G Subramaniam, CFO of Hathway Cable believes Phase II is likely to be less challenging for them. The company has seen substantial rollout of set top boxes in the recent past, informed Subramaniam. He is also hopeful of seeing considerable growth in set top box sales in the second phase of digitisation.
As the first phase of digitization was implemented from November 1, G Subramaniam, CFO of Hathway Cable believes Phase II is likely to be less challenging for them. The company has seen substantial rollout of set top boxes in the recent past, informed Subramaniam. He is also hopeful of seeing considerable growth in set top box sales in the second phase of digitisation.
In the past quarter, Hathway has added around 2 million subscribers and at present, have about Rs 60 crore cash on books. Subramaniam further added that they have a sufficient inventory to cater to the needs of Phase-II. He expects an increase in subscription and advertisement revenues in FY14.
Here is the edited transcript of the interview on CNBC-TV18.
Q: Can you give us an idea of how much you could increase subscribers in the past six months, especially in the last quarter and how do you see the tally in the second half of the year?
A: We have always been saying that the number of subscribers whom we get paid for is about 15-20 percent, obviously there is an opportunity to grow the subscriber base substantially. While Phase-I was supposed to have kicked off on the October 1, we are still continuing to rollout set top boxes and we have been seeing a substantial rollout of boxes in the course of the last couple of weeks.
If you take out that rollout, the cumulative rollout since early this year has been to nearly 1.8-1.9 million subscribers. We expect this phase to rollout boxes to more than 2 million subscribers if you add all the three cities of Mumbai, Delhi and Kolkata through our JV partner. It could fall anywhere between 2-2.2 million subscribers in phase-I.
After that we hope that in phase-II there will be a further acceleration because Hathway along with its JV partner is present in almost 65 percent of the 39 cities where Phase-II is supposed to start. We expect the set top box rollout in phase-II cities to commence very soon as the government has reiterated its position and has announced March 31 as the deadline.
Assuming that the deadline is met, we should see a substantial acceleration in distribution of boxes in the course of the next few months, gathering pace as we reach March 31. The problem is subscribers wait till the last minute. But, once subscribers see that the government stuck to its schedule in Phase-I, we will find it less challenging in phase-II.
The number of boxes can be anywhere upwards of 3 million. Along with our joint venture partners, we probably have to rollout 1.5-2 million boxes in the course of the next few months. To this, if you add the territories that are owned by our JV partners that will be amounting to another 2 million boxes. That is the type of numbers we are looking at now. We are fairly well stocked with set top boxes and we don’t see that as a particular challenge. We have already orders in the pipeline for the incremental needs as we go along.
Q: I wanted to concentrate on how exactly would you be funding phase-II, is it going to be via debt? Can you give us some perspective on what the balance sheet of the company would look like at this point and post Phase-II?
A: If you see close of September, we had about Rs 400-404 crore of gross debt. We had around Rs 60 crore of cash on the balance sheet and therefore, the net debt was around Rs 340 crore or so. Our net worth at that point of time would be just under Rs 800 crore. Therefore, we are well within control at this point of time.
Obviously, a substantial part of the requirements of Phase II will be met first by vendor credit and then the takeout financing will be by some form of debt. We expect it to be anywhere between Rs 150-200 crore of incremental debt. We must remember that it is not that we are funding the full cost of the boxes, we recover up to Rs 500 per box as activation charges. What we have to fund is about two third of the cost of the set top boxes.
Over and above this, net worth rerated investments will also have to be made. Some of our head ends will have to be upgraded to carry additional channels. As you know the TRAI had originally mandated about 500 channels as the capacity of these networks. We expect that post the TDSAT (Telecom Disputes Settlement and Appellate Tribunal) review, on an average between 250-400 channels will be rolled out across the country. In order to provide for some network related investment, I would say it may be in the range of about Rs 200 crore.
I must admit that the plans are still being made and we will have a clearer picture on the actual balance sheet closer to December, by when our board would have approved the plans and then we will be accelerating on our rollout.
Q: Would you say that in the first phase as you are replacing cables with set top boxes, you are going to see pressure on your margins? Will they pay up in the form of higher ARPUs in FY14 or will it take longer than that?
A: I would expect FY14 to give us some visibility on this. We have already filed our tariff plans with the TRAI, not just for the first television set but also assuming that a substantial part of our audience have more than one television set.
We have already filed these plans. These plans range anywhere between Rs 100-275 for the first television set and anywhere between Rs 84-105 for the second television set. A good number to start with is about 15 percent of our homes on an average have a second television set. In the large cities, in a dense city like Mumbai and probably in Delhi more homes will have a second television set. Unfortunately, there is no precise statistic available for us to measure this but if you look at the ARPU, it is a function of the penetration of our plans.
We expect that by and large most subscribers will adopt the Rs 200 plus plans because of the lower end of the plan range you don't get all the products that a subscriber typically desires to watch. Assuming that subscribers in the initial phase will come in at the lower end of tariffs due to unfamiliarity with the plans, they will very quickly upgrade.
The upgrade is expected to happen in the course of probably Q4 of this year and you will find visibility as far as higher ARPUs are concerned in Q1 and Q2 of the next financial year. That’s what we hope will be the case.
Q: You must have noticed that all media stocks are running up including broadcasters, may be particularly broadcasters. Is it a fair assumption that we are going to see greater subscriber identification and therefore, greater revenues for the broadcasters?
A: Digitization is all about transparency, that is what we started this journey with. If we substantially achieve that objective, this is not going to be a straight line to the end of the journey. There is going to be pitfalls along the way and I am sure we will negotiate those pitfalls. But at the end of it, obviously subscription revenues are bound to go up.
It is to the benefit of everybody along the value chain because the broadcasters will be able to have more cash to invest in programming. Today advertising revenues on which broadcasters are by and large dependent, is a very volatile revenue stream. When there is a recession, advertising revenues drop precipitously. This gives them the ability to have a more predictable revenue stream and that is for the good because as they invest on programming they will also attract more and more eyeballs and specialise programming.
As far as MSOs (multi-system operator) are concerned, it is an obvious benefit. We are going to carry much more content. Positioning advertisements very well to compete against alternative ways of consuming media is one very good thing. The bigger benefit is, as the capacity of these networks improve due to digitization, it will allow us to provide other services. Cable TV is not just about cable TV, it is much more than that, broadband is a very significant part of this upside.
Q: In the first lot itself, as the digitisation deadline ended on October 31 should we expect subscriber revenues to be 30 percent higher for broadcast companies? How much higher in FY13, how much higher in FY14?
A: Not immediately. I think the benefit of this will be felt through the course of Q4 and Q1 of next financial year because we have just focused our entire effort and rolling out boxes was a Herculean effort. Now, we have to go and monetise those boxes, that is the next part of the journey.
I believe that that will happen, there will be pitfalls along the way but, we are fairly confident by end of December we should have monetised a substantial part of these boxes. You will find some visibility as far as numbers are concerned in Q4 this year but, it will be more visible in Q1 of the next financial year.
Q: For you once the sunset date comes through, which is basically end of 2014 give us a sense what you could end FY14 with in terms of revenue as well as on the bottomline and the EBITDA especially on the bottomline. Would you be firmly in the black or would it be some amount of weighing in with regards to possibly a higher debt cost to fund all four phases?
A: I don't give forward guidance as a policy but, having said that obviously there is going to be a substantial upping of the EBITDA. More importantly, the investments that we are making in the networks in the course of the next couple of years will have to be also depreciated.
You will find the visibility at a bottomline level, that is at the PAT level coming in a bit later. Hopefully, by FY14 we will be able to answer that question more precisely but as a policy of the company we do not give guidance and I am just giving you a qualitative guidance at this point of time.
Q: What does Phase-II comprise of in terms of the cities that you would be targeting and what sort of market share would you be anticipating?
A: Actually Phase-II is very exciting for Hathway because we have got very good cities like Bangalore, Hyderabad, Pune and Ahmedabad, as far as our joint venture partners are concerned. We have got a very good bunch of cities in Phase-II. These cities are predominantly in the north, south and west. It is a very affluent part of India and we expect to garner a very good market share.
Even before starting this journey, we typically commanded anywhere between 30-40 percent share in each of these markets. We expect to keep those market shares. Whether we will go beyond that is a question of time because we don't know how these markets will carve themselves out. Whether there will be three players, four players that is a question of time and that is also a function of how well capitalized the other players are.
Hathway is very well capitalized to take advantages of opportunities as they come along and we expect to keep these shares between 30-40 percent in all these significant cities. About 65 percent of these 38 cities fall within Hathway's command area. Therefore, a big part of these cities and some of the best cities are part of those 65 percent. We expect to make bigger gains in Phase-II than in Phase I.