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WWIL: Long way to ‘HIT’ breakeven

Nov 6, 2007

Performance summary
  • Topline grew 3% QoQ on the back of 12% increase in subscriber related income

  • Operating expenses decline marginally despite 23% QoQ rise in staff costs.

  • The operating loss was 8.2% of sales compared to the 12% in the previous quarter

  • The net loss after tax increased by 19% QoQ.

(Rs m) 1QFY08 2QFY08 Change
Net Sales 616 635 3.1%
Expenditure 690 687 -0.3%
Operating profit -74 -52  
Operating profit margin (%) -12.0% -8.2%  
Other income 36 38 5.3%
Depreciation 73 77 4.2%
Interest 85 93 9.9%
Profit before tax -196 -184  
Exceptional items 0 55  
Tax 7 -12 -266.2%
Profit after tax -203 -227 11.8%
Minority Interest 1 16 1390.9%
Net Profit after Minority interest -204 -243  
No of shares (m) 21.7 22.6  
Diluted earnings per share (Rs)* -9.39 -10.77  

What is the company’s business?
WWIL is the largest Multi system operator (MSO) in India. It offers digital cable (CAS), analog cable services in alliance with the local cable operators (LCO’s). It is present in the 43 cities of India. It operates through a set of more than 4,000 local franchisee operators. It plans to rollout in 66 cities within 3 years. WWIL is preparing to roll out Headend in the Sky (HITS) technology in the country, which would make it the first MSO in the country to do so.

What has driven performance in 2QFY08?
Increase in subscriber related income: Subscriber related income has increased by 12%. WWIL has the largest market share in the 3 CAS markets of Mumbai, Delhi and Kolkata. The company is offering 192 channels on its digital platform, which is among the highest number of channels offered by any MSO.

The penetration of CAS and DTH services in the CAS notified areas has been only 50%. The penetration has been low due to the piracy of signals. The broadcasters and then MSOs are requesting the media regulator TRAI to extend the rollout of the CAS services throughout the city so that the piracy of signals can be curbed and the penetration levels can be increased. The sale of set top boxes in CAS notified areas was high initially as the early adopters belonged to the higher socio economic class. The sales have reduced as people belonging to the lower income group are hesitant to opt for set top boxes and cable signals are available even without a set top box due to piracy. Many viewers in non-CAS areas are also opting for digital cable services on a voluntary basis. WWIL is also entering into more alliances with local cable operators in order to increase its subscriber base.

Revenue break up
(Rs m) 1QFY08 2QFY08 Change
Subscriber related income 514 574 11.7%
% of operating revenues 83% 90%  
Sale of set top boxes 56 17 -69.6%
% of operating revenues 9% 3%  
Other operating revenues 46 44 -4.3%
% of operating revenues 7% 7%  

Increase in carriage fees: The capacity of most of the television sets to beam channels is less than 100. However, more than 100 channels are telecast in India. Besides, viewers mostly watch only the first 40 channels telecast on their television sets. Hence it is very important for the broadcaster to make available his channel in the right frequency band to the viewer. The placement of the channel is in the hands of the local cable operators and the Multi System Operators (MSOs). The broadcasters pay fees known as ‘carriage fees’ to the local cable operators, so as to ensure the right frequency band for the channel. The entry of many new channels during this year has helped in increasing income from carriage fees. During the second quarter, carriage fees for WWIL have grown 35% YoY compared to first quarter of this year.

Operating costs break up: The cost of goods and services (content cost), which increased by 8.4% compared to the previous quarter. However the administrative expenses and the selling and distribution expenses declined by 52% and 23% respectively. Thus operating costs as a percentage of sales declined from 112% to 108%.

Cost break up
(Rs m) 1QFY08 2QFY08 Change
Cost of goods and services 522 566 8.4%
% of sales 85% 89%  
Staff cost 48 59 22.9%
% of sales 8% 9%  
Administratative expenses 103 49 -52.4%
% of sales 17% 8%  
Selling and distribution expenses 17 13 -23.5%
% of sales 3% 2%  
Total operational costs 690 687 -0.4%
% of sales 112% 108%  

What to expect?
The roll out of Headend in the Sky (HITS) technology in the country would allow WWIL to provide high quality digital services reaching out to a pan India viewership base. HITS would be offered directly to the consumers as well as in association with the local cable operators. The company would be incurring a one-time capex of Rs 200 m for this purpose. It is also preparing to rollout its digital services and a sophisticated service network to a larger national market, which is beyond the notified CAS areas. It also plans to enter into alliances with more local cable operators. These initiatives would help the company to increase its subscriber base going forward. The potential market for MSOs is huge in India. There are expected to be 89 m homes connected to cable by 2011 (except DTH). The ARPU is expected to be Rs 470 and the operating margin is expected to be 25% translating into an industry-operating margin of Rs 125 bn. WWIL is expected to be a major beneficiary the strong momentum in this sector.

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