FDI limit increased to 74% in DTH and Digital cable

The increase in FDI limit is positive for the MSOs and DTH players such as Hathway, Den Networks, WWIL, Hinduja Ventures and Dish TV. The timing is very appropriate - because of the ongoing mandatory digitisation drive, all cable (and DTH) companies will need to invest huge sums of money and FDI could be a possible route now. While the existing 49% limit itself was not fully utilized by any of the companies, the new rules will allow foreign entities to take majority shareholding in the cable/DTH companies and thus evince interest from large strategic investors.

Phase II to be more exciting than Phase I: India’s MSOs are small in size and scale (compared to their global peers) and the industry is too complex (with just ~20% declaration and profitability pegged to carriage revenues). We feel that strategic investors would wait to see some execution of mandatory digitisation before betting on the Indian cable sector. Thus, Phase I (the four Metros) might not see many large investments by foreign entities. Phase 2 (38 Indian towns with population greater than 1 mn) would require large investments and teething problems of Phase 1 Digitisation would have been addressed. Hence, we believe that Phase II could see exciting participation from foreign entities.

We believe that the best candidates for foreign equity infusion could be Den Networks and Incable (listed via Hinduja Ventures) on the cable side and Tata Sky and Videocon D2H in the DTH segment. Hathway Cable already has a foreign strategic investor (Providence) who would not shy from increasing its stake (if the promoters are willing to dilute theirs) to fund Phase II digitisation.

Will this unleash a wave of Consolidation? We believe that this would trigger a wave of consolidation amongst the smaller MSOs (subscriber size less than 1 mn); as any strategic investor would want to invest in a business that provides scale. We believe that the cable sector would now also attract a lot of interest from Private Equity players. Consolidation amongst the large 5 MSOs would probably be difficult; however, they would buyout/merge smaller MSOs once flushed with funds.