The outlook for the Direct-to-Home (DTH) industry in India and its valuations “may have only weakened” in the past three years, Motilal Oswal Financial Services said in a report on Wednesday. The firm engaged in the financial services said that Airtel Digital TV is “well placed” in the DTH industry that has consolidated in the past few years. The report is on the heels of Airtel on Wednesday announcing its decision to buyback 20% of its stake in Bharti Telemedia, its DTH arm from Warburg Pincus, a global private equity firm.
Bharti Airtel Now Completely Owns DTH Business
Airtel in a release on Wednesday said that the transaction is worth Rs 3126 crore with the company issuing around 365 crore shares on a preferential basis to Warburg Pincus. The telecom operator said that it will also pay up to Rs 1037.8 crore in cash as part of the transaction. It was also said that the shares issued to Warburg Pincus are at a price of Rs 600 per share.
“DTH is an integral part of our Homes strategy and this transaction is another step towards simplifying the shareholding of our customer facing businesses providing structural flexibility and ease of implementation,” Harjeet Kohli, group director at Bharti Enterprises, said in the release on Wednesday.
Motilal Oswal highlighted that Airtel now completely owns its entire DTH business and that the “transaction is at 28% premium to its previous sale.”
“This is equivalent to a loan at 8.5% interest, which we believe is not an expensive trade,” Motilal Oswal said in its report on Wednesday.
It has to be noted that in December 2017, a Warburg Pincus affiliate purchased 20% equity stake in Bharti Telemedia for Rs 2450 crores.
Multiple analysts including the Jefferies Group said that the Wednesday's announcement provides an attractive exit for Warburg Pincus in just over two years.
“But with the risk of a digital disruption, the outlook for the DTH industry and valuations may have only weakened in the last three years in contrast of a cumulative 28% return for Warburg Pincus,” Motilal Oswal said.
Bharti Airtel Set to Accelerate ‘One Home’ Strategy
In its report, Motilal Oswal also highlighted that Airtel Digital TV clocked in 17.8% growth in revenues between 2017 to 2020 financial year as compared to the 30% growth rate registered by Dish TV. However, the financial services firm said that Airtel is likely to register an 5.8% earnings before interest, taxes, depreciation, and amortization (EBITDA) growth in the current financial year. Motilal Oswal said that Dish TV in comparison is likely to register flat EBITDA in the current financial year.
According to the Indian Telecom Services Performance Indicators report released by Telecom Regulatory Authority of India (Trai) in late January, Airtel Digital TV registered 24.59% market share as on September 30, 2020. In the same period, the Trai report highlights that Dish TV India registered a 27% market share while Tata Sky led with an 32.58% market share.
“The management plans to realign all customer-facing businesses under the same holding group,” Motilal Oswal said. “This [transaction] will allow it to offer differentiated and converged solutions to customers under its ‘One Home’ strategy.”
Crucially, Gopal Vittal, CEO of Bharti Airtel in the third quarter earnings call said that the DTH industry is “attractive in the medium to long term” due to multiple reasons including the price structure in India.
“In India, you can get for about $4 to $5 pretty much 200 channels per month," Vittal said in the earnings call in early February. "So the cost of actually having this linear entertainment in the home is pretty cheap in India. That's one factor. The second factor is that if you look at the DTH industry, it's a tiny fraction of the total industry that consumes or a total set of customers that consumes linear entertainment.”
Vittal also said that “there’s still a very large and fragmented cable play that operates in India” and that the users face “poorer experience, poorer quality of response” with a cable connection.
“The price structure is such that it's a small amount to pay to get channels that you may still want to consume along with streaming services,” Vittal said. “And finally, streaming is still a niche industry in India, given that the cost structure of streaming is contingent on more broadband penetration as also then the payment for the content.”
Airtel on Wednesday said that it has created a “special committee of directors” to reorganize its “various subsidiaries to achieve required flexibility” with a focus on digital and non-telecom businesses.
“The exit, we believe, is to restructure and seek investment in non-telecom and digital entity, separately, post restructuring,” ICICI Direct said in a report on Thursday.