Zomato
384,000 restaurants listed on Zomato,
up from 4,000 in 2008
Fig 26 - Rounds of funding since inception
(nos.)
(US$ mn)
450,000
384,000
400,000
350,000
300,000
250,000
200,000
150,000
94,000
100,000
50,000
0
Source: Company
4,000
2008
2013
2015
Aug-10
1.0
Sep-11
3.0
Sep-12
2.3
Feb-13
10.0
Nov-13
37.0
Nov-14
60.0
Apr-15
50.0
Source: RCML Research, Company, Media reports
3 August 2015
Page 126 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Financial snapshot
Revenue
(Rs mn)
Growth (%) (R)
(%)
(Rs mn)
EBITDA
(%)
Growth (%) (R)
12,000
35
4,000
70
10,000
30
3,500
60
3,000
50
2,500
40
2,000
30
1,500
20
1,000
10
25
8,000
20
6,000
15
4,000
10
2,000
5
500
0
0
0
2012
2013
2014
2015
2016E
2017E
2018E
0
2012
2013
2014
Source: Company
Source: Company
Fig 30 - PAT growth
(%)
(Rs mn)
34
32
2015
PAT
2016E
2017E
2018E
(%)
Growth (%) (R)
3,500
60
3,000
50
40
2,500
30
30
2,000
20
1,500
28
10
1,000
26
0
500
(10)
0
24
2012
2013
2014
2015
2016E
2017E
2012
2018E
2013
2014
Source: Company
Source: Company
Fig 32 - Debtor days
(%)
ROCE
15
200
12
150
9
100
6
50
3
2013
Source: Company
2014
2015
2016E
2015
2016E
2017E
2018E
(20)
(Days)
ROE
250
0
-10
2017E
2018E
0
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
Source: Company
3 August 2015
Page 127 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Valuation
SOTP-based TP of Rs 1,100 – BUY
We value INFOE’s core recruitment segment at 34x one-year forward P/E due to its high
market share, strong growth and healthy operating margins, translating to a sum of
Rs 760/sh. The real estate and other portals have been valued at 4x and 3x EV/sales
respectively based on the growth rates expected for these segments – this contributes to
Rs 44/sh for the company. Among investee companies, Zomato, Meritnation and
Policybazaar have been valued as per latest valuations in their funding rounds, whereas
other investee companies are valued at 1x investment. Combined, this gives us an SOTPbased Sep’16 TP of Rs 1,100 for INFOE – we initiate coverage with a BUY rating.
We value the core recruitment
segment at Rs 760/sh
Fig 33 - SOTP-based target price of Rs 1,100
Multiplier
(x)
EPS
(Rs)
Equity Value
(Rs mn)
Sales
Rs/share
(Rs mn)
1. EPS of core business - Naukri (PE)
34
22.3
-
-
760
2. 99 acres (EV/Sales)
4.0
-
2385
596
19
EV/ Sales 4x
3. Other verticals (EV/Sales)
3.0
-
3,110
1,037
25
EV/ Sales 3x
4. Zomato (50% stake)
-
-
31,000
-
252
Valuation of USD 1bn as per latest round of
funding
5. Meritnation (56% stake)
-
-
1,944
-
16
Valuation of USD 56mn as per latest round
of funding
5. Policy bazaar (18% stake)
-
-
2,160
-
18
Based on latest funding round
6. Other investee companies
1.0
-
362
-
Total price (Rs per share)
PE of 34x
Based on 1x investment
3
Sep-16 Target Price
1,101
Fig 34 - Global internet peers across various segments
Mkt cap
EV/Sales (x)
P/E (x)
ROE (%)
Rev CAGR
(USD bn)
CY15
CY16
CY15
CY16
CY15
CY16
(CY14-16E)
Info Edge India
1.6
2.0
0.9
41.2
32.4
10.0
11.7
25.3
Just Dial
1.0
9.2
7.1
55.3
36.2
22.8
27.6
30.5
India internet
Global job portals
Recruit Holdings
17.2
1.4
1.2
30.8
30.1
11.4
10.4
5.9
Robert Half
7.5
1.5
1.4
21.0
18.0
38.7
32.5
12.6
Monster Worldwide
0.6
1.0
0.9
16.2
10.5
6.0
8.4
1.0
Michael Page
2.8
1.1
1.0
26.2
20.5
27.4
31.5
8.2
Rightmove
5.0
11.8
10.7
29.4
25.8
1884.5
1219.8
10.9
Zillow Group
5.2
8.1
6.1
-
53.7
(3.2)
(0.9)
67.0
SouFun Holdings
3.5
2.8
2.2
42.3
22.6
15.5
26.1
26.4
E-House China
0.9
0.6
0.5
15.4
13.4
8.2
9.1
18.8
3.2
5.4
4.1
59.7
38.1
5.1
8.7
45.7
Global real estate portals
Global internet companies
Yelp
TripAdvisor
12.5
7.2
5.8
38.9
30.3
22.7
23.3
27.8
Amazon.com
203.7
1.6
1.4
103.5
67.3
5.6
15.5
19.4
Alibaba Group
207.2
15.7
11.6
37.8
30.3
33.8
22.3
42.1
73.4
3.5
3.2
19.4
17.8
17.2
15.5
9.6
244.1
12.6
9.4
43.5
33.1
10.9
12.9
37.9
Twitter
23.2
13.6
9.2
105.0
53.5
(2.5)
2.8
56.1
LinkedIn
26.2
9.8
7.4
107.6
61.5
8.2
17.6
34.1
eBay
Facebook
Source: RCML Research, Company, Bloomberg, (CY15 and CY16 are FY16/FY17 respectively for Indian companies)
3 August 2015
Page 128 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Key risks
Mounting losses in investee companies
INFOE has invested huge sums of money in the investee companies for higher growth
and earnings. The success of Naukri.com may not be replicated in the case of these
investee companies. Further, INFOE has written down various subsidiaries in the past
whose losses have increased and this remains a risk.
Risk of write-down of investment if
losses mount
Lower growth in India’s economy
Growth in the company’s job portal has a very high correlation with growth in the Indian
economy. The Naukri business has usually grown at 2.5-3.5x India’s GDP growth. Any
slowdown in economic growth due to an unexpected international or political event
could have a direct negative impact on the company’s growth and earnings. 99acres is
dependent on real estate performance and current slowdown could impact earnings.
Dependence on internet penetration
INFOE’s business and growth is dependent upon internet penetration in India. Increased
use of the internet and PCs is essential for success of the business. Though internet
penetration is increasing in the country, stagnation in this trend could impact business.
Competition from Indian and global peers
The online classifieds market is highly competitive and competition in the segment is
likely to increase. Content for the company’s database is provided by customers and
corporate clients who do not have any exclusivity arrangements with the company and
they may shift to other existing and upcoming web portals.
Competition from other platforms for advertisements
INFOE faces competition from advertisers on various other platforms such as print,
newspapers and television. These forms of advertisements may be seen to be
more effective and hence cause a shift of corporates and clients to other mediums
for their advertising.
3 August 2015
Page 129 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Company profile
Organisation structure
Fig 35 - Organisation structure
INFO Edge Consolidated
Standalone
Company
Naukri.com
Jeevansaathi
.com
99acres.com
Investee
Companies
Shiksha/others
Zomato.com
Meritnation.c
om
Policybazaar.
com
Mydala.com
Canvera.com
/Others
Source: Company
Fig 36 - Shareholding pattern – MFs have 10% stake
Bodies Corporate
1%
Others
16%
Promoters
44%
FII
29%
MF / UTI
10%
Source: Company
Management profile

Mr. Sanjeev Bikhchandani, Vice Chairman, joined the company in 1995. He has
completed BA in Economics and PGDM from IIM-A; has previously worked with
Lintas & Glaxo Smith Kline

Mr. Hitesh Oberoi, Managing Director and CEO, joined the company in 2000. He has
completed B.Tech from IIT-Delhi and PGDM from IIM-B; has previously worked with
Hindustan Unilever.

Mr. Chintan Thakkar, Chief Financial Officer, joined the company in 2014. He is a
Chartered Accountant; has previously worked with Computer Associates.

Mr. Vivek Khare, EVP- Coporate Development, joined the company in 2000. He has
completed MsC from IIT-Kanpur and PGDBA from Birla Institute of Management
Technology

Mr.Rajesh Khetarpal, SVP - Finance, joined the company in 2007. He is a Chartered
Accountant; previously worked with Bharti Group
3 August 2015
Page 130 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
16.5
2.4
13.2
19.2
26.0
Adjusted EPS
16.5
2.4
13.2
19.2
26.0
0.0
0.0
0.0
0.0
0.0
64.9
137.0
145.6
161.8
184.8
FY18E
DPS
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY14A
FY15A
FY16E
FY17E
EV/Sales
19.3
16.1
13.2
10.1
8.1
EV/EBITDA
58.7
54.0
54.3
31.8
25.1
Adjusted P/E
50.5
351.4
62.9
43.3
32.0
P/BV
12.8
6.1
5.7
5.1
4.5
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
32.9
29.7
24.3
31.9
32.4
EBIT margin
29.5
26.9
22.8
30.0
30.4
25.5
31.7
22.1
26.3
28.9
Adjusted ROAE
18.0
16.0
9.5
12.6
15.0
ROCE
14.4
9.8
7.0
10.3
11.4
Revenue
7.1
20.9
20.8
22.2
22.9
EBITDA
37.7
9.1
(1.2)
60.4
24.8
Adjusted EPS
146.1
(85.6)
458.5
45.3
35.1
Invested capital
121.2
410.5
(59.1)
26.2
26.0
Receivables (days)
3
4
6
7
6
Inventory (days)
0
0
0
0
0
Payables (days)
0
0
0
0
0
Current ratio (x)
2.4
4.7
4.3
4.1
4.0
Quick ratio (x)
1.1
1.1
2.7
2.5
2.4
3.3
3.6
8.4
NA
NA
0.6
0.4
0.4
0.4
0.4
0.0
0.0
0.0
0.0
0.0
(0.3)
(0.2)
(0.5)
(0.5)
(0.5)
FY14A
FY15A
FY16E
FY17E
FY18E
67.6
72.5
72.1
72.1
72.1
127.7
162.8
134.7
121.6
131.7
29.5
26.9
22.8
30.0
30.4
55.2
41.8
36.3
39.9
42.9
128.3
120.6
117.9
119.8
121.4
18.0
16.0
9.5
12.6
15.0
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
DuPont Analysis
Y/E 31 Mar (%)
Adjusted ROAE
3 August 2015
Page 131 of 181
BUY
Info Edge
Company Initiation
TP: INR 1,100.00
 32.1%
INFOE IN
INDIA
TELECOM
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
Total revenue
5,058
6,115
7,390
9,029
11,092
EBITDA
1,666
1,817
1,796
2,880
3,594
EBIT
1,492
1,645
1,681
2,705
3,372
408
1,027
577
577
1,062
0
0
0
0
0
Exceptional items
5
6
7
8
8
EBT
1,900
2,672
2,258
3,282
4,434
Income taxes
(591)
(737)
(632)
(919)
(1,242)
(26)
0
0
0
0
0
0
0
0
0
1,288
1,941
1,633
2,371
3,201
Extraordinary items
Reported net profit
Adjustments
0
0
0
0
0
1,288
1,941
1,633
2,371
3,201
FY14A
FY15A
FY16E
FY17E
FY18E
0
0
0
0
0
1,812
2,275
2,834
3,463
4,255
Provisions
323
453
466
569
699
Debt funds
57
67
67
67
67
0
0
0
0
0
Equity capital
1,092
1,202
1,202
1,202
1,202
Reserves & surplus
6,530
15,422
16,679
18,674
21,498
Shareholders' fund
7,622
16,624
17,881
19,876
22,700
9,814
19,419
21,248
23,975
27,720
Cash and cash eq.
2,311
3,007
9,055
10,181
11,919
50
98
152
173
213
0
0
0
0
0
2,658
9,738
5,061
6,184
7,598
Investments
3,781
5,579
5,579
5,579
5,579
952
935
1,338
1,795
2,350
CWIP
0
0
0
0
0
Intangible assets
0
0
0
0
0
63
63
63
63
63
Adjusted net profit
Balance Sheet
Accounts payables
Other liabilities
Inventories
Net fixed assets
Other assets
0
0
0
0
0
Total assets
9,815
19,420
21,248
23,975
27,720
FY14A
FY15A
FY16E
FY17E
FY18E
1,458
2,110
1,742
2,540
3,417
Interest expenses
0
1
0
0
0
0
0
0
0
0
259
334
5,195
(412)
(531)
(637)
(1,044)
601
601
1,087
1,080
1,400
7,538
2,730
3,972
(125)
(123)
(517)
(632)
(776)
(276)
(2,031)
0
0
0
(614)
(6,275)
0
0
0
(1,015)
(8,429)
(517)
(632)
(776)
Equities issued
0
7,497
0
0
0
Debt raised/repaid
6
2
0
0
0
Interest expenses
0
(1)
0
0
0
(254)
(337)
(368)
(368)
(368)
Cash Flow Statement
Dividends paid
(7)
(5)
(601)
(601)
(1,087)
(255)
7,156
(970)
(970)
(1,455)
(190)
127
6,051
1,128
1,740
(48)
367
6,407
10,183
11,921
3 August 2015
Page 132 of 181
India TMT
Sector Report
INDIA
Content
3 August 2015
Page 133 of 181
Company Update
INDIA
MEDIA
3 August 2015
NOT RATED
Balaji Telefilms
BLJT IN
Content outsourcing play with digital trump card
BLJT is one of the largest production houses in India, creating both Hindi
television and movie content. The company caters to leading broadcasters and
has posted a healthy 7% CQGR in programming hours in the last 10 quarters.
Apart from traditional media, BLJT is preparing for the rise in online content
viewership in India via plans for a subscription-based digital platform through
which customers can access its shows. The company is also streamlining its
movie business in a bid to curb losses and build its library for monetisation on
REPORT AUTHORS
Rumit Dugar
+91 22 6766 3444
digital platforms. We do not have a rating on the stock.
 Market leader in television content: BLJT produces television programming
content for all the leading broadcasters in India and this segment contributes 60%
of revenues. It currently runs 11 shows and has the ability to scale up to ~15 shows
over the next two years. BLJT’s revenue has grown at 15% CAGR in the last five
years. While the company will continue with Hindi GEC programming, expansion
into regional content could fuel growth in programming hours in traditional media.
 Movie business – a more focused approach: BLJT has adopted a new strategy of
focusing only on medium-to-low budget movies to build its movie library. The
company plans to produce 20 movies over the next three years with a budget of
Rs 400mn-500mn per film. Losses in the movie segment have reduced from
Rs 263mn to Rs 54mn in FY15 and we expect the business to turn profitable led by
the company’s niche focus. Further, building out the current library of 26 movies
will help monetisation on digital platforms.
 Digital business – the next growth driver: Television content programming hours
are limited by the fixed nature of primetime viewership slots. As digital penetration
picks up in terms of internet and smartphone usage, viewership will become more
flexible and expand manifold as consumers access content on the go – we thus
expect to see (1) increased programming opportunities for broadcasters, thus
driving content outsourcing and (2) opportunities for BLJT to launch its own content
through multiple digital platforms.
 Financials – net cash balance sheet: The company has never raised debt and has a
healthy balance sheet with cash of Rs 1.6bn. FCF as on FY14 was Rs 363mn.
Revenue has grown at a CAGR of 15% (FY11-FY15) while margins have currently
turned positive in FY15 due to reduced losses in the movie business.
INR 77.55
MARKET CAP
INR 5.1 bln
USD 79 mln
SHARES O/S
65.2 mln
FREE FLOAT
27.91%
283 K / USD 0.3 mln
52 WK HIGH
52 WK LOW
INR 92.85
INR 62.60
(INR)
100
90
80
70
60
50
40
30
20
10
0
Stock Price
Index Price
9,500
9,000
8,500
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
Television content outsourcing – the cash cow
Balaji among India’s top-tier production houses
BLJT is one of the largest production houses in India, creating both television and movie
content. The television programme and movie production segments contribute 60% and
32% of revenues respectively. Television remains the most lucrative segment for BLJT,
driving a bulk of the profits (96% of EBITDA, FY15). The movie segment turned profitable
at the operating level in FY15.
Fig 1 - Revenue split – FY15
Current business model hinges on
producing commissioned television
content
Fig 2 - EBITDA mix across segments
(Rs mn)
Others
(Creative and
events)
8%
Balaji Tele
Balaji Motion Pictures (R)
250
4.5
200
3.0
150
100
Motion
Pictures
32%
1.5
50
0.0
0
(50)
(1.5)
(100)
Source: RCML, Company
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
(3.0)
Q1FY14
(150)
Telefilms
60%
(Rs mn)
Business model – Television
BLJT produces content for various broadcasters on a per hour/episode fee–based model.
The business is about driving television ratings (TRP) and controlling productions costs.
IP rights of the content created by BLJT reside with the broadcaster and so do all the
monetisation rights. BLJT has executed well in this model by keeping the content creative
and production costs reasonable.
Caters to all the leading broadcasters
in India with 11 shows running across
several channels
The company has a dominant market share in the outsourced programming space and
currently runs 11 television shows. The average number of shows throughout the year
has gone up to 12 in FY15 from 8 in FY14. The company is currently focusing on genres
such as thriller, youth, horror and reality in the Hindi general entertainment (GEC) space
which is the most widely watched. It plans to innovate and produce new shows in order
to capture primetime slots across key channels. The risk is also diversified as the current
shows run across a variety of channels.
Fig 3 - Revenue per hour
(Rs mn)
Fig 4 - Television – Gross margins
Revenue per hour
QoQ growth (R)
3.0
2.5
(%)
(Rs mn)
50
450
40
400
30
2.0
20
1.5
10
0
1.0
(10)
0.5
(20)
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
(30)
Q4FY13
0.0
Gross profit
Gross margin (R)
(%)
30
25
350
300
20
250
15
200
150
10
100
5
50
0
FY12
FY13
FY14
FY15
0
3 August 2015
Page 135 of 181
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
Growth drivers in content programming business
Higher programming hours
BLJT believes that commissioned programming will remain the key growth driver for its
television segment. Realisations are largely flat and hence growth in revenue will
primarily come from the rising demand for TV shows from satellite channels. In FY15,
BLJT’s programming hours grew at 49% YoY in FY15 and at a healthy CQGR of 7% over
the last 10 quarters, driven by an increased number of shows commissioned by various
channels. Programming hours have grown from 146 in Q3FY13 to 258 hours in Q4FY15.
Realisation, though, has remained flat YoY at ~Rs 2.3mn per hour for FY15 and we see
little scope for improvement.
Fig 5 - Commissioned show revenue (QoQ)
Fig 6 - Programming hours and realisation
200
2.0
150
1.5
100
1.0
50
0.5
0
0.0
(mn)
Q4FY15
Q3FY15
Q2FY15
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
0
Q3FY13
100
2.5
Q1FY15
200
250
Revenue per hour (R)
Q4FY14
300
3.0
Programming hours
Q3FY14
400
300
Q2FY14
500
(Nos.)
50
40
30
20
10
0
(10)
(20)
(30)
(40)
Q1FY14
600
(%)
Q4FY13
QoQ growth (R)
Revenue
700
Q3FY13
(Rs mn)
Rising demand for TV shows from
satellite channels to boost growth
Growth in internet-based platforms to offset overcrowding in primetime
channels
Since the programming hours at prime time seem to have peaked out on television
channels, BLJT is looking at newer avenues of growth for its content programming
segment. The company plans to produce exclusive content which can then be outsourced
to internet platforms such as Ditto TV, Box TV and Bigflix. With the rising popularity of
internet TV, players like BLJT stand to benefit as they have the creative framework
necessary to churn out new programmes and content.
Internet-based platforms offer new
avenues of growth for content
programming business
3 August 2015
Page 136 of 181
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
Movies – a more focused approach
Healthy growth in India’s movie industry
As per KPMG, the movie industry in India has clocked a 7% CAGR over CY09-CY14 and is
poised to grow at a healthy 10% (CY14-CY19) to Rs 204bn as the industry becomes more
organised and continues to spin out high-budget movies. Box office collection has grown
from Rs 18bn in 2011 to Rs 26.5bn in 2014 despite muted growth in the number of
movies released – this is due to an explosion of multiplex screens and higher realisations
across multiplex chains which remain in a strong pan-India expansion mode.
Fig 7 - Movie releases and box office collections
Box office collection
Number of movie releases (R)
(Rs bn)
3,000
Fig 8 - Size of India’s movie industry
(Nos.)
175
2,500
170
2,000
165
1,500
160
1,000
YoY growth (R)
Size of movie industry
(Rs bn)
(%)
140
25
20
120
15
100
10
80
5
60
0
(5)
40
155
500
0
Movie industry expected to grow at
10% CAGR through CY19
2011
2012
2013
2014
150
Source: Company
(10)
20
(15)
0
2008
2009
2010
2011
2012
2013
(20)
2014
Source: Company
Balaji Motion Pictures – taking a more focused approach
BLJT runs a production house under the banner of ‘Balaji Motion Pictures’ and has
produced 20 films so far. However, the performance in the motion pictures segment has
been mixed, with losses incurred in the past due to the high-risk, high-investment nature
of the business. To minimize the risk, BLJT has moved to a new strategy over the past
year of focusing only on medium-to-small budget movies – the plan is to produce 20
movies over the next three years at a landed cost of Rs 400mn-500mn per film. The
overall capital employed in the movie segment was Rs 1.2bn in FY14 which falls within
the company’s comfort zone. Cash flow from movie business operations turned positive
at Rs 428mn in FY14 due to the recent shift in strategy.
Fig 9 - Capital employed – Motion Pictures
Fig 10 - Cash flow from operating activities – Motion
Pictures
(Rs mn)
(Rs mn)
2,000
600
1,808
1,800
98
200
1,400
1,206
1,200
0
(200)
1,000
659
600
(400)
595
(143)
(315)
(600)
323
400
(800)
(1,000)
200
0
428
400
1,600
800
New strategy of focusing only on
medium-to-small budget movies
FY10
FY11
FY12
FY13
FY14
(1,200)
FY10
FY11
FY12
(1,045)
FY13
FY14
3 August 2015
Page 137 of 181
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
New strategy has cut movie business losses
We believe BLJT’s niche focus on small/mid-budget movies is a sound strategy as highbudget movies involve enormous risk and can lead to significant capital burn if the movie
fails at the box office. Further, small/medium-budget movies typically have a higher
success rate. Losses in the movie segment have already reduced from Rs 263mn in FY14
to Rs 54mn in FY15 and the business is likely to turn profitable this year.
Losses in movie segment down from
Rs 263mn in FY14 to Rs 54mn in FY15
Fig 11 - Reduced losses in the volatile motion picture segment
(Rs mn)
3,000
Revenue
PAT
2,713
2,500
2,000
1,500
1,091
1,000
59
23.2
0
(500)
585
417
500
446
88.2
17.7
(89.0)
FY10
FY11
FY12
FY13
(263.0)
FY14
(54.0)
FY15
3 August 2015
Page 138 of 181
Company Update
Balaji Telefilms
NOT RATED
INDIA
BLJT IN
MEDIA
Digital business – the next growth driver
Entertainment to remain the largest consumer of mobile data
Television content programming hours are limited by the fixed nature of primetime
viewership slots. As digital penetration picks up in terms of internet and smartphone
usage, viewership will become more flexible and expand manifold as consumers access
content on the go – we thus expect to see (1) increased programming opportunities for
broadcasters, thus driving content outsourcing and (2) opportunities for BLJT to launch
its own content through multiple digital platforms.
New digital platforms offer scope to
launch own content
Increased use of smartphones to push video consumption
relatively low penetration of smartphone/data usage. Smartphone shipment share in
India has grown from 22% in CY13 to 35% in CY14. Extensive use of smartphones will
drive high-speed data usage as customers look to access content on mobile phones. As
per Cisco, 72% of the global mobile data traffic will be driven by videos in CY19,
especially
HD videos.
Smartphone
Fig 13 - Global mobile traffic generation split
File sharing
Feature phone
100%
100%
90%
90%
80%
80%
70%
78%
60%
72%
71%
68%
65%
70%
50%
40%
40%
30%
30%
22%
28%
29%
32%
35%
Q4CY13
Q1CY14
Q2CY14
Q3CY14
Q4CY14
10%
0%
Web
20%
10%
Source: IDC
0%
Video
55%
72%
60%
50%
20%
Audio
36%
19%
8%
2014
1%
7%
2019
2%
Source: CISCO
Better monetisation of movie and TV programme library
Focused approach to providing content on digital platforms
BLJT’s motion pictures arm has a small library of 26 movies which it intends to increase
over a period of time. The company plans to build its own subscription-based digital
platform through which viewers can access its existing library of movies and television
shows. BLJT will also produce exclusive content/television shows that can be viewed only
on its platform to attract more subscribers. We believe this is a perfect fit for a company
like BLJT as it already has a strong creative base to produce shows. Success in this
venture could also drive meaningful operating leverage in the long term.
Plans to build subscription-based
digital platform through which viewers
can access movies and TV shows
In-house creative strength provides key advantage
For the success and acceptability of any form of content, it is necessary to have your own
creative resources in place rather than an outsourcing or profit-sharing model. BLJT is an
old hand at creating content for both television as well as movies and thus holds an
advantage. With sustained demand for television programmes on various channels in
India and overcrowding of primetime slots, BLJT’s plans to produce exclusive shows for
online platforms will help sustain growth and give it an edge over competitors.
Creative resources offer key edge
3 August 2015
Page 139 of 181
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
Well capitalised to exploit digital opportunity
Management expects to roll out its digital platform over the next two years and has
already started investing in this opportunity. BLJT has always been a debt-free company
and has a healthy cash balance of Rs 1.5bn (FY15-end) which can be used to build out the
new digital media opportunity.
Fig 14 - Healthy cash balance
(Rs mn)
2,500
2,159
2,000
1,810
1,676
1,500
1,560
1,295
1,000
500
40
0
FY10
FY11
FY12
FY13
FY14
FY15
3 August 2015
Page 140 of 181
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
Income Statement
Total revenue
EBITDA
EBIT
FY11A
FY12A
FY13A
FY14A
FY15A
1,922
1,878
1,860
4,075
3,427
11
25
83
(208)
61
(101)
(53)
2
(269)
(22)
0
1
1
14
3
5
10
35
2
0
EBT
54
211
183
(112)
85
Income taxes
(4)
(9)
37
60
29
Extraordinary items
68
16
0
0
0
(11)
204
146
(172)
56
(11)
204
146
(172)
56
FY11A
FY12A
FY13A
FY14A
FY15A
186
215
296
302
372
91
118
165
216
107
Provisions
2
1
1
3
0
Debt funds
0
0
0
0
0
Other liabilities
0
0
0
0
0
Equity capital
1,609
1,609
1,609
1,609
130
Reserves & surplus
2,116
2,305
2,420
2,218
3,687
Shareholders' fund
3,725
3,914
4,029
3,827
3,818
4,004
4,248
4,491
4,347
4,296
50
60
109
77
110
506
338
398
385
670
Inventories
128
430
1,506
700
302
2,259
2,285
1,359
1,905
1,906
0
176
317
367
320
858
325
269
232
272
Exceptional items
Reported net profit
Adjustments
Adjusted net profit
Balance Sheet
Accounts payables
Cash and cash eq.
Investments
Net fixed assets
CWIP
Intangible assets
1
10
15
25
57
Other assets
202
624
518
655
658
Total assets
4,004
4,248
4,491
4,347
4,296
FY11A
FY12A
FY13A
FY14A
FY15A
101
282
226
(112)
139
(262)
(314)
(2)
(135)
0
151
(141)
(1,045)
635
0
Cash Flow Statement
Interest expenses
(10)
(173)
(821)
387
139
(129)
(46)
(25)
(24)
0
3,996
3,543
2,545
1,601
0
(3,824)
(3,303)
(1,633)
(1,965)
0
43
195
887
(388)
0
Equities issued
0
0
0
0
0
Debt raised/repaid
0
0
0
0
0
Interest expenses
0
0
0
0
0
(23)
(15)
(15)
(31)
0
0
0
0
0
0
(23)
(15)
(15)
(31)
0
11
7
50
(31)
139
Dividends paid
3 August 2015
Page 141 of 181
NOT RATED
Company Update
Balaji Telefilms
INDIA
BLJT IN
MEDIA
Per Share Data
Y/E 31 Mar (INR)
FY11A
FY12A
FY13A
FY14A
FY15A
Reported EPS
0.9
3.4
2.2
(2.6)
0.9
Adjusted EPS
0.9
3.4
2.2
(2.6)
0.9
FY11A
FY12A
FY13A
FY14A
FY15A
2.8
0.6
1.0
1.1
1.0
EV/EBITDA
109.1
39.2
31.8
15.1
44.8
Adjusted P/E
30.3
39.2
13.4
17.4
76.3
0.8
0.6
0.8
0.6
1.2
FY11A
FY12A
FY13A
FY14A
FY15A
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
EBITDA margin
0.6
1.3
4.4
(5.1)
1.8
EBIT margin
(5.2)
(2.8)
0.1
(6.6)
(0.6)
(0.6)
10.9
7.8
(4.2)
1.6
Adjusted ROAE
(0.3)
5.4
3.7
(4.4)
1.5
--
--
3.7
(4.2)
1.5
ROCE
YoY Growth (%)
Revenue
EBITDA
Adjusted EPS
Invested capital
21.1
(2.3)
(1.0)
119.1
(15.9)
(59.4)
116.1
232.8
(352.5)
(129.1)
(117.2)
(1992.4)
(28.7)
(218.0)
(132.6)
(1.1)
6.1
5.7
(3.2)
(1.2)
Receivables (days)
105.0
82.3
72.3
35.1
56.2
Inventory (days)
50.5
87.7
247.9
104.6
--
Payables (days)
51.7
50.1
37.3
35.8
--
Current ratio (x)
10.5
9.3
7.3
5.9
6.2
8.3
7.5
3.7
4.0
4.7
0.5
0.5
0.4
0.9
0.8
2.3
3.2
6.3
16.3
13.6
-
(38.1)
2.8
(19.6)
(6.5)
0.0
0.0
0.0
0.0
0.0
Quick ratio (x)
3 August 2015
Page 142 of 181
Company Update
INDIA
MEDIA
3 August 2015
NOT RATED
Eros International
EROS IN
Movie content play
EROS is one of the largest film studios in India with a library of 1,900 Hindi and
regional language films and is also the leading distributor of overseas rights
for Indian movies. India’s film industry is moving into a consolidation phase,
which will be steered by large studios like EROS. The company’s rich content
library has the potential to benefit from rising entertainment spends and the
adoption of subscription-based internet streaming platforms, backed by a
surge in smartphone and mobile data use in India. NOT RATED.
 Movie industry taking the organised route: India’s movie industry has clocked a 7%
CAGR over CY09-CY14 and is poised to grow at a healthy 10% over CY14-CY19 to
Rs 204bn – growth will be led by consolidation of the hitherto fragmented industry
(due to the entry of large global movie studios), a rising screen count and big-budget
releases. Screens per million population number at just 7 in India vs. 13 in China,
implying scope for screen addition and hence higher box office collections.
REPORT AUTHORS
Rumit Dugar
+91 22 6766 3444
INR 586.35
 Leading Indian movie studio: EROS offers movies across Hindi and regional
languages and has released more than 220 films over the last three years via the
production/acquisition and distribution model. The company, through a tie-up with
its global parent Eros PLC, is the market leader for distributing movie rights
overseas and has 42%/40% market share in this business in the US/UK.
MARKET CAP
 ErosNow platform provides opportunity to exploit data penetration: India offers a
massive opportunity for content consumption given its large population and
relatively low penetration of smartphone and data usage. ErosNow, the parent
company’s internet subscription service for streaming movies and music videos, has
access to EROS’ library of 1,900 movies. Traffic on ErosNow has surpassed most
major providers of on-demand internet streaming media in India such as Bigflix, Box
TV and Ditto TV. Although EROS India doesn’t own the platform, it stands to gain
from better revenue monetisation of its content.
24.11%
INR 54.3 bln
USD 847 mln
SHARES O/S
92.5 mln
FREE FLOAT
489K / USD 3 mln
52 WK HIGH
52 WK LOW
INR 644.40
INR 206.7
(INR)
700
600
500
400
300
200
100
0
Stock Price
Index Price
9,500
9,000
8,500
8,000
7,500
7,000
6,500
6,000
5,500
5,000
4,500
NOT RATED
EROS International
Company Update
EROS IN
INDIA
MEDIA
India’s movie industry on a strong wicket
As per KPMG, the movie industry in India has clocked a 7% CAGR over CY09-CY14 and is
poised to grow at a healthy 10% to Rs 204bn (CY14-CY19) as the industry becomes more
organised and continues to churn out high-budget movies. Box office collection has
grown from Rs 18bn in 2011 to Rs 26.5bn in 2014 despite muted growth in the number
of movies released. The higher collections can be attributed to an explosion of multiplex
screens and higher realisations across multiplex chains which remain in a strong panIndia expansion mode.
Fig 1 - Hindi movie releases and Box office collections
Box office collection
Number of movie releases (R)
(Rs bn)
3,000
Fig 2 - Size of India’s movie industry
(Nos.)
175
2,500
170
2,000
165
1,500
160
1,000
Size of movie industry
(Rs bn)
YoY growth (R)
140
155
2011
2012
2013
2014
20
120
15
100
10
80
5
60
0
(5)
(10)
20
0
150
Source:www.boxofficeindia.com
(%)
25
40
500
0
Movie industry expected to grow at
10% CAGR through CY19
(15)
2008
2009
2010
2011
2012
2013
2014
(20)
Consolidation ahead as global players plan entry
India’s movie industry (including regional movies) is set for consolidation as the planned
entry of several large global movie studios could lead to tie-ups/takeovers of Indian studios.
Over the last few years, best practices of film production from western markets have been
adopted in India, raising industry efficiency. We expect more new players from the West to
enter India in order to tap the country’s high growth opportunity.
Global studios keen on tapping the
Indian market
Fig 3 - Studios in India
Name of studio
Overview
Fox Star Studio
Subsidiary of global studio 21st Century Fox
Year of establishment in India
2008
UTV Motion Pictures/Disney
Unit of UTV India now sold to Walt Disney Company, USA in 2012
2004
EROS International
India-based movie production and distribution company
1973
Yash Raj
Oldest Bollywood studio founded by Bollywood veteran Yash Chopra
1970
Viacom 18 Motion Pictures
A JV between US based Viacom and TV 18 India
2000
Multi Screen Media
A subsidiary of Sony Pictures worldwide
2013
Source: Company
Movie monetisation in India
We note that there has been a major shift in the way a movie is monetised in India.
While theatre screenings (theatricals) remain the major revenue stream, the ancillary
streams have shifted from music and home videos to satellite and overseas distribution
rights. We believe revenue from music provides scope for sharp growth due to
monetisation of content on mobile phones given increased mobile data usage and
internet penetration in India.
3 August 2015
Page 144 of 181
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EROS International
Company Update
EROS IN
INDIA
MEDIA
Fig 4 - Movie revenue streams in India
Revenue Stream
Revenue from sale of music rights
harbours significant growth potential
% of Revenues
Domestic Theatrical
Overseas Theatrical
58
15
Music
5
Satellite
15
Home video
7
Scope for addition of theatre screens
Box office collections in India are driven by healthy screen additions and higher
realisations by multiplexes. The number of screens per million population stands at 7 in
India versus 13 in China; the US leads with 125. Given India’s large population and the
untapped opportunity for theatres in tier-2 cities, we expect significant growth in the
number of screens over the next few years. Revenue for PVR has grown at a CAGR of 42%
(FY12-15) led by healthy screen additions and rising box office collections. We expect
more consolidation in the industry as large players like Inox and PVR acquire smaller
brands in the industry.
Fig 5 - Number of screens – Global vs. India
Fig 6 - Revenue growth - PVR
No. of screens per million population
(Nos.)
140
(Rs bn)
125
120
82
80
61
60
40
26
Japan
Germany
UK
Spain
France
US
20
0
Revenue
(%)
YoY Growth (R)
16
80
14
70
12
60
50
10
57
40
8
13
30
6
7
India
85
China
100
Screens per million population at 7 in
India vs. 13 in China and 125 in the US
20
4
10
2
0
0
FY09
FY10
FY11
FY12
FY13
FY14
FY15
(10)
Movie collections witness radical change over last few years
Bollywood has witnessed some of its biggest hits in recent years largely owing to the
conversion of single-screen theatres into multiplexes. As screen additions continue to
rise, movies that have the right content and story will continue to rake in bigger
collections. Aamir Khan’s PK leads with a gross worldwide collection of Rs 7.4bn; other
movies such as Dhoom 3, Chennai Express and 3 Idiots have also done extremely well at
the box office.
Fig 7 - Biggest hits in Bollywood
Movie
Year
Production House/Studio
PK
2014
Vinod Chopra Films /UTV Disney
Worldwide Gross Collection (Rs mn)
7,350
Dhoom 3
2013
Yashraj Films
5,420
Chennai Express
2013
Red Chillies Entertainment / UTV
4,220
3 Idiots
Happy New Year
2009
2014
Vinod Chopra Films
Red Chillies Entertainment
3,950
3,830
Kick
2014
Nadiadwala Grandson Entertainment
3,770
Krissh 3
2013
Filmkraft Productions
3,740
Bang Bang
2014
Fox Star Studios
3,400
Ek Tha Tiger
2012
Yashraj Films
3,200
Yeh Jawaani Hai Deewani
2013
Dharma Productions
3,110
3 August 2015
Page 145 of 181
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EROS International
Company Update
EROS IN
INDIA
MEDIA
EROS a production & distribution powerhouse
EROS is a global player in the Indian media and entertainment industry that acquires, coproduces and distributes Indian films across different formats such as cinema, television
and digital new media. The company has a competitive advantage through its library of
1,100+ movies across Hindi, Tamil and other regional languages. EROS leverages on its
extensive global distribution network across 50+ countries, with offices in India, the UK,
North America, UAE, Australia, Fiji, Isle of Man and Singapore.
Large movie pipeline; overseas rights remains key growth driver
The company offers movies across Hindi and regional languages such as Tamil, Telugu
and Punjabi which helps diversify risks. EROS has released more than 220 movies over
the last three years via the production/acquisition/distribution model. It produced 69
movies in FY15 and has a healthy pipeline of 70 movies in FY16 across genres. The
company has a de-risking strategy of tying up for pre-sale of cable and satellite rights,
music and DVDs, through which it recovers 30-35% of its production cost. This reduces its
dependency on box office collections. Apart from theatrical and overseas rights, the
company has other revenue streams such as satellite and music.
Fig 8 - Revenue mix
EROS had 220 releases in the last 3
years including 69 in FY15; healthy
pipeline of 70 movies for FY16
Fig 9 - Split of movies produced across budgets
(Nos.)
100
High
Medium
Low
90
Others
32%
Theatrical
42%
80
70
60
50
97
76
64
40
58
67
44
30
20
Overseas
26%
10
0
13
2
FY09
11
FY10
Fig 10 - Market share – US
Viva
8%
5
FY12
5
13
6
FY13
21
4
FY14
Biggest distributor of overseas rights
for Indian movies with 40%+market
share in the US and UK
Fig 11 - Market share – UK
Fox
4%
Yash Raj
17%
UTV
20%
Source: Company
FY11
3
Overseas distribution a key revenue contributor
EROS is the market leader for distributing Indian movie rights overseas, with 42%
and 40% market share in the US and UK respectively, ahead of other leading
distributors such as Yash Raj Studios, UTV and Reliance. This implies that every
movie produced in India, except by these three large studios, is given to EROS for
overseas distribution.
Reliance
9%
10
3
Eros
42%
Others
17%
Fox
3%
Eros
40%
Reliance
6%
Yash Raj
19%
UTV
15%
Source: Company
3 August 2015
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Company Update
EROS IN
INDIA
MEDIA
Fixed overseas revenue provided by Eros PLC for all releases
Tie-up with parent for overseas
distribution de-risks business
EROS has tied up with its parent Eros PLC which acquires overseas rights of all the
moves released by the company. The parent pays EROS 39% (30% mark-up and
30% of this mark-up) of the production cost for distribution of movies outside
India. This is a long-term agreement between the parent and subsidiary and
again helps de-risk the business model.
Profit sharing and co-production
EROS releases big-budget movies on the basis of profit sharing. This is a type of
co-production where the company ties up with either the lead actor of the movie
or the creative person (director). Here, the total profit/loss of the movie is divided
equally with the partner. However, the profit will only be shared after deducting
EROS’s mark-up revenue for distribution of the movie across India (15-17% of the
total revenue) – this too reduces the company’s risk in a big-budget production.
ErosNow (held in US-listed parent Eros Plc) – new media-based
initiative to tap the data penetration opportunity
Increased use of smartphones to push video consumption
relatively low penetration of smartphone/data usage. Smartphone shipment share in
India has grown from 22% in CY13 to 35% in CY14. Extensive use of smartphones will
drive high-speed data usage as customers look to access content on mobile phones. As
per Cisco, 72% of the global mobile data traffic will be driven by videos in 2019,
especially HD videos.
Smartphone
Fig 13 - Global mobile data traffic break-up
File sharing
Feature phone
100%
100%
90%
90%
80%
80%
70%
78%
60%
72%
71%
68%
65%
70%
50%
40%
40%
30%
30%
22%
28%
29%
32%
35%
Q4CY13
Q1CY14
Q2CY14
Q3CY14
Q4CY14
10%
0%
Source: IDC
Audio
Web
20%
10%
0%
Video
55%
72%
60%
50%
20%
72% of global mobile data traffic likely
to be driven by videos in 2019
36%
19%
8%
2014
1%
7%
2019
2%
Source: CISCO Report
Internet-based platform to exploit data penetration opportunity
EROS has a library of 1,200 movies and access to digital rights of an additional 700
movies which can be viewed on ErosNow – its internet subscription service for streaming
movies and music videos (available on its website and mobile app). Traffic on ErosNow
has surpassed most major platforms in India including Bigflix, Box TV and Ditto TV. With
rising mobile data and internet penetration, revenues from ErosNow are poised to grow
at a fast pace. The release of 70 movies each year provides scale to the library while
lower operating costs for the new digital platform should prove margin accretive for the
company in the long run.
3 August 2015
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EROS International
Company Update
EROS IN
INDIA
MEDIA
Healthy positioning versus Indian and global peers
ErosNow is currently ranked above its Indian counterparts such as Ditto TV, Bigflix and
Box TV. The company has a strong competitive edge as it owns IP rights for all its content
and hence incurs no additional royalty cost to procure the same. ErosNow also
differentiates itself from other platforms by providing a mix of content including movies,
live stream events and music. The daily time spent on the website per unique visitor is
2:53 minutes; we believe this has the potential to move up significantly, in line with
global peers like Netflix who currently dominate the online library business.
ErosNow ranked above its Indian
counterparts in terms of traffic;
ownership of IP rights offers key edge
Fig 14 - Traffic comparison
Global Rank
Regional Rank
EROS NOW
Netflix
Ditto TV
Bigflix
Box TV
27,625
58
31,117
147,810
46,216
6,762
3,724
11
4,040
27,176
Daily page views per unique visitor
1.19
5.16
2.68
2.4
3.3
Daily time on site (mins)
2:53
5:57
3:04
2:52
3:13
Bounce rate (%)
48
22
39.5
35
33
% of traffic from a search engine
16
3
16
15
25
Source: RCML Research, Alexa.com
Netflix – a highly successful model for viewing content online
Netflix is a US-based internet television network with more than 48mn streaming
members in 40+ countries enjoying over one billion hours of television shows and movies
per month. The company was established in 2007 and has the first mover-advantage of
providing TV shows online. Its domestic and international streaming segments derive
revenue from monthly membership fees and the company has an average ARPU/month
of US$ 7-8.
ErosNow has the potential to grow to
the size of Netflix in India
Netflix’s revenue has grown at a strong CAGR of 23% (FY10-FY14) and the company’s cash
balance has increased to US$ 1.6bn currently from US$ 350mn in CY10. We believe
ErosNow, which is still in the nascent stages of expansion, has the potential to grow to the
size of Netflix in India give a large target audience and rising data/internet penetration.
Fig 15 - Netflix financials
(USD mn)
2010
2011
2012
2013
2014
Revenue
2163
3205
3609
4375
5905
YoY growth (%)
EBITDA
EBITDA margin (%)
PAT
YoY growth (%)
Cash
29
48
13
21
26
316
438
96
277
457
14.6
13.7
2.7
6.3
7.7
157
238
17
129
267
7.3
7.4
0.5
2.9
4.8
350
798
748
1,200
1,609
3 August 2015
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EROS International
Company Update
EROS IN
INDIA
MEDIA
Business model
Fig 16 - Content acquisition and distribution across various platforms
OPERATING ACTIVITIES
SOURCING CONTENT
(Hindi / Regional)
Existing Content
EXPLOITATION / DISTRIBUTION
New Content
India
International
Acquisition
Co-production
Production
1.
Theatrical
2.
Television
3.
Home entertainment
4.
Music / music
publishing
5.
Digital distribution /
new media
EyeQube
Licensing through
the Relationship
Agreement
Directly and
via Licensing
Existing Content
NEW BUSINESS INITIATIVES
1.
Arrangements with
Eros International Plc
and Eros Worldwide
for International
Rights
Universal Music JVA
EMI tie-up (through Eros
Music Publishing)
Fig 17 - Exploitation and distribution of content
Distribution
Platforms
Timing
Music
Release
6-8 weeks
before TR
Theatrical
Release (TR)
0
DTH
1-3 months from TR
DVD
Distribution
Satellite
licensing to
Television
New Media
and other
3-6 months
from TR
3-9 months
from TR
3 August 2015
Page 149 of 181
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EROS International
Company Update
EROS IN
INDIA
MEDIA
Fig 18 - Eros – Holding structure
46.68%
Founder Group
Eros International Plc
(Isle of Man)
53.32%
Public
100%
100%
100%
Eros Worldwide
FZ-LLC (Dubai)
Other International
Subsidiaries
Eros Holdings
FZ LLC (UAE)
100%
Eros Digital
FZ LLC (UAE)
(ErosNow)
99.98%
50.94%
Eros Digital
Private Limited
(India)(b)
Other Big Screen
Shareholders
36%
23.46%
Big Screen Entertainment
Private Limited (India)
Digicine Pte. Limited
(Singapore)
Copsale Limited
(BVI)
Eros International
Media Limited
(India)
25.62%
Public
64%
99.65%
100%
50%
100%
Other Indian
Subsidiaries(a)
0.35%
Colour Yellow Productions 50%
Private Limited (India)
Nominee Holders
Other Colour Yellow
Shareholders
51%
Other Ayngaran
Subsidiaries
49%
Ayngaran International
Limited (Isle of Man)(c)
100%
Other Ayngaran
Subsidiaries
Source: SEC Filing
a)
Eros India holds at least 99% of each of its Indian subsidiaries other than Big Screen Entertainment Private Limited (India) and Colour Yellow Productions Private
Limited (India).
b)
Eros Digital Private Limited (India) holds the remaining 0.35% of Eros India’s Indian subsidiary Eros International Films Private Limited.
c)
Ayngaran International Limited (Isle of Man) holds 51% of Ayngaran Anak Media Private Limited (India) and 100% of each of its other subsidiaries.
3 August 2015
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Company Update
EROS IN
INDIA
MEDIA
Per Share Data
Y/E 31 Mar (INR)
FY11A
FY12A
FY13A
FY14A
FY15A
Reported EPS
7.1
10.9
11.9
13.7
14.2
Adjusted EPS
7.1
10.9
11.9
13.7
14.2
DPS
0.0
0.1
0.1
0.1
0.0
82.1
91.3
107.4
131.5
160.6
BVPS
Valuation Ratios
Y/E 31 Mar (x)
FY11A
FY12A
FY13A
FY14A
FY15A
EV/Sales
1.6
1.2
1.1
1.1
0.9
EV/EBITDA
7.4
5.6
5.2
4.2
3.7
Adjusted P/E
72.1
47.0
43.0
37.3
35.8
6.2
5.6
4.7
3.9
3.2
FY11A
FY12A
FY13A
FY14A
FY15A
EBITDA margin
22.1
21.9
21.2
26.4
24.4
EBIT margin
21.5
21.2
20.6
26.0
23.9
16.6
15.7
14.5
17.6
17.4
Adjusted ROAE
25.8
19.6
17.0
18.2
18.4
ROCE
17.3
12.9
11.9
14.4
14.9
Revenue
10.3
33.5
13.1
6.2
25.2
EBITDA
38.1
32.3
9.6
32.5
15.8
Adjusted EPS
(75.1)
53.6
9.3
15.2
4.1
Invested capital
108.8
28.9
23.5
21.4
14.7
Receivables (days)
68
73
79
68
48
Inventory (days)
17
3
4
3
103
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Payables (days)
10
36
56
82
80
Current ratio (x)
0.9
1.1
0.9
0.6
0.6
Quick ratio (x)
0.2
0.5
0.3
0.2
0.1
0.6
0.6
0.6
0.6
0.5
346.0
0.0
77.9
10.6
19.9
0.1
0.2
0.2
0.2
0.2
3 August 2015
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EROS International
Company Update
EROS IN
INDIA
MEDIA
Income Statement
FY11A
FY12A
FY13A
FY14A
FY15A
Total revenue
7,069
9,438
10,680
11,347
14,212
EBITDA
1,561
2,065
2,262
2,998
3,471
EBIT
1,523
2,005
2,198
2,947
3,403
(4)
117
(28)
(278)
(171)
0
0
0
0
0
Exceptional items
0
0
0
0
0
EBT
1,518
2,122
2,170
2,670
3,232
Income taxes
(336)
(631)
(612)
(737)
(762)
0
0
0
0
0
(10)
(13)
(13)
64
1
1,172
1,478
1,545
1,997
2,471
Extraordinary items
Reported net profit
Adjustments
0
0
0
0
0
1,172
1,478
1,545
1,997
2,471
FY11A
FY12A
FY13A
FY14A
FY15A
291
1,153
1,423
2,310
2,379
3,460
1,689
1,211
1,605
8,622
Provisions
0
0
0
0
0
Debt funds
2,387
4,362
3,841
3,832
4,250
Other liabilities
766
1,127
1,633
2,089
2,601
Equity capital
914
917
919
920
925
5,791
7,429
8,946
11,167
13,897
Adjusted net profit
Balance Sheet
Accounts payables
Reserves & surplus
Shareholders' fund
6,705
8,346
9,865
12,086
14,822
13,661
16,741
18,049
21,934
32,685
Cash and cash eq.
1,435
3,004
1,725
1,544
1,697
1,335
2,450
2,150
2,053
1,697
47
70
96
40
5,257
2,673
1,391
811
495
294
80
80
331
257
1,381
Inventories
Investments
Net fixed assets
7,787
9,567
12,308
16,196
22,321
CWIP
0
0
0
0
0
Intangible assets
0
0
0
0
0
0
0
0
0
0
Other assets
301
179
627
1,348
38
Total assets
13,659
16,741
18,047
21,932
32,685
FY11A
FY12A
FY13A
FY14A
3,645
5,015
6,301
6,648
Interest expenses
0
0
0
0
0
0
0
0
440
(1,612)
(99)
1,420
Cash Flow Statement
120
48
108
343
4,205
3,451
6,310
8,410
(5,477)
(5,300)
(7,644)
(8,961)
46
(1,523)
446
1,102
0
0
462
2
(5,431)
(6,822)
(6,737)
(7,857)
Equities issued
3,206
38
23
5
Debt raised/repaid
194
1,731
(437)
320
Interest expenses
(269)
(67)
(132)
(60)
Dividends paid
0
0
(164)
0
0
0
1
13
3,333
1,638
(636)
69
2,107
(1,733)
(1,063)
622
2,107
4,451
6,135
4,683
3 August 2015
Page 152 of 181
Company Initiation
INDIA
MEDIA
3 August 2015
BUY
TP: INR 400.00
 40.4%
SHEM IN
Content monetisation play backed by large library
We initiate coverage on SHEM with BUY and a Sep’16 TP of Rs 400. Apart
from its traditional business of television broadcast syndication, SHEM offers
3,000 movies on digital platforms and hence is an apt fit for our theme of
content monetisation led by higher mobile data consumption in India. Given
plans to expand the content library to 5,000 titles by 2019, along with a rising
share of the high-margin new media (internet) business, we model for a solid
revenue/earnings CAGR of 15%/20% over FY15-FY18E.
REPORT AUTHORS
Rumit Dugar
+91 22 6766 3444
 New media platforms the next growth driver…: We expect wireless internet
connections in India to grow at a 38% CAGR (FY15-FY20) to 550mn connections in
FY20 led by strong growth in smartphone penetration and rollout of data networks.
Various platforms such as YouTube (where SHEM runs 32 channels with 2.5mn hits
per day), IPTV and MVAS offer scope for robust growth among players who own
content, by opening up newer avenues for monetising their content libraries.
 …chipping away at traditional media share: SHEM’s new media segment has clocked
an impressive 53% revenue CAGR over FY11-FY15 and we expect the strong growth
trajectory to continue at 37% over FY15-FY17, given increased mobile internet
penetration and growing smartphone usage. Already, revenue share from new media
has risen from 4% in FY11 to 11% now and we model for an 18% share by FY17.
 Increased operating efficiency: SHEM’s EBITDA margin has improved steadily over
the last five years to 27% in FY15, as operating profit clocked a 28% CAGR (FY11-FY15)
versus a 20% revenue CAGR, driven by growth in the new media segment. We expect
30bps margin expansion over FY15-FY17 as the new platforms gain traction.
 Initiate with BUY: The rise of new media will not only leapfrog growth for SHEM but
also improve the working capital/receivables cycle and bring in capital efficiency. We
initiate coverage with BUY and a Sep’16 TP of Rs 400 set at 14x one-year fwd P/E.
INR 285.00
MARKET CAP
INR 7.7 bln
USD 121.0 mln
SHARES O/S
20.6 mln
FREE FLOAT
33.0%
52 WK HIGH
52 WK LOW
INR 321.85
INR 144.00
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
2,646
3,235
3,800
4,439
5,082
EBITDA (INR mln)
644
869
1,011
1,208
1,306
282
421
512
650
735
Adjusted EPS (INR)
13.7
17.4
21.1
26.9
30.4
230
180
Revenue (INR mln)
15.2
26.8
21.8
27.3
13.1
DPS (INR)
0.5
1.2
1.5
1.5
1.5
ROIC (%)
13.4
14.8
15.3
16.7
16.4
Adjusted ROAE (%)
17.5
17.1
15.0
16.3
15.8
Adjusted P/E (x)
20.8
16.4
13.5
10.6
9.4
EV/EBITDA (x)
10.8
8.5
6.8
5.5
5.1
3.9
2.1
1.8
1.6
1.3
P/BV (x)
(INR)
280
130
Stock Price
Index Price
30,690
29,690
28,690
27,690
26,690
25,690
24,690
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
Media content aggregator with large library
SHEM is a media content aggregator with a large library of 3,000 movie titles. The
company’s business model involves acquiring the content from various production
houses and monetising the same by distributing it through the traditional (television) and
new media (internet) platforms.
Large library of 3,000 movie titles
Fig 1 - Business model
Perpetual Rights
-Complete
ownership
Broadcast
syndication –
satellite, cable
Aggregation
rightsLimited ownership
Content library
1)
Hindi films
2)
Regional content
3)
Music
4)
Special Interest
New media –
Mobile, internet
Home video –
VCD, DVD,
Blu-Ray
Others –
In-flight,
overseas
Rapid growth in content library
SHEM has established strong relationships with producers for acquiring content and also
with broadcasters/digital media to distribute it over various platforms. Early in 2005, the
company had a content library of just 500 titles, which has expanded to 2,900+ today.
Management is targeting 5,000 titles by 2019 driven by a strategy of aggressive content
acquisition across various genres.
Management targeting 5,000 titles by
2019
Fig 2 - Content library
(Nos.)
6,000
5,000
5,000
4,000
3,000
3,000
2,000
1,000
0
500
2005
2015
2019
3 August 2015
Page 154 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
Low-risk, low-capital strategy
SHEM’s library is based upon two types of rights: (1) perpetual rights which give it
distribution rights across all geographies and platforms and (2) aggregation rights where
rights are limited to a particular geography/period. Within SHEM’s library, 26% of the
titles have perpetual rights and 74% have aggregated rights. This is in line with the
company’s low-risk, low-capital strategy as the acquisition of aggregated rights requires
lower capital. The library is also well diversified as Hindi and regional titles make up 56%
and 44% of the content respectively.
Focus on aggregated rights and timing
of content acquisition helps cut risk
SHEM acquires content in the second lifecycle of a movie so as to avoid heavy costs
associated with new releases and also to better gauge performance of a movie in the first
cycle. It has long-term arrangements with broadcasters to monetise content on television
(traditional media) and also distributes it through new media (internet, mobile valueadded services or MVAS) and home video platforms.
Fig 3 - Content split – type of rights
Fig 4 - Library size – type of content
Perpetual
titles
26%
Regional/
Others
44%
Hindi movies
56%
Aggregated
titles
74%
Source: Company
Source: Company
Fig 5 - Rights accounting policy
Long Term Rights
(>10 years)
Aggregated Rights
Bundled Rights
(Satellite + Digital Rights)
Satellite rights
- 90% of cost
amortized in
year of sale
Digital rights /
Home Video 10% of cost
amortized
over 5 years
Specific Rights
Satellite,
overseas, etc.
- 100%
amortized in
year of sale
Catalog –
amortized
equally over
60 months
Digital rights /
Home Video
First cycle - 65% of cost
amortized in year of sale
Satellite rights
- 90% of cost
amortized in
year of sale
Satellite Second Cycle – 35%
of cost amortized in year of sale
Digital rights /
Home Video 10% of cost
amortized
over 5 years
New Titles –
70% of cost
amortized in first
year & balance
over 4 years
3 August 2015
Page 155 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
New (digital) media – the next big growth driver
The advent of mobile internet and increasing affordability of smartphones are key reasons
behind the rising internet penetration in India. We model for a 38% CAGR (FY15-FY20) in
wireless internet connections in India to 550mn in FY20. This will drive demand for data
services and content viewing. SHEM’s new media business taps into this opportunity by
offering access to its movie library on YouTube, MVAS and emerging platforms such as
IPTV. After posting an impressive 53% revenue CAGR over FY11-FY15 (vs. 14% in its
traditional media business), we expect robust growth of 50%+ in new media through FY18,
accompanied by strong margin gains.
Fig 6 - India – Smartphone shipments
Fig 7 - India – High speed data subscriber estimates
(mn)
300
225
191
200
600,000
70%
500,000
60%
50%
40%
300,000
119
82
100
YoY Growth (R)
400,000
159
150
High Speed Data Subs ('000s)
('000s)
281
259
250
New media to be the key growth driver
for next two years
30%
200,000
50
20%
100,000
0
2014
2015E
2016E
2017E
2018E
2019E
0
2020E
10%
2014
2015E
2016E
2017E
2018E
2019E
2020E
0%
Multiple avenues for growth in new media business
YouTube channels
Video-sharing website YouTube is the largest platform in SHEM’s new media business
with the company running 32 channels on the site. Hits per day on SHEM’s channels have
increased from 1.5mn-2mn to 2.5mn now and the upside potential is massive as mobile
internet penetration gathers steam in India. As per technology analytics firm Comscore,
SHEM’s channels have had 4.5mn unique visitors in FY13, higher than peers like ZEE and
Star TV. T-series leads in terms of new visitors given its comprehensive database of music
video content.
Content library expansion will drive
increase in page hits
Fig 8 - Unique visitors on YouTube channels, FY13
(000)
10,000
9,436
9,000
8,000
7,249
7,000
6,000
4,802
5,000
4,611
4,447
4,094
4,000
4,030
4,019
3,916
3,886
3,000
2,000
1,000
0
T-series
music
Sony
Universal
Grp
Eros
Shemaroo Zee Ent
Star TV Saregama Fullscreen Rajshri
Source: Comscore
3 August 2015
Page 156 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
As per Comscore, an average visitor spends 9.2 minutes on SHEM’s YouTube channels,
which is the third highest after Star TV and T-series.
Fig 9 - Minutes per visitor
(mins)
30
27.6
25
20
15.3
15
8.8
10
7.3
8.0
Universal
Grp
Eros
9.2
8.3
7.9
8.9
6.9
5
0
T-series
music
Sony
Shemaroo Zee Ent
Star TV Saregama Fullscreen
Rajshri
Source: Comscore
Mobile value-added services (MVAS)
SHEM has tied up with large telecom players such as Reliance, BSNL and Airtel for mobile
value-added services of their content. This provides for promotion of the company’s
content and acceptability among a larger audience. SHEM also distributes its content
through other emerging platforms including DTH and IPTV (internet TV). These currently
make up only a small portion of revenues but are expected to do well over the longer term.
MVAS helps promote content to a
larger audience due to increased
mobile penetration
Growing much ahead of industry
SHEM’s new media segment has clocked a strong 53% CAGR in revenues to Rs 370mn
over FY11-FY15 vs. 35% growth for the industry, driven by rising viewership of the
company’s video content on its YouTube channels. SHEM derives revenues in various
ways including subscription and advertisement on YouTube.
We expect growth to remain ahead of industry at a 37% CAGR over FY15-FY17,
contributing 18% of the company’s revenue by FY17 from 11% in FY15 – this will be
underpinned by increased mobile internet penetration in India, larger screen sizes on
smartphones which enable easy viewing of videos, SHEM’s expanding content library and
its acceptability over various internet platforms.
New media revenue share to rise from
11% in FY15 to 18% by FY17
Fig 10 - Shemaroo new media revenue growth
New media revenues
(Rs mn)
800
YoY Growth (%) (R)
(%)
140
119
700
689
600
100
511
500
300
0
60
246
200
100
80
370
400
147
175
41
67
38
50
35
FY12
FY13
FY14
40
20
19
FY11
120
FY15
FY16E
FY17E
0
3 August 2015
Page 157 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
Rising operating leverage and capital efficiency
New media a key margin lever
We believe the new media business will be margin-accretive for the company as this
segment commands a significantly higher operating margin versus the traditional
television business. The company’s overall EBITDA margin has improved steadily over the
last five years to 27% in FY15, as operating profit clocked a 28% CAGR (FY11-FY15) versus a
20% revenue CAGR, driven by growth in the new media segment.
New media business will continue to
be a strong margin lever
Fig 11 - SHEM’s EBITDA growth vs. New media revenue growth, YoY
EBITDA
45%
New media segment (R)
140%
41%
40%
120%
35%
35%
119%
100%
30%
23%
25%
80%
20%
60%
41%
15%
40%
50%
10%
12%
5%
20%
19%
0%
FY12
FY13
FY14
0%
FY15
Higher capital efficiency
SHEM has significant exposure to the traditional media segment where payment cycles
are elongated due to delayed settlement of dues by TV broadcasters. In contrast, new
media platforms (YouTube/MVAS) have shorter payment cycles, leading to a sharp drop
in receivable days to 143 in FY15 as compared to 194 in FY14. We expect receivable days
to stabilise before falling sharply over the longer term as revenue share of the new media
business rises.
Shorter payment cycles driving down
receivable days
Fig 12 - Stable debtor days due to shift towards new media segment
(Days)
200
194
190
183
180
165
170
160
155
154
150
143
140
130
121
120
110
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
3 August 2015
Page 158 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
The company has been facing pressures on the working capital front due to higher
debtor days and the need to maintain a large inventory. With the help of money rose
during the recent IPO (Rs 1bn), it has been able to fulfill its increased working capital
requirements by investing in new inventory and paying off short-term debts.
Requirement for working capital is expected to remain at current levels. This coupled
with stable cash generation should turn operating cash flows positive FY16 onwards.
Fig 13 - Working capital requirement
Fig 14 - Cash from operating activities
(Rs mn)
(Rs mn)
3,500
3,047
3,000
2,691
2,704
500
206
518
143
(11)
328
(193)
(500)
2,000
(1,000)
1,487
1,500
(1,500)
1,048
(2,000)
765
1,000
0
1,000
0
2,500
500
Working capital pressure to ease
(2,500)
308
FY11
(2,972)
(3,000)
FY12
FY13
FY14
FY15
FY16E
FY17E
(3,500)
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
3 August 2015
Page 159 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
Traditional media – growing on par with industry
We expect India’s television industry to grow between 14% and 16% (FY15-FY20) backed
by a recovery in the domestic macro and in FMCG spends, as well as the entry of a newcategory in the form of internet companies. This should lead to double-digit growth in
advertisement and subscription revenues. Subscription revenue growth will be further
driven by digitisation. Cable & satellite (C&S) penetration is expected to grow to 90%
from 82% currently. This will aid growth in SHEM’s traditional media (television) segment
and we model for 14% revenue CAGR over FY15-FY17, in line with the industry.
TV industry to report double-digit
growth
Traditional media remains mainstay for SHEM
Traditional media continues to be the larger segment for SHEM despite expansion into
new media. In this business, SHEM provides its content to broadcasters through the
cable television, satellite and terrestrial platforms in return for a one-time fee that gives
broadcasters content rights for a period of 5-7 years. Its content is currently telecast
across GECs and movie channels, such as UTV Movies, Star Gold, Sony Max and NDTV. As
more channels follow the digitisation route, SHEM will benefit from further monetization
SHEM provides content to
broadcasters for a one-time fee
The traditional media business also includes distribution of content via home
entertainment (DVDs, blue ray) and in overseas markets, albeit forming a small share of
segmental revenue. Revenue in the traditional media segment has grown at a CAGR of
14% (FY11-FY15), in line with industry, and we expect a similar growth rate going ahead.
However, the contribution of this segment (currently 89%) will dip given the strong
growth in new media.
Fig 15 - Segment-wise contribution
(%)
100
90
Traditional
4
8
8
Fig 16 - Double-digit growth in traditional segment
(Rs mn)
New media
10
11
14
18
80
3,500
70
3,000
60
2,500
50
40
96
92
92
90
89
86
82
30
10
500
FY12
FY13
FY14
FY15
FY16E
FY17E
YoY Growth (%) (R)
(%)
25
21
19
20
15
14
12
0
15
10
1,500
1,000
FY11
19
2,000
20
0
Traditional segment
4,000
5
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
0
3 August 2015
Page 160 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
Financial snapshot
(Rs mn)
Revenue
Growth (%) (R)
(%)
6,000
25
5,000
20
EBITDA
45
40
1,200
35
2,000
30
15
800
25
10
600
20
3,000
15
400
5
1,000
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
10
200
0
5
0
FY12
FY13
FY14
Fig 20 - PAT growth
(%)
(Rs mn)
27.2
27.5
26.9
26.7
27.0
26.6
26.0
500
0
FY18E
(%)
Growth (%) (R)
60
50
40
30
300
20
200
FY12
FY13
FY14
10
100
24.3
FY15
FY16E
FY17E
0
FY18E
FY12
FY13
FY14
Fig 22 - Net debt/Equity
(%)
20
ROCE
FY15
FY16E
FY17E
FY18E
0
(x)
ROE
1.0
18
0.9
16
0.8
14
0.7
12
0.9
0.7
0.7
0.6
10
0.5
8
0.3
0.4
6
4
0.3
2
0.2
0
FY17E
400
25.7
25.6
24.5
24.0
FY16E
700
600
25.0
PAT
FY15
800
26.5
25.5
(%)
Growth (%) (R)
1,000
4,000
0
(Rs mn)
1,400
FY13
FY14
FY15
FY16E
FY17E
FY18E
0.1
0.2
FY12
FY13
FY14
FY15
FY16E
0.2
0.1
FY17E
FY18E
3 August 2015
Page 161 of 181
BUY
Company Initiation
Shemaroo
Entertainment
TP: INR 400.00
 40.4%
INDIA
MEDIA
SHEM IN
Valuation
Growing ahead of large peers…
SHEM’s new media business will drive growth better than the industry. We model for a
revenue CAGR of 16% over FY15-FY18 – this coupled with a strong uptick in margins as
operating leverage from new media kicks in would support a stronger earnings CAGR of
20%. EBITDA margin gains in new media will come from strong demand visibility and
lower costs as 80% of the content library has already been digitised.
Fig 23 - SHEM in line with peers
Shemraoo
Eros ENt
New media business to be
instrumental in driving SHEM’s growth
Zee Ent
30%
27%
23%
25%
21%
20%
20%
17%
16%
15%
10%
5%
0%
Rev CAGR (FY14-18E)
PAT CAGR (FY15-18E)
…but significantly cheaper; initiate with BUY
SHEM was listed in Oct’14 (listing price of Rs 160). Despite double-digit revenue growth
over the last three years and healthy margin improvement, the company is trading at
discounted valuations of 11.4x/8.9x/7.9 FY16E/FY17E/FY18E earnings. SHEM has paid off
a large portion of its debt post the IPO, leading to a drop in debt/equity ratio from 0.9x in
FY14 to 0.3x in FY15, alleviating investor concerns over debt management. We believe
sustained growth momentum and increased contribution from the new media business
will be key re-rating triggers for the company. Our Sep’16 TP of Rs 400 is set at 14x oneyear forward P/E – initiate with BUY.
Valuation discount unwarranted; we
value the stock at 14x forward
earnings
Fig 24 - Financials – Peer comparison
Company
Price (Rs)
Mkt cap
(US$ mn)
Revenue (Rs mn)
FY16E
FY17E
EBITDA margin (%)
PAT (Rs mn)
FY18E
FY16E
FY17E
FY18E
FY16E
FY17E
FY18E
Shemraoo
586
846
3,800
4,439
5,082
26.6
27.2
25.7
512
650
735
Eros Int*
285
121
16,166
18,965
24,874
28.8
29.8
30.8
3,110
3,749
5,174
Zee Ent
399
5,970
55,276
64,739
77,837
26.6
28.9
28.6
10,455
13,180
16,228
Source: RCML Research, Bloomberg Consensus. Note: * - Bloomberg consensus for Eros (NR)
Fig 25 - Valuations – Peer comparison
Company
ROE (%)
EV/EBITDA (X)
FY16E
FY17E
FY18E
FY16E
Shemraoo
15.0
16.3
15.8
Eros Int
19.0
18.9
21.0
Zee Ent
21.2
23.2
22.8
28.2
PE(X)
Net debt (Rs bn)
FY17E
FY18E
FY16E
FY17E
FY18E
FY16E
FY17E
FY18E
8.7
7.3
4.3
13.0
11.0
7.9
770
727
743
12.7
10.3
6.9
16.2
13.4
9.8
4,342
3,540
2,079
23.6
15.6
37
30
21.7
(12,840)
(16,688)
(24,494)
Source: RCML Research, Company, Bloomberg Consensus. Note: * - Bloomberg consensus for Eros (NR)
3 August 2015
Page 162 of 181
BUY
TP: INR 400.00
 40.4%
Shemaroo
Entertainment
SHEM IN
Company Initiation
INDIA
MEDIA
Key risks
Increase in content prices and availability
SHEM faces competition from new and existing players in the film and television media
segments. Rising competition is inflating the cost of content acquisition, which could
impact business and dent profitability.
Rapid technological change
The media and entertainment industry continues to undergo significant technological
developments, including the ongoing transition from physical to digital media. The
company may not be successful in adapting to new and emerging digital distribution
technology, which could have a material adverse effect on business prospects.
Inability to keep pace with new
technologies a key risk
Piracy in the media entertainment industry
The industry is highly dependent on maintenance of intellectual property rights in
entertainment content. Growing sales of pirated goods and downloading of pirated
content online can diminish demand for the company’s products and also impact
revenue in the new media segment, particularly as the move to digital formats has
facilitated high-quality piracy.
Concentration risk
Broadcast syndication is one of the company’s major activities. As there are a limited
number of television broadcasters, the number of prospective buyers for SHEM’s content
is limited. Similarly, the number of telecom operators and streaming websites through
which content is distributed in the new media business is limited. Any significant changes
in this customer group’s buying patterns may have an adverse effect on growth.
3 August 2015
Page 163 of 181
BUY
TP: INR 400.00
 40.4%
Company Initiation
Shemaroo
Entertainment
INDIA
MEDIA
SHEM IN
Management profile

Mr. Buddhichand Maroo, Chairman, is also the co-founder of the Group and has
been associated with SHEM since 1962. He has 52 years of business experience, of
which he has been associated with the media and entertainment industry for over
30 years. He has been involved in various aspects of the business over the last
several years. Currently, he has retired from active business.

Mr. Raman Maroo, Managing Director, has been associated with the Group since
1974 and has been instrumental in the Group’s expansion into television rights
syndication as well as transformation of SHEM into a content house. He is a Director
on the Board of several companies.

Mr. Atul Maru, Joint Managing Director, has been associated with the Group since
1979 and has 34 years of experience in the media and entertainment industry. He
has been actively involved in the operations of the company and has spearheaded
various initiatives including the home video division.

Mr. Hiren Gada, Whole Time Director and Chief Financial Officer, has been
associated with the Group since 2003 and the company since 2008. He has helped
set up some of the newer business areas, and handles the Strategy and Finance
functions.

Mr. Jai Maroo, Non-executive Director, has been associated with the Group since
2002 and has been active on the technology side. He is guiding the company on
digital distribution activities, mainly on mobile and internet amongst others. He has
been a speaker on several national and international forums on technology and
media-related topics.
Fig 26 - Shareholding pattern – MFs have 7% stake
Others
18%
FII
10%
Promoter Indian
54%
Mutual Funds
7%
Promoter Foreign
11%
Source: Company
3 August 2015
Page 164 of 181
BUY
TP: INR 400.00
 40.4%
Company Initiation
Shemaroo
Entertainment
INDIA
MEDIA
SHEM IN
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
13.7
17.4
21.1
26.9
30.4
Adjusted EPS
13.7
17.4
21.1
26.9
30.4
0.5
1.2
1.5
1.5
1.5
74.0
134.6
155.6
182.6
211.6
FY14A
FY15A
FY16E
FY17E
FY18E
2.6
2.3
1.8
1.5
1.3
EV/EBITDA
10.8
8.5
6.8
5.5
5.1
Adjusted P/E
20.8
16.4
13.5
10.6
9.4
3.9
2.1
1.8
1.6
1.3
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
24.3
26.9
26.6
27.2
25.7
EBIT margin
23.2
25.7
25.8
26.4
25.7
10.7
13.0
13.5
14.6
14.5
Adjusted ROAE
17.5
17.1
15.0
16.3
15.8
ROCE
13.2
14.5
14.2
14.6
14.0
Revenue
23.2
22.2
17.5
16.8
14.5
EBITDA
12.3
34.9
16.4
19.4
8.1
Adjusted EPS
15.2
26.8
21.8
27.3
13.1
Invested capital
29.7
26.9
5.7
13.6
14.2
Receivables (days)
146
151
143
148
145
Inventory (days)
381
440
421
381
376
Payables (days)
43
42
27
27
27
Current ratio (x)
1.7
2.7
2.7
2.7
2.7
Quick ratio (x)
0.0
0.0
0.2
0.3
0.4
1.7
1.8
3.8
NA
NA
0.7
0.7
0.7
0.7
0.7
3.4
4.2
4.4
5.6
5.9
0.9
0.3
0.2
0.2
0.1
DPS
BVPS
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
DuPont Analysis
Y/E 31 Mar (%)
FY14A
FY15A
FY16E
FY17E
FY18E
64.1
65.9
67.2
67.1
67.1
71.7
76.7
77.8
82.7
83.8
23.2
25.7
25.8
26.4
25.7
74.8
71.8
72.0
72.2
71.3
219.1
183.1
154.2
154.1
153.4
17.5
17.1
15.0
16.3
15.8
Adjusted ROAE
3 August 2015
Page 165 of 181
BUY
TP: INR 400.00
 40.4%
Company Initiation
Shemaroo
Entertainment
INDIA
MEDIA
SHEM IN
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
2,646
3,235
3,800
4,439
5,082
EBITDA
644
869
1,011
1,208
1,306
EBIT
614
832
978
1,171
1,306
(179)
(200)
(224)
(210)
(220)
0
0
0
0
0
Exceptional items
5
6
7
8
9
436
633
755
961
1,086
Total revenue
EBT
Income taxes
(165)
(222)
(257)
(327)
(369)
Extraordinary items
0
0
0
0
0
1
(1)
0
0
0
277
415
505
642
726
Reported net profit
Adjustments
Adjusted net profit
5
6
7
8
9
282
421
512
650
735
Balance Sheet
FY14A
FY15A
FY16E
FY17E
FY18E
Accounts payables
306
165
194
226
259
469
416
488
570
653
Provisions
0
0
0
0
1
Debt funds
1,512
1,057
1,241
1,450
1,659
Other liabilities
91
74
74
74
74
198
272
272
272
272
Reserves & surplus
1,546
2,902
3,396
4,033
4,715
Shareholders' fund
1,744
3,174
3,668
4,305
4,987
4,123
4,885
5,665
6,624
7,633
9
25
471
723
917
1,405
1,268
1,718
1,885
2,158
Inventories
2,005
2,887
2,707
3,162
3,620
264
170
200
243
278
98
168
168
168
168
341
295
330
371
419
CWIP
0
0
0
0
1
Intangible assets
0
0
0
0
0
0
0
0
0
0
Other assets
0
72
72
72
72
Total assets
4,123
4,885
5,665
6,624
7,632
FY14A
FY15A
FY16E
FY17E
FY18E
302
446
531
671
717
Interest expenses
0
0
0
0
0
0
0
0
0
0
(760)
(1,204)
(13)
(343)
(441)
Equity capital
Cash and cash eq.
Investments
Net fixed assets
Cash Flow Statement
187
(2,216)
0
0
0
(271)
(2,973)
518
328
275
(19)
(30)
(35)
(41)
(47)
0
0
0
0
0
7
(896)
0
0
0
(13)
(926)
(35)
(41)
(47)
Equities issued
0
1,200
0
0
0
Debt raised/repaid
415
0
0
0
0
Interest expenses
(192)
0
0
0
0
(12)
(28)
(35)
(35)
(35)
Dividends paid
(7)
0
0
0
0
204
1,172
(35)
(35)
(34)
(80)
(2,728)
447
251
194
3,981
1,822
3,989
5,249
8,542
3 August 2015
Page 166 of 181
Company Update
INDIA
MEDIA
3 August 2015
BUY
Zee Entertainment
TP: INR 450.00
 12.8%
Z IN
Upsides from ad growth, digital platform – upgrade to BUY
ZEE continues to have a strong presence in the GEC category with strong
presence in in the regional genre. We expect ZEE to report double-digit
revenue growth led by a 15%/12% advertising/subscription revenue CAGR
over FY15-FY18E. Emergence of internet platforms is likely to drive demand
REPORT AUTHORS
for short form content. Though the sports segment will be a drag on EBITDA
Rumit Dugar
margins, we see upsides from ZEE’s internet TV platform, Ditto TV. Upgrade
from HOLD to BUY and roll over to a new Sep’16 TP of Rs 450 (from Rs 325).
+91 22 6766 3444
 Strong player in Hindi and regional GECs: Television viewership in India continues to
be dominated by Hindi and regional general entertainment – these channels
accounted for close to 50% of the total viewership and advertisement spends in
CY14. ZEE’s Hindi entertainment channel, Zee TV, ranked second in terms of
viewership share among GECs after Star TV in CY14.
 Poised to grow above industry average: India’s television industry is estimated to
grow at 15.5% CAGR (CY14-CY19) to reach Rs 975bn in CY19. Subscription revenue is
poised to grow at 16% driven by digitisation in India whereas advertisement revenue
will grow at an estimated 14% (CY14-CY19). ZEE’s management has guided for aboveindustry growth in advertisement revenue, supported by healthy growth in domestic
subscribers. We model for 15%/12% ad/subscription revenue CAGR over FY15-FY18.
 Digital play: The number of TV/internet viewers in India is poised to grow at a CAGR
of 3%/18% (CY14-CY19). ZEE has an internet-based platform called Ditto TV which
currently has over 1mn subscribers and offers various affordable packages. We
expect demand for Ditto TV to grow as more consumers look to access TV content
on any device (smartphones, tablets, among others).
 Valuation: We expect the shift towards viewing content on digital platforms will
support long-term growth for ZEE – upgrade to BUY, TP Rs 450 (30x fwd earnings).
INR 398.80
MARKET CAP
INR 383.0 bln
USD 6.0 bln
SHARES O/S
961.7 mln
FREE FLOAT
57.2%
52 WK HIGH
52 WK LOW
INR 410.45
INR 265.05
Y/E 31 Mar
FY14A
FY15A
FY16E
FY17E
FY18E
Revenue (INR mln)
44,217
48,837
55,701
63,439
73,174
EBITDA (INR mln)
12,043
12,539
13,769
16,448
19,193
8,921
9,777
10,249
12,666
15,095
9.3
8.7
10.7
13.2
15.7
23.6
(6.5)
22.9
23.6
19.1
DPS (INR)
1.7
1.9
1.8
2.2
2.6
ROIC (%)
26.0
22.7
24.5
29.7
32.2
Adjusted ROAE (%)
20.6
19.0
17.3
18.8
19.4
Adjusted P/E (x)
43.0
46.0
37.4
30.3
25.4
EV/EBITDA (x)
31.4
30.1
27.3
22.2
18.7
8.1
6.9
6.1
5.3
4.6
Adjusted EPS (INR)
P/BV (x)
(INR)
400
350
300
250
200
150
100
Stock Price
Index Price
29,410
24,410
19,410
14,410
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
TV industry bouncing back
After a lacklustre spell during FY13, India’s television industry bounced back in FY14
due to the elections and an improved macroeconomic environment. Apart from
government poll-related spends, growth in advertisement revenue was largely driven by
e-commerce, mobile handset companies and the FMCG/auto verticals. Going ahead,
India’s television industry is estimated to log a 15.5% CAGR (CY14-CY19) to Rs 975bn in
CY19. Subscription revenue is poised to grow at a 16% CAGR driven by digitisation, with
completion of Phases 3 and 4 of the government’s digital access plan during this period.
Advertisement revenue is poised for a healthy 14% CAGR over CY14-CY19.
Fig 1 - Size of India’s TV industry
(Rs bn)
Advertisement revenue
800
E-commerce, mobile companies and
FMCG/auto verticals boosting
television ad spends
Subscription Revenue
700
600
500
400
300
200
100
0
2015P
2016P
2017P
2018P
2019P
Shift towards digital cable – a global trend
Digital cable is expected to become the most popular television platform going ahead and
will account for 34% of the world’s TV households by 2020. Television digitisation efforts of
most governments across the world have been focused on the switch from analogue cable
to digital terrestrial television (DTT) cable. DTT will account for an estimated 28% of cable
connections globally in 2020 from 13% now.
In India, the deadlines for Phase 3 and Phase 4 of digital access systems (DAS) have been
set for year-end of CY15 and CY16 respectively. Direct-to-home (DTH) services are
expected to report the largest growth in these two phases due to their ability to cater to
sparsely populated areas. DTH/digital cable together will account for an estimated 91%
of cable connections in India by CY18 driven by digitisation. The shift towards digital
cable will in turn enable growth in subscription revenue for ZEE.
Fig 2 - Global shift from analogue towards digital cable
(%)
100
Analog Terrestrial
Analog Cable
Digital Cable
DTH
DTT
IPTV
(%)
100
80
80
Cable
60
60
50
50
30
30
20
20
0
2014
2020
Other digital
7
7
7
6
27
30
37
41
41
41
49
50
50
19
28
40
47
10
10
DTH
7
40
40
Digital cable
7
70
70
0
Fig 3 - India’s shift towards digital cable
90
90
Rising penetration of digital cable to
benefit ZEE by way of higher
subscription revenue
35
16
2014
2015P
2016P
3
2017P
3
3
2018P
2019P
3 August 2015
Page 168 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
GECs – most preferred channels in India
Television viewership in India continues to be dominated by Hindi and regional general
entertainment channels (GEC), which accounted for 49% of total viewership in CY14.
Hindi GEC viewership share has risen from 29% to 31% over the last two years, in part
aided by new channel launches – Zindagi (ZEE), Sony Pal (Sony MSM) and EPIC. Hindi
movie viewership dipped from 15% in CY13 to 13.6% in CY14. ZEE’s Hindi entertainment
channel, Zee TV, is second in terms of viewership share among GECs after Star TV.
Zee TV the No. 2 general
entertainment channel after Star TV
Fig 4 - Viewership split across various genres
Hindi News
4%
Regional
Movies/Music
8%
Others
13%
Hindi GEC
31%
Sports
2%
Music
3%
Kids
7%
Regional GEC
18%
Hindi movies
14%
GECs dominate advertisement spends, Zee TV well placed
Hindi and regional GECs continue to garner the highest television advertisement spends,
accounting for 49% of the total ad spend on channels. We believe Zee TV has the right
positioning for the Indian market which typically comprises a family-based audience that
prefers watching GECs. Other popular genres such as Hindi movies and kids account for
14% and 7% of the overall advertisement expenditure on television.
Hindi and regional GECs account for
49% of total ad spend on channels
Fig 5 - Advertisement expense split across various genres
Hindi GEC
28%
Others
26%
Regional
Movies/Music
4%
Hindi News
8%
Sports
4%
Music
3%
Kids
4%
Hindi movies
7%
Regional GEC
16%
3 August 2015
Page 169 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Opportunity for double-digit growth in FY16/17
Uptick in advertisement revenue growth
Advertisement revenue is back on track and ZEE’s management expects growth in the
mid-teens in FY16. After a healthy 12% CAGR (FY11-FY15), we expect stronger growth for
the next two years at 16% YoY given heavy advertisement spending by relatively new
verticals such as e-commerce and mobile phone companies. Advertisement accounts for
54% of ZEE’s revenue and this share has remained flat over the last five years.
ZEE poised to grow its advertising
revenue slightly above industry in FY16
Fig 6 - Healthy advertisement revenue growth
(Rs bn)
Revenue
YoY growth (R)
(%)
30
70
60
25
50
20
40
30
15
20
10
10
0
5
0
(10)
FY12
FY11
FY13
FY15
FY14E
(20)
Subscriber growth driven by domestic market
Subscription revenue accounts for 37% of ZEE’s total revenue and is largely supported by
healthy growth in domestic subscribers. Revenue from domestic subscribers has
increased at a 19% CAGR over FY11-FY15 versus -0.6% from international subscribers.
International subscriber revenues dipped 19% YoY in FY15 due to a change in accounting
method; excluding this impact, the business posted high single-digit growth. We expect
phases 3 and 4 of digitisation in India along with marginally higher realisations from
domestic subscribers to boost revenues going ahead.
Fig 7 - Domestic subscriber revenue
(Rs bn)
Domestic revenue
Fig 8 - International subscriber revenue
YoY (R)
(%)
16
14
12
10
8
6
4
2
0
FY11
FY12
FY13
Digitisation to push up subscription
revenue
FY14E
FY15
(Rs bn)
30
6
25
5
20
4
15
3
10
2
5
1
0
0
International revenue
YoY (R)
(%)
20
15
10
5
0
(5)
(10)
(15)
(20)
FY11
FY12
FY13
FY14E
FY15
(25)
3 August 2015
Page 170 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Healthy expansion in the regional market
ZEE has expanded its footprint into the Marathi and Bangla regional markets. Viewership
in the Marathi channel has grown from 28% in FY12 to 49% at the end of FY15, taking ZEE
to the No. 1 spot followed by Star and ETV at 21% and 19% respectively. In the Bangla
language segment, viewership share has increased from 31% in FY12 to 35% in FY15 –
second only to Star which has 47% viewership.
Fig 9 - Zee Marathi viewership share
Marathi channel viewership up from
28% in FY12 to 49% at the end of FY15
Fig 10 - Zee Bangla viewership share
(%)
(%)
58
43
53
41
48
39
37
43
35
38
33
33
31
28
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
25
Q1FY13
27
18
Q1FY13
29
23
ZEE’s Telegu channel viewership has grown from 19.6% in FY12 to 23% in FY15, with key
competitors like Gemini and MAA at 26% and 30% respectively. Kannada is the only
regional stream where ZEE’s share has gone down – from 17% in FY12 to 13.5% in FY15
(fourth among the five channels present).
Fig 11 - Zee Telugu viewership share
Fig 12 - Zee Kannada
(%)
(%)
22
27
24
18
21
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
10
Q2FY13
Q4FY15
Q3FY15
Q2FY15
Q1FY15
Q4FY14
Q3FY14
Q2FY14
Q1FY14
Q4FY13
Q3FY13
Q2FY13
Q1FY13
15
Q1FY13
14
18
3 August 2015
Page 171 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Sports segment remains a drag
Growing losses in sports…
ZEE’s sports segment has clocked a muted 9% CAGR over FY11-FY15 with operating
losses of Rs 0.3bn in FY15. Management expects a loss of Rs 1bn for FY16. Growth in the
sports segment has come to a standstill over the last one year as India’s cricket board
(BCCI) has signed a long-term contract with rival Star TV to broadcast all international
and domestic tours of India (except Bangladesh and West Indies). The recent cricket
series in Bangladesh in Q1 will have a positive impact on revenue for ZEE’s Ten Sports
channel, but diversification into other sports is needed to push viewership.
Fig 13 - Volatile growth in the sports segment
(Rs bn)
Fig 14 - Losses expected to increase in FY16
7
50
6
40
5
30
4
20
3
10
2
0
1
-10
0
-20
FY11
FY12
FY13
(Rs bn)
(%)
YoY growth (R)
Revenue
FY14E
FY15
Management expects sports business
losses of Rs 1bn in FY16
0.0
(0.3)
(0.5)
(1.0)
(0.9)
(1.5)
(1.0)
(1.5)
(2.0)
(2.1)
(2.5)
FY11
FY12
FY13
FY14E
FY15
…but EBITDA ex-sports healthy
Management has provided for long-term EBITDA margin guidance of 25-27%. In FY15,
margins dipped 160bpsYoY to 25.7% despite lower losses in the sports segment due to
the launch cost of new Channel AndTV. Margins are expected to remain in the narrow
band of 25-27% over the next two years due to higher losses in sports. ZEE’s EBITDA
margin excluding sports is in a healthy range of 30-34%.
EBITDA margin excluding sports at
30-34%
Fig 15 - EBITDA margin ex-sports segment
(%)
EBITDA margin
EBITDA margin ex Sports
45
40
35
30
25
20
FY11
FY12
FY13
FY14E
FY15
3 August 2015
Page 172 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Digital TV – The next growth driver
Internet usage to drive demand for internet-based TV
Internet penetration in India is growing at a swift pace led by electrification in rural
areas. Television viewers in the country numbered 825mn in CY14 and are poised to
grow at a 3% CAGR (CY14-CY19), whereas internet users number at 281mn and are
poised for a much faster 18% CAGR. This will buoy demand for internet-based TV in India.
Globally, the trend has been led by a higher number of televisions per household; in
India, the growth will be driven by different screens (mobile, tablet) in a household
where one can watch internet TV based on convenience.
Internet users poised for 18% CAGR
over CY14-CY19 vs. 3% for TV viewers
Fig 16 - Growth in internet users in India
Tv viewers
(mn)
Internet users
1,200
1,000
825
960
938
913
886
857
800
600
400
348
281
420
494
570
640
200
0
2014
2015P
2016P
2017P
2018P
2019P
Shift from traditional TV to internet TV
The digital TV and video streaming industry has changed beyond recognition and
continues to evolve. Consumer habits are shifting from broadcast television to ondemand content – especially streaming. Traditional television viewing is increasingly
facing competition from other viewing platforms such as smart phones, tablets, and
Smart TVs.
Consumer habits shifting from
broadcast television to on-demand
content – especially streaming
Broadcasters are no longer in charge of the global viewing habits of consumers, who
have the ability to access an enormous amount of movie and TV series content through
internet broadband. Pay TV across the various platforms – including cable TV, IPTV, and
internet TV – continues to rise in popularity, and this trend is reflected in the market’s
increasing service revenues. IPTV is the fastest-growing pay TV platform from a global
perspective. More and more people are willing to pay for accessing TV content on any
device (anywhere access). Five countries – China, USA, India, Japan, and Brazil – together
account for 56% of the world’s digital TV households.
More and more people are willing to
pay for anywhere access
Streaming video providers face increasing competition as more and more companies
enter this extremely promising market. The most successful of these has been US-based
Netflix. Since CY10, it has been gradually expanding outside of its domestic market, and
has seen its international subscriber base triple between CY12 and CY14. In CY15 to date,
it has over 60 million subscribers worldwide with two-thirds of these based in the US.
3 August 2015
Page 173 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Affordable small-ticket packages offered to audience
ZEE has an internet-based platform called Ditto TV which currently has over 1mn
subscribers that have been added over the last one year alone. It offers the Ditto TV
service in various packages ranging from one day to one year. The annual subscription
cost for using all its content and services for a year is Rs 4,000.
ZEE’s Ditto TV service offers various
packages ranging from one day to one
year
The company has also launched a mobile version christened ‘Ditto Lite’ which provides
access to 15 channels across genres like news, entertainment and regional content. Ditto
Lite plans are very affordable and a subscription can be had for just Rs 129 per month.
We believe this pricing is more aligned to international subscriptions and should
progressively come down as penetration grows.
Fig 17 - Ditto Lite
Name of pack
Jumbo Live TV pack
Gold Pack
Silver Pack
Cost
Number of channels
Rs 129/month
Rs 30/week
15
Rs 5/day
3 August 2015
Page 174 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Financial snapshot
Revenue
(Rs bn)
Growth (%) (R)
(%)
80
25
EBITDA
20
60
50
15
10
30
20
5
10
35
30
16
14
25
12
20
8
15
6
10
4
5
2
FY13
FY14
FY15
FY16E
FY17E
FY18E
0
0
FY13
FY14
FY15
Fig 21 - PAT growth
(%)
(Rs bn)
27.2
27.5
27.0
26.5
25.8
25.9
25.7
26.1
PAT
FY16E
FY17E
0
FY18E
Growth (%) (R)
(%)
14
30
12
25
10
20
8
25.5
15
6
24.7
25.0
10
4
24.5
24.0
(%)
20
10
40
26.0
Growth (%) (R)
18
70
0
(Rs bn)
5
2
FY13
FY14
FY15
FY16E
FY17E
FY18E
0
FY13
FY14
FY15
Fig 23 - Debtor days
(%)
ROCE
FY16E
FY17E
FY18E
0
(Days)
ROE
106
35
103
103
FY17E
FY18E
30
25
94
92
90
20
83
15
82
10
78
5
0
FY13
FY14
FY15
FY16E
FY17E
FY18E
70
FY13
FY14
FY15
FY16E
3 August 2015
Page 175 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Valuation
Upgrade to BUY
ZEE has traded at an average one-year forward P/E multiple of 25x over FY11-FY15 and is
currently trading at 30x FY17E earnings. We believe the entire shift towards digital
platforms for viewing content will drive long-term growth for the company, marking it
out as a re-rating candidate. We upgrade the stock from HOLD to BUY with a Sep’16 TP of
Rs 450 based on 30x Sep’17 earnings.
Shift towards digital platforms marks
ZEE out as a re-rating candidate
Fig 24 - ZEE one-year forward P/E
(x)
1-yr fwd P/E
40
30
20
10
0
Jun-08
Jan-09 Aug-09 Mar-10
Oct-10 May-11 Dec-11
Jul-12
Feb-13 Sep-13 Apr-14 Nov-14 Jun-15
Source: Bloomberg, RCML Research
3 August 2015
Page 176 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Per Share Data
Y/E 31 Mar (INR)
FY14A
FY15A
FY16E
FY17E
FY18E
Reported EPS
9.3
8.7
10.7
13.2
15.7
Adjusted EPS
9.3
8.7
10.7
13.2
15.7
DPS
1.7
1.9
1.8
2.2
2.6
49.3
57.7
65.4
75.0
86.7
FY14A
FY15A
FY16E
FY17E
FY18E
8.6
7.7
6.8
5.8
4.9
EV/EBITDA
31.4
30.1
27.3
22.2
18.7
Adjusted P/E
43.0
46.0
37.4
30.3
25.4
8.1
6.9
6.1
5.3
4.6
FY14A
FY15A
FY16E
FY17E
FY18E
EBITDA margin
27.2
25.7
24.7
25.9
26.2
EBIT margin
26.1
24.3
23.3
24.6
25.0
20.2
20.0
18.4
20.0
20.6
Adjusted ROAE
20.6
19.0
17.3
18.8
19.4
ROCE
18.0
16.0
15.3
16.2
16.5
Revenue
19.5
10.4
14.1
13.9
15.3
EBITDA
26.2
4.1
9.8
19.5
16.7
Adjusted EPS
23.6
(6.5)
22.9
23.6
19.1
Invested capital
29.6
14.3
(8.1)
7.1
9.1
102
BVPS
Valuation Ratios
Y/E 31 Mar (x)
EV/Sales
P/BV
Financial Ratios
Y/E 31 Mar
YoY Growth (%)
Receivables (days)
83
78
90
103
Inventory (days)
181
201
87
1
1
Payables (days)
99
91
90
95
93
Current ratio (x)
3.2
3.3
3.6
3.7
3.9
Quick ratio (x)
0.5
0.5
1.1
1.3
1.5
18.0
NA
13.7
7.6
8.2
0.8
0.7
0.7
0.7
0.7
73.1
115.2
160.0
192.5
228.6
(0.1)
(0.1)
(0.3)
(0.3)
(0.4)
FY14A
FY15A
FY16E
FY17E
FY18E
67.6
69.6
70.1
70.1
70.1
114.3
118.3
112.7
115.7
117.6
26.1
24.3
23.3
24.6
25.0
79.8
74.9
74.8
74.8
74.8
128.2
126.7
125.9
125.7
125.7
20.6
19.0
17.3
18.8
19.4
DuPont Analysis
Y/E 31 Mar (%)
Adjusted ROAE
3 August 2015
Page 177 of 181
BUY
Zee Entertainment
Company Update
TP: INR 450.00
 12.8%
Z IN
INDIA
MEDIA
Income Statement
FY14A
FY15A
FY16E
FY17E
FY18E
Total revenue
44,217
48,837
55,701
63,439
73,174
EBITDA
12,043
12,539
13,769
16,448
19,193
EBIT
11,542
11,866
12,975
15,612
18,316
(158)
(103)
(81)
(81)
(80)
1,807
2,278
1,727
2,538
3,293
Exceptional items
0
0
0
0
1
EBT
13,190
14,041
14,620
18,068
21,529
Income taxes
(4,291)
(4,284)
(4,386)
(5,420)
(6,458)
0
0
0
0
0
19
57
15
18
22
8,919
9,814
10,249
12,666
15,095
2
(37)
0
0
0
8,921
9,777
10,249
12,666
15,095
FY14A
FY15A
FY16E
FY17E
FY18E
8,893
9,183
11,471
12,935
14,677
0
0
0
0
1
3,645
5,072
4,591
5,674
6,760
12
Extraordinary items
Reported net profit
Adjustments
Adjusted net profit
Balance Sheet
Accounts payables
Provisions
Debt funds
Other liabilities
Equity capital
Reserves & surplus
17
12
12
12
324
288
0
0
0
0
962
962
962
962
82,439
0
54,685
61,931
71,178
Shareholders' fund
47,377
55,498
62,893
72,140
83,401
60,317
70,058
78,958
90,733
104,802
Cash and cash eq.
5,644
7,365
18,282
25,003
32,775
10,281
10,692
16,710
19,032
21,952
Inventories
11,736
11,877
56
63
73
11,977
17,205
22,678
25,739
29,483
Investments
8,290
9,755
9,080
9,080
9,080
Net fixed assets
4,106
4,367
4,073
3,737
3,360
0
0
0
0
0
7,625
7,887
7,887
7,887
7,887
192
CWIP
Intangible assets
298
531
192
192
Other assets
0
0
0
0
0
Total assets
60,317
70,057
78,958
90,733
104,803
FY14A
FY15A
FY16E
FY17E
FY18E
9,422
10,450
11,043
13,502
15,971
158
103
81
81
81
0
0
0
0
0
(4,460)
2,047
2,618
(3,926)
(4,932)
(1,732)
(2,299)
452
(2,038)
(2,798)
3,388
10,301
14,193
7,619
8,321
(1,886)
(524)
(500)
(500)
(500)
(384)
(1,699)
0
0
1
1,807
2,278
1,727
2,538
3,293
Cash Flow Statement
Interest expenses
(463)
56
1,227
2,038
2,794
Equities issued
3
0
0
0
0
Debt raised/repaid
0
(5)
0
0
0
Interest expenses
(158)
(103)
(81)
(81)
(81)
Dividends paid
(2,245)
(2,251)
(1,468)
(1,537)
(1,938)
(197)
(6,278)
(2,978)
(1,317)
(1,314)
(2,597)
(8,636)
(4,527)
(2,935)
(3,332)
327
1,721
10,893
6,721
7,783
5,644
7,365
18,258
24,979
32,763
3 August 2015
Page 178 of 181
RESEARCH TEAM
ANALYST
SECTOR
EMAIL
TELEPHONE
Mihir Jhaveri
Auto, Auto Ancillaries, Cement, Logistics
mihir.jhaveri@religare.com
+91 22 6766 3459
Siddharth Vora
Auto, Auto Ancillaries, Cement, Logistics
siddharth.vora@religare.com
+91 22 6766 3435
Misal Singh
Capital Goods, Infrastructure, Utilities
misal.singh@religare.com
+91 22 6766 3466
Prashant Tiwari
Capital Goods, Infrastructure
prashant.tiwari@religare.com
+91 22 6766 3485
Gaurang Kakkad
Consumer
gaurang.kakkad@religare.com
+91 22 6766 3470
Premal Kamdar
Consumer
premal.kamdar@religare.com
+91 22 6766 3469
Nitin Tiwari
Energy
nitin.tiwari@religare.com
+91 22 6766 3437
Parag Jariwala
Financials
parag.jariwala@religare.com
+91 22 6766 3442
Vikesh Mehta
Financials
vikesh.mehta@religare.com
+91 22 6766 3474
Rumit Dugar
IT, Telecom, Media
+91 22 6766 3444
Pritesh Jani
Metals
pritesh.jani@religare.com
+91 22 6766 3467
Arun Baid
Mid-caps
arun.baid@religare.com
+91 22 6766 3446
Praful Bohra
Pharmaceuticals
praful.bohra@religare.com
+91 22 6766 3463
Arun Aggarwal
Real Estate
arun.aggarwal@religare.com
+91 22 6766 3440
Pawan Parakh
Utilities
pawan.parakh@religare.com
+91 22 6766 3438
Jay Shankar
Economics & Strategy
shankar.jay@religare.com
+91 11 3912 5109
3 August 2015
Page 179 of 181
RESEARCH DISCLAIMER
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3 August 2015
Page 180 of 181
RESEARCH DISCLAIMER
Research analyst or his/her relatives do not have any material conflict of interest at the time of
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Digitally signed by DUGAR RUMIT
Date: 2015.08.03 15:19:59 +05'30'
3 August 2015
Page 181 of 181

India TMT - Religare Capital Markets

Transcription

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