According to the report on Media Industry from Kotak Institutional Equities, HD subscribers in India to increase to 3X in the next 3-4 years, resulting in incremental subscription/advertising revenues of Rs25/35 bn for the industry. Growth will be driven by a combination of a strong developed ecosystem and sales push by distributors and broadcasters. Zee will be a key beneficiary of this; it will lend further legs to an already strong growth story.
Ecosystem is ready: Decline in HD STB cost, proliferation of HD TV sets and HD channels:
The report states that all catalysts necessary to propel growth of HD are in place—
(1) cost of high-definition (HD) STB has converged with that of standard definition (SD) STB (versus 3X five years ago),
(2) HD TV set has become the ‘default’ TV set; it is available at all price points and non-HD variants have largely been discontinued,
(3) supply of HD channels has gone up to 63 from 15-20 in FY2011 and it will cross 100 in the next two years. Subscription cost per HD channel is trending down, and
(4) broadcasters have begun tapping into the HD ad inventory, a separate and incremental ad revenue stream. Monetization potential of HD channel far outweighs the associated costs.
HD connections can increase to 3X in the next three-four years:
India has about 6.5 mn active HD subs (FY2016-end) as compared with stretched potential target segment of 78 mn NCCS A and NCCS B households (HHs). The report expect trebling of HD subs to 19 mn over the next 3-4 years, assuming
(1) 4% growth in NCCS A+ B HHs,
(2) 18% HD penetration in the same, and
(3) 10% multiple TV connections. Our understanding of affluence levels based on car ownership and 3G subscriber data has fed into these assumptions. While seemingly stretched, in view of the current annual run-rate of 1.5 mn sub adds, The expectations in the report are within the realm of possibility given the strong ecosystem development.
Win-win for all; HD facilitates sharper ad targeting, aiding TV compete better against digital:
HD subscription garners an additional Rs140/month. Trebling of HD subs can add incremental Rs25 bn to the industry’s subscription kitty. Additionally, higher HD penetration will boost HD viewership that can command higher ad yields (2-2.5X premium) once critical mass is attained. The report estimate potential upside of Rs35 bn to TV ad revenues after factoring cannibalization of advertising attributable to shift to HD from SD. Essentially, strong growth in HD can add 2% to domestic subscription and ad revenue CAGR in supportive economy (demand). Large chunk of incremental revenues will flow through to EBITDA given negligible incremental costs.
The HD subscriber base of 19 mn by FY2020E will largely cover India’s affluent and upper middle-class HHs. Advertisers will be able to target this audience without any wastage. HD would facilitate sharper ad targeting, helping television compete better against digital.
Zee will be a key beneficiary—HD to provide a nice top-up on strong base growth:
Broadcasters will be key beneficiaries as HD boosts both subscription and ad revenue streams. For Zee, HD will serve as a nice top-up on an already strong base growth. Accelerated HD growth can present about 12% upside to our FY2020E EBITDA. Sun can have similar gains provided its ratings hold/improve. Among DTH, Tata Sky will be a key beneficiary given its premium positioning; it has 50% market share in HD. Dish TV will have to up the ante on marketing for any upside beyond what is already built in the Streets’ estimates. Cable has potential but our confidence on execution is low; our base case assumes 75:25 DTH:Cable share in incremental HD sub adds. We have BUY rating on Zee and Dish TV.
