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How digitisation has impacted the credit profiles of MSOs

MUMBAI: Multi-system operators
(MSOs) have grown their digital cable
TV subscriber base rapidly over the
last three years. However, while they
have raised equity capital and their
valuations have shot up, there has
also been a growing debt pile due to
massive investments in digital
infrastructure such as set-top boxes
DEN Networks’ investment in STBs has
been nearly Rs 1,181.7 crore (Rs
11.82 billion) over the past three
years. Siti Cable has invested Rs
607.5 crore (Rs 6.08 billion) during
this period.
On average, an STB has cost the MSO
Rs 1,000–1,800, of which Rs 600–800
was recovered from the subscriber,
resulting in a net capital expenditure
(capex) of Rs 800–1,000 per STB
funded by the MSO.
The national MSOs raised a substantial
amount of capital via the equity route
to support their investments in Phase
I and II markets. The key players
have raised equity funding exceeding
Rs 2,000 crore (Rs 20 billion) over the
last three years.
However, debt funding may be a major
route for investments in Phases III
and IV, broadband as well as value-
added services. The borrowing levels
are, thus, expected to remain high
over the next two years while
profitability from digitised areas
tends to stabilise gradually, said
investment information and credit
rating agency ICRA.
Due to the debt-funded capex plans of
the MSOs to finance digitisation in
Phases III and IV, their credit
profiles are unlikely to improve
significantly. There will be no rest in
investment for the MSOs as the
deadline for digital addressable
system (DAS) in Phases III and IV fall
due on 31 December 2015 and 31
December 2016 respectively.
“Longer-than-expected timelines in
monetisation opportunities, higher
content costs for digitised areas,
coupled with ongoing investments for
Phases III and IV, would keep the
return and coverage indicators of
MSOs muted in the near term,” said
Longer gestation period for
investments made in Phase III and IV
markets, due to the price-sensitive
subscriber base and low ARPU growth
potential, is expected to keep the
return indicators under pressure over
the near term.
The television distribution industry is
highly technology-intensive, with
players exposed to risks of
obsolescence and foreign currency
fluctuations on imported equipment.
In addition, the migration from the
analogue to the digital cable regime
necessitated heavy investments in
STBs by cable and DTH operators, as
well as an efficient supply chain to
ensure timely procurement and
seeding of STBs.
“The domestic supply of STBs has been
unable to meet the sudden surge in
demand from distributors. As a result,
dependence on imported STBs increased
during 2012–14, thereby making
players vulnerable to foreign currency
movements. Nevertheless, delay in
deadline for Phase III and IV
implementation provides opportunity
for sourcing indigenous STBs,” ICRA
While the rollout of digital cable in
the first two phases has called for
significant investments in
infrastructure and STBs over the last
three years, monetisation of the same
has in effect remained slow due to
on-ground implementation challenges.
Consequently, the credit profiles of
the industry players have not shown
significant improvements over the last
two years because of weaker
OPBITDA/cash generation and
significant debt-funded capex
undertaken in these markets.
Further, the receivables cycle for
distributors has remained relatively
stretched over four to five months
due to delayed subscription revenue
collections from local cable operators
(LCOs) as well as extended credit
period to broadcasters for carriage
“The rising working capital
requirements have been funded
through bank borrowings as well as
supplier credit primarily from
broadcasters towards content costs.
While the players reported certain
write-offs with respect to
irrecoverable debts during the last
fiscal, the industry is moving towards
stricter credit norms,” ICRA stated.
ICRA notes that during the first
quarter of the current fiscal, certain
players have taken disciplinary action
selectively against defaulting cable
operators by switching off signals and
sending out notices. “This, coupled
with the changing nature of deals
between broadcasters and distributors
is expected to result in faster
collections, thereby supporting the
operating liquidity of players going
forward,” it observed.

How digitisation has impacted the credit profiles of MSOs

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