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Zee and CAS: A sensitivity analysis
Mar 20, 2006

Last week saw an important judgment passed by the Delhi High Court, which asked the government to implement the Conditional Access System (CAS) within 4 weeks! Now, havenít we heard that before, CAS? This service was originally intended to be launched somewhere in mid-2003 (almost 3 years ago), but for some reason or the other, the implementation of this service was postponed. Of course, during this period, CAS was launched in Chennai, where the service has seemingly got a mixed response. With this backdrop, we look at how could CAS change the scenario for the broadcasting industry in general and Zee TV in particular. CAS is basically a system that transmits television signals through a set-top box (STB) and gives the viewer the option to choose to subscribe the channels as per his/her liking and pay only for these channels. While the big advantage for the consumer here is that he pays only for what he chooses to subscribe to, for the broadcaster, this service is a boon. This is because it will take care of the under-declaration of subscribers by cable operators. As per some estimates, currently cable operators declare only 15% to 20% of their subscriber base to broadcasters, thus retaining a large chunk of the monthly cable charges collected from subscribers.

To put this in perspective, the total subscription revenues of the industry is estimated at Rs 115 bn. Of this, as much as 75% (Rs 86 bn) is retained by cable operators, another 10% (Rs 12) of by the multi-system operators (MSO) and the balance 15% (Rs 17 bn) is passed onto the broadcasters like Zee. CAS is aimed at taking care of this malpractice.

To substantiate, here is a sensitivity analysis of how the CAS regime could benefit Zee.

  FY06E Scenario 1 Scenario 2 Scenario 3 Scenario 4 Scenario 5
Total C&S homes in the country (m) 55 55 55 55 55 55
Siticables' total subscriber base (m) 8 11 22 33 44 55
% declared by cable operators 15% 20% 40% 60% 80% 100%
Zee's total subscription revenues (m) 7,000 8,362 13,114 21,034 32,122 46,378
- International 3,220 3,542 3,542 3,542 3,542 3,542
% of total subscriptions 46% 42% 27% 17% 11% 8%
- Domestic 2,942 3,236 3,236 3,236 3,236 3,236
% of total subscriptions 42% 39% 25% 15% 10% 7%
- Siticable (@ Rs 60/month/subscriber) 838 1,584 6,336 14,256 25,344 39,600
% of total subscriptions 12% 19% 48% 68% 79% 85%
% growth over current status - 89% 656% 1602% 2925% 4627%

As can be seen in the table above, subscription revenues for Zee (through Siticable) at the end of FY06 in the current scenario is Rs 838 m. This is assuming that Siticable would have a subscriber base of 8 m, which would be about 15% of the estimated total C&S homes in the country.

Now, assuming that other things remaining constant, if ONLY the subscriber declaration by cable operators goes up, as is the objective of CAS, then the revenues for Zee would increase significantly. In turn, a major chunk of the additional revenues from increased declaration of subscribers would flow directly to the bottomline of the company, as Zee would not be incurring any additional expenditure to earn this additional revenue (though the company may provide some discounts on the set-top boxes to customers). Thus, Zeeís bottomline could easily double or even triple from the current base.

However, it must be noted that the above example is based on certain assumptions as mentioned above. Moreover, while expecting a 100% declaration by cable operators seems quite difficult, a 60% subscriber declaration number seems realistic in the long-term. Further, this would be achieved only over the next 3 to 5 years and it would be naÔve to assume exponential growth to come by within the next couple of years, as the implementation of CAS would not be smooth considering the past experience on this front. Nonetheless, if and when CAS is fully implemented, it will change the scenario for broadcasters, which includes players like Zee, TV18 and NDTV.

We will update our Zee research report, incorporating any upside from the CAS regime. For now, we have a positive view on the stock from a long-term perspective.

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