India TMT - Religare Capital Markets
Transcription
India TMT - Religare Capital Markets
Digital India The data revolution starts now! 3 August 2015 | RUMIT DUGAR | +91 22 6766 3444 | [email protected] Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 3 August 2015 India TMT The data revolution starts now! 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 [email protected] 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 The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM Cheatsheet Stocks to play the Mobility theme Secular Content – Movies Theme Stocks IP-driven business model Shemaroo Entertainment 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 Page 2 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 3 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 4 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 5 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research, Company, Bloomberg 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 3 August 2015 Page 6 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 3 August 2015 Page 7 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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. 3 August 2015 Page 8 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 9 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 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 3 August 2015 Page 10 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 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). 3 August 2015 Page 11 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 3 August 2015 Page 12 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 3 August 2015 Page 13 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 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. 3 August 2015 Page 14 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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’ 3 August 2015 Page 15 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research, Bloomberg 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. 3 August 2015 Page 16 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 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. 3 August 2015 Page 17 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 18 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Operators, Handset vendors, Equipment vendors Operators, Handset vendors, Equipment vendors Source: RCML Research 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 3 August 2015 Page 19 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Distributor - Access provider 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) Source: RCML Research 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 3 August 2015 Page 20 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM Fig 27 - Return curve across stakeholders through Mobility 2.0 Source: RCML Research 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 3 August 2015 Page 21 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: CISCO Visual Networking Index 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 3 August 2015 Page 22 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: CISCO Visual Networking Index 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 Source: Company, RCML Research, Bloomberg 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 Source: Company, Bloomberg 3 August 2015 Page 23 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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% Source: CISCO Visual Networking Index 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 Source: CISCO Visual Networking Index 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). 3 August 2015 Page 24 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Ericsson Mobility Report 2015 Fig 40 - Proportion of video traffic based on network 2G dominated networks <15% 3G dominated networks 30-40% 4G dominated networks 45-55% Source: Ericsson Mobility Report 2015 3 August 2015 Page 25 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 26 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Google Apps (Gmail, Contacts, Docs, Maps, etc.) besides 3rd party apps / content Motorola Google Android Android Market Google Apps (Gmail, Contacts, Docs, Maps, etc.) besides 3rd party apps / content 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 Source: Company, RCML Research 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 3 August 2015 Page 27 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 External / user generated A P P S Telecom operators Distributor - Access provider 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 Inorganic extensions Voice ALTERNATE NETWORKS (Wi-Fi) Source: RCML Research 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. 3 August 2015 Page 28 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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. 3 August 2015 Page 29 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, Bloomberg FY14 FY15 (5) FY10 FY11 FY12 FY13 FY14 FY15 Source: Company, Bloomberg 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. 3 August 2015 Page 30 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research Source: Company, RCML Research 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 Source: Company, Bloomberg 2009 2010 2011 2012 2013 2014 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Source: Company, Bloomberg 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. 3 August 2015 Page 31 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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. 3 August 2015 Page 32 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 33 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 External / user generated A P P S Telecom operators Distributor - Access provider 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 Inorganic extensions ALTERNATE NETWORKS (Wi-Fi) Source: RCML Research 3 August 2015 Page 34 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 External / user generated A P P S Telecom operators Distributor - Access provider 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 Inorganic extensions ALTERNATE NETWORKS (Wi-Fi) Source: RCML Research 3 August 2015 Page 35 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Free for Airtel customer 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 For Airtel customers 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. 3 August 2015 Page 36 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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 Source: Company, RCML Research 3 August 2015 Page 37 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research Handset vendors Mobility 2.0 Returns Returns Equipment vendors Equipment vendors Time Source: RCML Research 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 3 August 2015 Page 38 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Page 39 of 181 Sector Report India TMT India The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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% Rev CAGR (FY14-16): 6% Ericsson • • • • • Mkt Cap: 195 USD bn EV/Sale: 2.3x EV/EBITDA: 6.5x ROE: 82.5% Rev CAGR (FY14-16): 4% • • • • • Mkt Cap: 101 USD bn EV/Sale: 1.9x EV/EBITDA: 7.1x ROE: 2.2% Rev CAGR (FY14-16): 6% 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% Rev CAGR (FY14-16): 1% Vodafone China Mobile Cisco • • • • • • • • • • Mkt Cap: 146 USD bn EV/Sale: 2.2x P/E: 12.7x ROE: 17.4% Rev CAGR (FY14-16): 6% • • • • • 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% Rev CAGR (FY14-16): 4% • • • • • 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 External / user generated A P P S A P P S Telecom operators Distributor - Access provider 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% Rev CAGR (FY14-16): 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 Inorganic extensions Voice ALTERNATE NETWORKS (Wi-Fi) 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% Rev CAGR (FY14-16): 4% • • • • • 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% Rev CAGR (FY14-16): 7% SBA Comm American Tower LG Display • • • • • Mkt Cap: 8 USD bn EV/Sale: 0.4x P/E: 6.7x ROE: 10.2% Rev CAGR (FY14-16): 3% • • • • • 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 Page 40 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research, Company, Bloomberg 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 Page 41 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research, Bloomberg 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 Source: Company, RCML Research, Bloomberg 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 Source: Company, RCML Research, Bloomberg 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 Source: Company, RCML Research, Bloomberg 1200 HTC Jan-15 Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Source: Company, RCML Research, Bloomberg 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 Source: Company, RCML Research, Bloomberg 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 Source: Company, RCML Research, Bloomberg 3 August 2015 Page 42 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Page 43 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 2014 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Page 44 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Up to 32GB expandable memory Up to 32GB expandable memory Video Playback & Recording Video Playback & Recording 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 Source: Company, RCML Research 2017E 2018E 2019E 2020E 0% 2014 2015E 2016E 2017E 2018E 2019E 2020E Source: Company, RCML Research 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 Page 45 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Page 46 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 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 Page 47 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM Fig 91 - India’s broadband penetration (%) Internet penetration Fig 92 - 3G penetration – Bharti and Idea (%) Broadband penetration 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 – $16bn revenue market potential in next 5 years India still has a nascent high-speed data (HSD) market, with only ~80mn subscribers or 13-15% of the existing subscriber base using this service. We estimate ~38% CAGR in HSD subscribers in India over the next five years as operators extend 3G networks and device prices continue to climb down. This will take HSD users to ~550mn by 2020 and create a massive internet ecosystem. Growth is likely to be accelerated by technology development, launch of Reliance Jio and improving device affordability. Fig 93 - India – High speed data subscriber estimates High Speed Data Subs ('000s) ('000s) Fig 94 - India telcos – Revenue market share (Dec’14) YoY Growth (R) 600,000 70% 500,000 60% 50% 400,000 40% 300,000 20% 100,000 0 2015E 2016E 2017E 2018E 2019E 2020E BSNL 5% Vodafone 23% 10% 2014 Bharti 31% Idea 18% 30% 200,000 Reliance 6% Others 17% 0% Source: RCML Research, Company Source: RCML Research, Company Fig 95 - China Mobile – LTE Subscriber Fig 96 - China Mobile ARPU– Voice getting hit Blended ARPU (RMB) (Mn) 200.0 180.0 160.0 140.0 120.0 100.0 80.0 60.0 40.0 20.0 0.0 190 Source: Company 71.0 68.0 67.0 61.0 65.0 60.0 55.0 41 50.0 14 2QCY14 73.0 70.0 90 1QCY14 77.0 75.0 143 3 (RMB) 80.0 45.0 3QCY14 4QCY14 1QCY15 2QCY15 40.0 FY09 FY10 FY11 FY12 FY13 FY14 Source: Company 3 August 2015 Page 48 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM Strong traction in data revenues Indian telecom players have seen strong traction in data revenues led by rising smartphone affordability and increased mobile internet usage. 3G subscriber share has risen from ~2% in CY12 to 8-12% for Bharti and Idea as consumers demand high-speed internet for video and other use. Data contributes 18% of revenues for both players (lower than global peers) and holds tremendous scope for growth given the large untapped opportunity in rural India. Source: Company Fig 99 - India – Data market size Data Revenues ($ 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. 3 August 2015 Page 49 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Page 50 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, Bloomberg 2012 2013 2014 0 FY10 FY11 FY12 FY13 FY14 FY15 Source: Company, Bloomberg 3 August 2015 Page 51 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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. 3 August 2015 Page 52 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: Company, RCML Research 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% Source: RCML Research, Company BSNL 5% Vodafone 42% Source: RCML Research, Company 3 August 2015 Page 53 of 181 India TMT Sector Report INDIA The data revolution starts now! 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 TECHNOLOGY, MEDIA, TELECOM FY13 FY14 FY15E FY16E FY17E (10) Source: RCML Research, Company 6 6.3 8.6 4 2 0 FY13 FY14 FY15E FY16E FY17E Source: RCML Research, Company 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 3 August 2015 Page 54 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Page 55 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: FICCI KPMG report 2015 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. 3 August 2015 Page 56 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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. 3 August 2015 Page 57 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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) Source: FICCI KPMG report 2015 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 Source: Company, RCML Research 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 3 August 2015 Page 58 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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 Source: RCML Research 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. 3 August 2015 Page 59 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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) Source: FICCI KPMG report 2015 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. 3 August 2015 Page 60 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 61 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: FICCI KPMG report 2015 UK USA Japan Russia Brazil China India Source: FICCI KPMG report 2015 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 Source: Company, Bloomberg Fig 142 - India – Broadband penetration (%) Internet penetration Fig 143 - India – Mobile data penetration Broadband penetration 25 (%) 10 9 8 20 7 6 15 5 4 10 3 2 5 1 0 2008 2009 2010 2011 Source: RCML Research, Company 2012 2013 2014 0 2008 2009 2010 2011 2012 2013 2014 Source: RCML Research, Company 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 3 August 2015 Page 62 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, RCML Research 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. 3 August 2015 Page 63 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: Company, Bloomberg 3 August 2015 Page 64 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM Fig 148 - Apps – A delivery platform SMS Equipment vendors Provides technology Government Provides spectrum Mobile Banking eCommerce News/ Information A P P S Content External / user generated Movies A P P S Telecom operators Distributor - Access provider Handset User Access User Mobile Ads Games D A T A Social Networking O F F L O A D I N G Components Inorganic extensions Voice ALTERNATE NETWORKS (Wi-Fi) Source: RCML Research 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 3 August 2015 Page 65 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Source: RCML Research 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 3 August 2015 Page 66 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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) 3 August 2015 Page 67 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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 3 August 2015 Page 68 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 Page 69 of 181 India TMT Sector Report The data revolution starts now! INDIA TECHNOLOGY, MEDIA, TELECOM 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 [email protected] 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 Source: RCML Research, 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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) Source: RCML Research, Company 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 Source: RCML Research, Company FY13 FY14 FY15 0 FY11 FY12 FY13 FY14 FY15 (80) Source: RCML Research, Company 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 Source: RCML Research, Company FY13 FY14 FY15 (250) FY10 FY11 FY12 FY13 FY14 Source: RCML Research, Company 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% Source: RCML Research, Company 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 Y/E 31 Mar (INR mln) 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 Y/E 31 Mar (INR mln) 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 [email protected] 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. PRICE CLOSE (31 Jul 15) INR 117.90 MARKET CAP INR 47.1 bln USD 735.9 mln SHARES O/S 399.6 mln FREE FLOAT 39.3% 3M AVG DAILY VOLUME/VALUE 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) Source: Company, Bloomberg, RCML Research (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 INFORMATION TECHNOLOGY 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% Source: Company, RCML Research India Non IT 5% 13.0% Source: Company, RCML Research (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% Source: Company, RCML Research 4.9 1.7 2.3 FY10 FY11 FY12 FY13 FY14 H1FY15 Source: Company, RCML Research 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 Source: Company, RCML Research 3 August 2015 Page 82 of 181 BUY Redington India Company Update TP: INR 145.00 23.0% REDI IN INDIA INFORMATION TECHNOLOGY 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 Source: Company, RCML Research 3 August 2015 Page 83 of 181 BUY Redington India Company Update TP: INR 145.00 23.0% REDI IN INDIA INFORMATION TECHNOLOGY 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 Adjusted profit margin 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 Profitability & Return Ratios (%) YoY Growth (%) Working Capital & Liquidity Ratios Turnover & Leverage Ratios (x) Gross asset turnover 110.1 149.0 147.2 147.4 157.8 Total asset turnover 4.0 4.0 4.0 4.1 4.4 Net interest coverage ratio 3.4 3.9 4.7 5.0 5.3 Adjusted debt/equity 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 INFORMATION TECHNOLOGY Income Statement Y/E 31 Mar (INR mln) 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 Min. int./Inc. from associates (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 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Accounts payables 33,977 40,009 39,214 44,385 43,661 Other current liabilities 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 Total liabilities and equities 73,102 85,078 88,622 100,137 102,105 Total revenue Net interest income/(expenses) Other income/(expenses) 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 Accounts receivables 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 Other current assets Investments Net fixed assets Deferred tax assets, net Other assets 738 738 738 738 738 Total assets 73,102 83,828 88,622 100,137 102,105 Cash Flow Statement Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Net income + Depreciation 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 Non-cash adjustments Changes in working capital Other operating cash flows 213 239 228 255 293 4,086 1,983 8,692 2,858 8,763 Capital expenditures 529 (497) (840) (720) (535) Change in investments (81) 0 0 0 0 Other investing cash flows 0 0 0 0 0 Cash flow from investing 448 (497) (840) (720) (535) (4,365) Cash flow from operations 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 Other financing cash flows 116 131 (228) (255) (293) Cash flow from financing (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 Changes in cash and cash eq Closing cash and cash eq 3 August 2015 Page 85 of 181 India TMT Sector Report The data revolution starts now! INDIA TECHNOLOGY, MEDIA, TELECOM 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 [email protected] PRICE CLOSE (31 Jul 15) 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% 3M AVG DAILY VOLUME/VALUE 5.3 mln / USD 34.0 mln 52 WK HIGH 52 WK LOW INR 452.45 INR 335.80 Financial Highlights 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 net profit (INR mln) Adjusted EPS (INR) Adjusted EPS growth (%) 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 Source: Company, Bloomberg, RCML Research (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 Source: RCML Research, Company 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 Adjusted profit margin 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 Profitability & Return Ratios (%) 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 Working Capital & Liquidity Ratios 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 Gross asset turnover 1.3 1.6 1.6 1.7 1.7 Total asset turnover 0.5 0.5 0.5 0.5 0.5 Net interest coverage ratio 2.5 3.2 3.2 3.6 2.6 Adjusted debt/equity 1.1 0.9 0.8 0.7 0.6 Turnover & Leverage Ratios (x) DuPont Analysis Y/E 31 Mar (%) FY14A FY15A FY16E FY17E FY18E Tax burden (Net income/PBT) 38.0 47.4 52.8 54.1 51.0 Interest burden (PBT/EBIT) 60.7 68.7 68.6 72.1 61.0 EBIT margin (EBIT/Revenue) 14.0 17.1 18.4 17.0 15.7 Asset turnover (Revenue/Avg TA) 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 Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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 Net interest income/(expenses) (47,206) (49,098) (55,199) (48,834) (68,446) Other income/(expenses) 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 Min. int./Inc. from associates Reported net profit Adjustments Adjusted net profit Balance Sheet Y/E 31 Mar (INR mln) Accounts payables Other current liabilities 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 Total liabilities and equities Cash and cash eq. Accounts receivables Inventories Other current assets 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 Deferred tax assets, net Cash Flow Statement Y/E 31 Mar (INR mln) Net income + Depreciation Interest expenses Non-cash adjustments Changes in working capital Other operating cash flows Cash flow from operations Capital expenditures 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) Change in investments 0 0 0 0 0 Other investing cash flows 0 0 0 0 0 Cash flow from investing (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) Other financing cash flows (297) 0 0 0 0 Cash flow from financing 47,922 (161,744) (86,158) (74,793) (94,405) Dividends paid Changes in cash and cash eq Closing cash and cash eq 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 [email protected] PRICE CLOSE (31 Jul 15) INR 173.35 MARKET CAP INR 623.8 bln USD 9.7 bln SHARES O/S 3,544.1 mln FREE FLOAT 57.7% 3M AVG DAILY VOLUME/VALUE 4.9 mln / USD 13.3 mln 52 WK HIGH 52 WK LOW INR 204.00 INR 138.10 Financial Highlights 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 Adjusted net profit (INR mln) 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) Adjusted EPS growth (%) Source: Company, Bloomberg, RCML Research (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 Profitability & Return Ratios (%) Adjusted profit margin Adjusted ROAE ROCE YoY Growth (%) Working Capital & Liquidity Ratios 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 Gross asset turnover 0.7 0.8 0.7 0.6 0.5 Total asset turnover 0.6 0.6 0.6 0.6 0.6 Net interest coverage ratio 5.0 5.3 5.1 1.7 1.2 Adjusted debt/equity 1.2 0.6 0.3 1.0 0.9 Turnover & Leverage Ratios (x) DuPont Analysis Y/E 31 Mar (%) FY14A FY15A FY16E FY17E FY18E Tax burden (Net income/PBT) 64.6 64.5 65.0 65.0 65.0 Interest burden (PBT/EBIT) 79.8 88.9 88.1 48.9 25.8 EBIT margin (EBIT/Revenue) 14.4 17.5 16.7 15.0 10.6 Asset turnover (Revenue/Avg TA) 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 Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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 Net interest income/(expenses) (7,700) (10,452) (12,274) (36,458) (40,145) Other income/(expenses) 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 Min. int./Inc. from associates 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 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Accounts payables 74,046 84,996 92,731 105,993 116,301 Adjusted net profit Balance Sheet Other current liabilities 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 Total liabilities and equities 465,575 604,668 566,682 803,581 797,845 Cash and cash eq. 4,036 130,804 96,081 106,944 93,717 Accounts receivables 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 Other current assets 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 Deferred tax assets, net 0 0 0 0 0 Other assets 0 0 0 0 0 Total assets 465,575 604,668 566,682 803,581 797,845 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Net income + Depreciation 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 Non-cash adjustments Changes in working capital Other operating cash flows Cash flow from operations Capital expenditures 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) Change in investments 0 0 0 0 0 Other investing cash flows 0 0 0 0 0 Cash flow from investing (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 Other financing cash flows 0 0 0 0 0 Cash flow from financing 59,589 85,149 (93,527) 167,542 (64,145) Changes in cash and cash eq (7,673) 126,768 (34,723) 10,864 (13,228) 4,036 130,804 96,081 106,944 93,717 Closing cash and cash eq 3 August 2015 Page 93 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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 [email protected] 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. PRICE CLOSE (31 Jul 15) 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. 3M AVG DAILY VOLUME/VALUE 3.1 mln / USD 21.8 mln 52 WK HIGH 52 WK LOW INR 505.00 INR 243.20 Financial Highlights 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 Adjusted net profit (INR mln) 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 EPS growth (%) 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) Source: Company, Bloomberg, RCML Research 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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. Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 0 FY13A FY14A FY15A Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company FY15 FY16E FY17E 0.0 FY15 FY16E FY17E Source: RCML Research, Company 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 Source: Bloomberg, Company, RCML Research 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 Source: RCML Research, Company Source: RCML Research, Company 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 Source: RCML Research, Company Source: RCML Research, Company 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 Source: RCML Research, Company FY15 FY16E FY17E FY18E (0.4) FY12 FY13 FY14 FY15 FY16E FY17E FY18E Source: RCML Research, Company 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 Source: RCML Research, Bloomberg 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 Source: Bloomberg, Company, RCML Research 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 Source: Bloomberg, Company, RCML Research 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. Shareholding pattern 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 Adjusted profit margin 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 Profitability & Return Ratios (%) 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 Working Capital & Liquidity Ratios 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 Gross asset turnover NA NA NA NA NA Total asset turnover 0.4 0.4 0.5 0.5 0.6 Net interest coverage ratio 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 EBIT margin (EBIT/Revenue) 21.1 24.2 25.7 28.9 31.8 Asset turnover (Revenue/Avg TA) 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 Turnover & Leverage Ratios (x) Adjusted debt/equity DuPont Analysis Y/E 31 Mar (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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 Other income/(expenses) 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 Net interest income/(expenses) (8,053) (10,591) (11,857) (14,789) (18,323) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 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 Y/E 31 Mar (INR mln) Accounts payables Other current liabilities 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 Total liabilities and equities 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. Accounts receivables Inventories Other current assets 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 Deferred tax assets, net 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 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Net income + Depreciation 36,438 41,771 45,433 51,358 58,021 Interest expenses 0 0 0 0 0 Non-cash adjustments 0 0 0 0 0 Changes in working capital 1,160 (1,350) (229) (2,430) (193) Other operating cash flows (1,782) (2,392) 2,457 2,323 1,918 Cash flow from operations 35,816 38,029 47,662 51,251 59,746 Capital expenditures (15,813) (20,781) (22,060) (20,980) (21,112) Change in investments (35,977) 8,143 0 0 0 Other investing cash flows 28,313 3,264 0 0 0 Cash flow from investing (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) Other financing cash flows 36 (4,933) 0 0 0 Cash flow from financing (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 Changes in cash and cash eq Closing cash and cash eq 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 [email protected] 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. PRICE CLOSE (31 Jul 15) INR 450.45 MARKET CAP INR 128.4 bln USD 2.0 bln SHARES O/S 285.0 mln FREE FLOAT 25.0% 3M AVG DAILY VOLUME/VALUE 0.6 mln / USD 4.2 mln 52 WK HIGH 52 WK LOW INR 505.80 INR 336.10 Financial Highlights 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 net profit (INR mln) Adjusted EPS (INR) Adjusted EPS growth (%) Adjusted ROAE (%) Adjusted P/E (x) EV/EBITDA (x) P/BV (x) Source: Company, Bloomberg, RCML Research 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 Basis of valuation/comments 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 Source: RCML Research 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 Profitability & Return Ratios (%) EBITDA margin 15.7 15.0 15.2 16.1 16.2 EBIT margin 5.1 4.2 5.0 5.9 6.1 Adjusted profit margin 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 Working Capital & Liquidity Ratios 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 Gross asset turnover 0.8 0.7 0.7 0.7 0.7 Total asset turnover 0.8 0.8 0.9 0.9 0.9 Net interest coverage ratio 1.3 1.1 1.7 2.2 2.6 11.6 21.2 10.7 5.6 2.7 Turnover & Leverage Ratios (x) Adjusted debt/equity DuPont Analysis Y/E 31 Mar (%) FY14A FY15A FY16E FY17E FY18E Tax burden (Net income/PBT) 26.8 0.3 49.0 49.2 49.2 Interest burden (PBT/EBIT) 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 EBIT margin (EBIT/Revenue) Asset turnover (Revenue/Avg TA) Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Accounts payables 76,362 99,603 104,562 111,512 119,756 Other current liabilities 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 Net interest income/(expenses) Other income/(expenses) Exceptional items EBT Income taxes Extraordinary items Min. int./Inc. from associates 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 Accounts receivables 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 Total liabilities and equities Inventories Other current assets 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 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Net income + Depreciation 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 Deferred tax assets, net Cash Flow Statement Interest expenses Non-cash adjustments Changes in working capital Other operating cash flows (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 Other investing cash flows 0 0 0 0 0 Cash flow from investing (21,771) (20,613) (20,900) (22,289) (16,756) Cash flow from operations Capital expenditures Change in investments 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) Other financing cash flows (7,282) (4,813) 257 (92) (100) Cash flow from financing 2,114 (38,771) (9,160) (10,816) (10,557) Changes in cash and cash eq 11,822 (1,643) 3,342 3,868 12,189 Closing cash and cash eq 26,739 25,096 28,438 32,306 44,495 Dividends paid 3 August 2015 Page 114 of 181 India TMT The data revolution starts now! Sector Report INDIA TECHNOLOGY, MEDIA, TELECOM 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 [email protected] 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. PRICE CLOSE (31 Jul 15) INR 832.70 MARKET CAP INR 100.3 bln USD 1.6 bln SHARES O/S 120.6 mln FREE FLOAT 47.0% 3M AVG DAILY VOLUME/VALUE 0.1 mln / USD 1.8 mln 52 WK HIGH 52 WK LOW INR 1,015.00 INR 685.00 Financial Highlights 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 Adjusted net profit (INR mln) 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) Adjusted EPS growth (%) Source: Company, Bloomberg, RCML Research (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% Source: FICCI KPMG Report 2015 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 Source: FICCI KPMG Report 2015 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 Source: FICCI KPMG Report 2015 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 Source: Company, RCML Research 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 Source: RCML Research, Company Infrastructure 17% Source: RCML Research, Company 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 Source: RCML Research, Company 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%) Source: RCML Research, Company 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 Source: RCML Research, Company FY15 (30%) 10 0 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company FY12 FY13 FY14 0% FY15 FY11 FY12 FY13 FY14 FY15 Source: RCML Research, Company 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 Source: RCML Research, Company FY09 2 FY10 3 3 FY12 FY13 2 FY11 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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) invested Rs 325mn for 18% stake Zomato Media Pvt Ltd (www.Zomaro.com) invested Rs 3,283mn for 50% stake Investee companies Canvera Digital Tech (www.canvera.com) invested Rs 671mn for 32% stake Kinobeo Software (www.mydala.com) invested Rs 270mn for 45% stake Happily unmarried marketing (www.happiluinmarried.com) invested Rs 94mn for 27% stake Source: RCML Research, Company 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 Source: RCML Research, Company Meritnation Others (1,600) FY12 FY13 FY14 FY15 Source: RCML Research, Company 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 Fig 27 - Revenue growth Fig 28 - EBITDA growth 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 29 - EBITDA margin 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 31 - Return ratios 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) Basis of valuation/comments PE of 34x Based on 1x investment 3 Sep-16 Target Price 1,101 Source: RCML Research 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 Shareholding pattern 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 Adjusted profit margin 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 Gross asset turnover 3.3 3.6 8.4 NA NA Total asset turnover 0.6 0.4 0.4 0.4 0.4 Net interest coverage ratio 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 EBIT margin (EBIT/Revenue) 29.5 26.9 22.8 30.0 30.4 Asset turnover (Revenue/Avg TA) 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 Profitability & Return Ratios (%) YoY Growth (%) Working Capital & Liquidity Ratios Turnover & Leverage Ratios (x) Adjusted debt/equity DuPont Analysis Y/E 31 Mar (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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 Other income/(expenses) 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 Net interest income/(expenses) Extraordinary items Min. int./Inc. from associates 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 Total liabilities and equities 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 Other current assets 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 Y/E 31 Mar (INR mln) Accounts payables Other current liabilities Other liabilities Accounts receivables Inventories Net fixed assets Deferred tax assets, net 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 Non-cash adjustments 0 0 0 0 0 259 334 5,195 (412) (531) Other operating cash flows (637) (1,044) 601 601 1,087 Cash flow from operations 1,080 1,400 7,538 2,730 3,972 Capital expenditures (125) (123) (517) (632) (776) Change in investments (276) (2,031) 0 0 0 Other investing cash flows (614) (6,275) 0 0 0 Cash flow from investing (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 Y/E 31 Mar (INR mln) Net income + Depreciation Changes in working capital Dividends paid Other financing cash flows (7) (5) (601) (601) (1,087) Cash flow from financing (255) 7,156 (970) (970) (1,455) Changes in cash and cash eq (190) 127 6,051 1,128 1,740 (48) 367 6,407 10,183 11,921 Closing cash and cash eq 3 August 2015 Page 132 of 181 India TMT Sector Report INDIA The data revolution starts now! TECHNOLOGY, MEDIA, TELECOM 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 [email protected] 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. PRICE CLOSE (31 Jul 15) INR 77.55 MARKET CAP INR 5.1 bln USD 79 mln SHARES O/S 65.2 mln FREE FLOAT 27.91% 3M AVG DAILY VOLUME/VALUE 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) Source: RCML, Company 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) Source: RCML, Company 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 Source: RCML, Company 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 Source: RCML, Company 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 Source: RCML, Company 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 Source: RCML, Company FY11 FY12 FY13 FY14 (1,200) FY10 FY11 FY12 (1,045) FY13 FY14 Source: RCML, Company 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 Source: RCML, Company 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 India offers a huge opportunity for content consumption given its large population and 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. Fig 12 - India’s smartphone shipment share 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 Source: RCML, Company 3 August 2015 Page 140 of 181 NOT RATED Company Update Balaji Telefilms INDIA BLJT IN MEDIA Income Statement Y/E 31 Mar (INR mln) 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) Net interest income/(expenses) 0 1 1 14 3 Other income/(expenses) 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 Total liabilities and equities 4,004 4,248 4,491 4,347 4,296 50 60 109 77 110 Accounts receivables 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 Min. int./Inc. from associates Reported net profit Adjustments Adjusted net profit Balance Sheet Y/E 31 Mar (INR mln) Accounts payables Other current liabilities Cash and cash eq. Other current assets Investments Net fixed assets CWIP Intangible assets Deferred tax assets, net 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 Y/E 31 Mar (INR mln) Net income + Depreciation Interest expenses Non-cash adjustments Changes in working capital Other operating cash flows Cash flow from operations (10) (173) (821) 387 139 Capital expenditures (129) (46) (25) (24) 0 Change in investments 3,996 3,543 2,545 1,601 0 Other investing cash flows (3,824) (3,303) (1,633) (1,965) 0 Cash flow from investing 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 Other financing cash flows 0 0 0 0 0 Cash flow from financing (23) (15) (15) (31) 0 11 7 50 (31) 139 Dividends paid Changes in cash and cash eq 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 Profitability & Return Ratios (%) EBITDA margin 0.6 1.3 4.4 (5.1) 1.8 EBIT margin (5.2) (2.8) 0.1 (6.6) (0.6) Adjusted profit margin (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) Working Capital & Liquidity Ratios 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 Gross asset turnover 0.5 0.5 0.4 0.9 0.8 Total asset turnover 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) Turnover & Leverage Ratios (x) Net interest coverage ratio Adjusted debt/equity 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 [email protected] PRICE CLOSE (31 Jul 15) 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 3M AVG DAILY VOLUME/VALUE 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) Source: FICCI KPMG Report 2015 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 NOT RATED 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 Source: RCML Research, Company 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 Source: FICCI KPMG Report 2015 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) Source: RCML Research, Company 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 Source: RCML Research, Company 3 August 2015 Page 145 of 181 NOT RATED 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Page 146 of 181 NOT RATED EROS International 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 India offers a huge opportunity for content consumption given its large population and 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. Fig 12 - India’s smartphone shipment share 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 Page 147 of 181 NOT RATED 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 Source: RCML Research, Company 3 August 2015 Page 148 of 181 NOT RATED 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) Source: RCML Research 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 Source: RCML Research 3 August 2015 Page 149 of 181 NOT RATED 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 Page 150 of 181 NOT RATED EROS International 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 Adjusted profit margin 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 Profitability & Return Ratios (%) YoY Growth (%) Working Capital & Liquidity Ratios 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 Turnover & Leverage Ratios (x) Gross asset turnover Total asset turnover Net interest coverage ratio Adjusted debt/equity 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 Page 151 of 181 NOT RATED EROS International Company Update EROS IN INDIA MEDIA Income Statement Y/E 31 Mar (INR mln) 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) Other income/(expenses) 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 Net interest income/(expenses) Extraordinary items Min. int./Inc. from associates 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 Y/E 31 Mar (INR mln) Accounts payables Other current liabilities 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 Accounts receivables 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 Total liabilities and equities Inventories Other current assets 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 Deferred tax assets, net 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 Non-cash adjustments 0 0 0 0 440 (1,612) (99) 1,420 Cash Flow Statement Y/E 31 Mar (INR mln) Net income + Depreciation Changes in working capital Other operating cash flows 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 Other investing cash flows 0 0 462 2 Cash flow from investing (5,431) (6,822) (6,737) (7,857) Cash flow from operations Capital expenditures Change in investments 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 Other financing cash flows 0 0 1 13 Cash flow from financing 3,333 1,638 (636) 69 Changes in cash and cash eq 2,107 (1,733) (1,063) 622 Closing cash and cash eq 2,107 4,451 6,135 4,683 3 August 2015 Page 152 of 181 Company Initiation INDIA MEDIA 3 August 2015 BUY Shemaroo Entertainment 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 [email protected] 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. PRICE CLOSE (31 Jul 15) INR 285.00 MARKET CAP INR 7.7 bln USD 121.0 mln SHARES O/S 20.6 mln FREE FLOAT 33.0% 3M AVG DAILY VOLUME/VALUE 0.1 mln / USD 0.3 mln 52 WK HIGH 52 WK LOW INR 321.85 INR 144.00 Financial Highlights 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 Adjusted net profit (INR mln) 282 421 512 650 735 Adjusted EPS (INR) 13.7 17.4 21.1 26.9 30.4 230 Adjusted EPS growth (%) 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) Source: Company, Bloomberg, RCML Research (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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research 10% 2014 2015E 2016E 2017E 2018E 2019E 2020E 0% Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research FY14 FY15 FY16E FY17E (3,500) FY11 FY12 FY13 FY14 FY15 FY16E FY17E Source: Company, RCML Research 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 Source: Company, RCML Research 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 Source: Company, RCML Research 3 August 2015 Page 160 of 181 BUY Company Initiation Shemaroo Entertainment TP: INR 400.00 40.4% INDIA MEDIA SHEM IN Financial snapshot Fig 17 - Revenue growth (Rs mn) Fig 18 - EBITDA growth 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 Source: Company, RCML Research Source: Company, RCML Research Fig 19 - EBITDA margin 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 Source: Company, RCML Research Source: Company, RCML Research Fig 21 - Return ratios 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 Source: Company, RCML Research FY16E FY17E FY18E 0.1 0.2 FY12 FY13 FY14 FY15 FY16E 0.2 0.1 FY17E FY18E Source: Company, RCML Research 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) Source: Company, RCML Research …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. Shareholding pattern 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 Adjusted profit margin 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 Gross asset turnover 1.7 1.8 3.8 NA NA Total asset turnover 0.7 0.7 0.7 0.7 0.7 Net interest coverage ratio 3.4 4.2 4.4 5.6 5.9 Adjusted debt/equity 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 Profitability & Return Ratios (%) YoY Growth (%) Working Capital & Liquidity Ratios Turnover & Leverage Ratios (x) DuPont Analysis Y/E 31 Mar (%) FY14A FY15A FY16E FY17E FY18E Tax burden (Net income/PBT) 64.1 65.9 67.2 67.1 67.1 Interest burden (PBT/EBIT) 71.7 76.7 77.8 82.7 83.8 EBIT margin (EBIT/Revenue) 23.2 25.7 25.8 26.4 25.7 Asset turnover (Revenue/Avg TA) 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 Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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) Other income/(expenses) 0 0 0 0 0 Exceptional items 5 6 7 8 9 436 633 755 961 1,086 Total revenue Net interest income/(expenses) EBT Income taxes (165) (222) (257) (327) (369) Extraordinary items 0 0 0 0 0 Min. int./Inc. from associates 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 Y/E 31 Mar (INR mln) FY14A FY15A FY16E FY17E FY18E Accounts payables 306 165 194 226 259 Other current liabilities 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 Total liabilities and equities 4,123 4,885 5,665 6,624 7,633 9 25 471 723 917 Accounts receivables 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 Deferred tax assets, net 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 Non-cash adjustments 0 0 0 0 0 (760) (1,204) (13) (343) (441) Equity capital Cash and cash eq. Other current assets Investments Net fixed assets Cash Flow Statement Y/E 31 Mar (INR mln) Net income + Depreciation Changes in working capital Other operating cash flows Cash flow from operations Capital expenditures 187 (2,216) 0 0 0 (271) (2,973) 518 328 275 (19) (30) (35) (41) (47) Change in investments 0 0 0 0 0 Other investing cash flows 7 (896) 0 0 0 Cash flow from investing (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 Other financing cash flows (7) 0 0 0 0 Cash flow from financing 204 1,172 (35) (35) (34) (80) (2,728) 447 251 194 3,981 1,822 3,989 5,249 8,542 Changes in cash and cash eq Closing cash and cash eq 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 [email protected] 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). PRICE CLOSE (31 Jul 15) INR 398.80 MARKET CAP INR 383.0 bln USD 6.0 bln SHARES O/S 961.7 mln FREE FLOAT 57.2% 3M AVG DAILY VOLUME/VALUE 3.2 mln / USD 16.9 mln 52 WK HIGH 52 WK LOW INR 410.45 INR 265.05 Financial Highlights 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 net profit (INR mln) Adjusted EPS (INR) Adjusted EPS growth (%) P/BV (x) Source: Company, Bloomberg, RCML Research (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 Source: FICCI KPMG Report 2015 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 Source: FICCI KPMG Report 2015 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 Source: FICCI KPMG Report 2015 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% Source: RCML Research, Company 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% Source: RCML Research, Company 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) Source: RCML Research, Company 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 Source: RCML Research, Company 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) Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company 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 Source: RCML Research, Company …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 Source: RCML Research, Company 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 Source: FICCI KPMG report 2015 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 Source: RCML Research, Company 3 August 2015 Page 174 of 181 BUY Zee Entertainment Company Update TP: INR 450.00 12.8% Z IN INDIA MEDIA Financial snapshot Fig 18 - Revenue growth Fig 19 - EBITDA growth 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 Source: RCML Research, Company Source: RCML Research, Company Fig 20 - EBITDA margin 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 Source: RCML Research, Company Source: RCML Research, Company Fig 22 - Return ratios 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 Source: RCML Research, Company FY16E FY17E FY18E 70 FY13 FY14 FY15 FY16E Source: RCML Research, Company 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 Adjusted profit margin 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 Profitability & Return Ratios (%) YoY Growth (%) Working Capital & Liquidity Ratios 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 Gross asset turnover 18.0 NA 13.7 7.6 8.2 Total asset turnover 0.8 0.7 0.7 0.7 0.7 Net interest coverage ratio 73.1 115.2 160.0 192.5 228.6 Adjusted debt/equity (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 EBIT margin (EBIT/Revenue) 26.1 24.3 23.3 24.6 25.0 Asset turnover (Revenue/Avg TA) 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 Turnover & Leverage Ratios (x) DuPont Analysis Y/E 31 Mar (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT) Leverage (Avg TA/Avg equities) 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 Y/E 31 Mar (INR mln) 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 Net interest income/(expenses) (158) (103) (81) (81) (80) Other income/(expenses) 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 Min. int./Inc. from associates Reported net profit Adjustments Adjusted net profit Balance Sheet Y/E 31 Mar (INR mln) Accounts payables Other current liabilities 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 Total liabilities and equities 60,317 70,058 78,958 90,733 104,802 Cash and cash eq. 5,644 7,365 18,282 25,003 32,775 Accounts receivables 10,281 10,692 16,710 19,032 21,952 Inventories 11,736 11,877 56 63 73 Other current assets 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 Deferred tax assets, net 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 Changes in working capital (4,460) 2,047 2,618 (3,926) (4,932) Other operating cash flows (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) Change in investments (384) (1,699) 0 0 1 Other investing cash flows 1,807 2,278 1,727 2,538 3,293 Cash flow from investing Cash Flow Statement Y/E 31 Mar (INR mln) Net income + Depreciation Interest expenses Non-cash adjustments Cash flow from operations Capital expenditures (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) Other financing cash flows (197) (6,278) (2,978) (1,317) (1,314) Cash flow from financing (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 Changes in cash and cash eq Closing cash and cash eq 3 August 2015 Page 178 of 181 RESEARCH TEAM ANALYST SECTOR EMAIL TELEPHONE Mihir Jhaveri Auto, Auto Ancillaries, Cement, Logistics [email protected] +91 22 6766 3459 Siddharth Vora Auto, Auto Ancillaries, Cement, Logistics [email protected] +91 22 6766 3435 Misal Singh Capital Goods, Infrastructure, Utilities [email protected] +91 22 6766 3466 Prashant Tiwari Capital Goods, Infrastructure [email protected] +91 22 6766 3485 Gaurang Kakkad Consumer [email protected] +91 22 6766 3470 Premal Kamdar Consumer [email protected] +91 22 6766 3469 Nitin Tiwari Energy [email protected] +91 22 6766 3437 Parag Jariwala Financials [email protected] +91 22 6766 3442 Vikesh Mehta Financials [email protected] +91 22 6766 3474 Rumit Dugar IT, Telecom, Media [email protected] +91 22 6766 3444 Pritesh Jani Metals [email protected] +91 22 6766 3467 Arun Baid Mid-caps [email protected] +91 22 6766 3446 Praful Bohra Pharmaceuticals [email protected] +91 22 6766 3463 Arun Aggarwal Real Estate [email protected] +91 22 6766 3440 Pawan Parakh Utilities [email protected] +91 22 6766 3438 Jay Shankar Economics & Strategy [email protected] +91 11 3912 5109 3 August 2015 Page 179 of 181 RESEARCH DISCLAIMER Important Disclosures This report was prepared, approved, published and distributed by a Religare Capital Markets (“RCM”) group company located outside 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Analysts and strategists are paid in part by reference to the profitability of RCM. Stock Ratings are defined as follows Recommendation Interpretation (Recommendation structure changed with effect from March 1, 2009) Recommendation Buy Hold Sell Expected absolute returns (%) over 12 months More than 15% Between 15% and –5% Less than –5% Expected absolute returns are based on the share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation. Stock Ratings Distribution As of 1 July 2015, out of 162 rated stocks in the RCM coverage universe, 89 have BUY ratings (including 10 that have been investment banking clients in the last 12 months), 54 are rated HOLD and 19 are rated SELL. Research Conflict Management Policy RCM research has been published in accordance with our conflict management policy, which is available here. Disclaimers This report is not directed to, or intended for distribution to or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction where such distribution, publication, availability or use would be contrary to law or regulation or which would subject RCM to any registration or licensing requirement within such jurisdiction(s). This report is strictly confidential and is being furnished to you solely for your information. All material presented in this report, unless specifically indicated otherwise, is under copyright to RCM. None of the material, its content, or any copy of such material or content, may be altered in any way, transmitted, copied or reproduced (in whole or in part) or redistributed in any form to any other party, without the prior express written permission of RCM. All trademarks, service marks and logos used in this report are trademarks or service marks or registered trademarks or service marks of RCM or its affiliates, unless specifically mentioned otherwise. The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. RCM has not taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. RCM will not treat recipients as its customers by virtue of their receiving the report. The investments or services contained or referred to in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt about such investments or investment services. In addition, nothing in this report constitutes investment, legal, accounting or tax advice or a representation that any investment or strategy is suitable or appropriate to your individual circumstances or otherwise constitutes a personal recommendation to you. Religare Capital Markets does and seeks to do business with companies covered in our research report. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of research produced by Religare Capital Markets. Investors should consider our research as only a single factor in making their investment decision. Any reference to a third party research material or any other report contained in this report represents the respective research organization's estimates and views and does not represent the views of RCM and RCM, its officers, employees do not accept any liability or responsibility whatsoever with respect to its accuracy or correctness and RCM has included such reports or made reference to such reports in good faith. This report may provide the addresses of, or contain hyperlinks to websites. Except to the extent to which the report refers to material on RCM’s own website, RCM takes no responsibility whatsoever for the contents therein. Such addresses or hyperlinks (including addresses or hyperlinks to RCM’s own website material) is provided solely for your convenience and information and the content of the linked site does not in any way form part of this report. Accessing such website or following such link through this report or RCM’s website shall be at your own risk. Other Disclosures by Religare Capital Markets Limited under SEBI (Research Analysts) Regulations, 2014 with reference to the subject companies(s) covered in this report: Religare Capital Markets Limited (“RCML”) is engaged in the business of Institutional Stock Broking and Investment Banking. RCML is a member of the National Stock Exchange of India Limited and BSE Limited and is also a SEBI-registered Merchant Banker. RCML is a subsidiary of Religare Enterprises Limited which has its various subsidiaries engaged in the businesses of commodity broking, stock broking, lending, asset management, life insurance, health insurance, wealth management, portfolio management, etc. RCML has set up subsidiaries in Singapore, Hong Kong, Sri Lanka and Middle East to render stock broking and investment banking services in respective jurisdictions. RCML’s activities were neither suspended nor has it defaulted with any stock exchange authority with whom it has been registered in the last five years. RCML has not been debarred from doing business by any Stock Exchange / SEBI or any other authority. No disciplinary action has been taken by any regulatory authority against RCML impacting its equity research analysis activities. RCML or its research analyst or his/her relatives do not have any financial interest in the subject company. RCML or its research analyst or his/her relatives do not have actual/beneficial ownership of one per cent or more securities in the subject company at the end of the month immediately preceding the date of publication of this research report. 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 publication of this report. RCML may from time to time solicit or perform investment banking services for the company(ies) mentioned in this report. Research analyst has not received any compensation from the subject company in the past 12 months. RCML or its associates may have material conflict of interest at the time of publication of this research report. RCML may have managed or co-managed a public offering of securities for the subject company in the past 12 months. RCML’s associates may have financial interest in the subject company. RCML’s associates may have received compensation from the subject company in the past 12 months. RCML’s associates may hold actual / beneficial ownership of one per cent or more securities in the subject company at the end of the month immediately preceding the date of publication of this research report. RCML may have received compensation from the subject company in the past 12 months. Research analyst has not served as an officer, director or employee of the subject company. RCML or its research analyst is not engaged in any market making activities for the subject company. RCM has obtained registration as Research Entity under SEBI (Research Analysts) Regulations, 2014. Digitally signed by DUGAR RUMIT Date: 2015.08.03 15:19:59 +05'30' 3 August 2015 Page 181 of 181