T he Hindujas have started the first round of cable TV digitisation in the three metro cities of Mumbai, Delhi and Kolkata. The second phase will open up 15 more cities where IndusInd Media and Communications Ltd (IMCL), the cable TV company they own, operates. Aggression is being planned to take on 14 more cities through acquisitions, joint ventures or direct entries.

The ambitious target set is deployment of four million digital set-top boxes (STBs) on top of the 1.5 million IMCL is expecting to achieve in the first phase of digitisation. The company is also planning to own one million last mile connections in two years, up from its current base of 300,000.

IMCL, which operates its cable TV business under the Incablenet brand, will need Rs 6 billion in the new phase that will see 38 cities go digital by 31 March 2013. The company is in talks with private equity investors to raise $75 million.

“There is a huge appetite now to invest in cable TV companies. The first phase of digitisation has been successfully implemented in the three metro cities of Mumbai, Delhi and Kolkata. There is also no uncertainty now about India’s digitisation programme across the country. We should see equity deals happening in the sector,” says IndusInd Media and Communications chief executive officer Nagesh Chhabria.

Chhabria believes the cable TV ARPUs (average revenue per user) would rise to Rs 500 by 2015, while carriage income would see a 10-15 per cent drop in DAS (digital addressable systems) markets.

“In the first phase, we are looking at a 15 per cent increase and believe our ARPU would settle at Rs 225. If the ARPU is lower than this, the local cable operator will not survive,” he says.

In an interview with Indiantelevision.com’s Sibabrata Das, Chhabria talks about the changing cable TV environment and the multi-system operator’s (MSO) expansion plans.

Excerpts:

Q. Is IMCL in talks with private equity investors to raise capital for funding its cable TV digitisation programme?
We are looking at raising $75 million and have mandated Ernst & Young for this purpose. There is a huge appetite now to invest in cable TV companies. The first phase of digitisation has been successfully implemented in the three metro cities of Mumbai, Delhi and Kolkata. There is also no uncertainty now about India’s digitisation programme across the country. We should see equity deals happening in the sector.

Q. Will $75 million meet IMCL’s total funding requirement for the second phase?
We will need Rs 6 billion as we expect to deploy four million set-top boxes (STBs). We have existing lines of credit from banks for $15 million. We can further raise $10 million of new debt. So along with equity financing, we should be comfortably placed. Of course, there is concern about the weakening of the rupee, which will mean STBs becoming costlier. But we are asking our STB manufacturer to offer us a better rate so that it offsets any rise in dollar value.

Q. Hasn’t IMCL lined up vendor financing so that the pressure on funding upfront eases?
We have not gone in for that option. The Cisco set-top boxes are 15-20 per cent more expensive than ours. Our model works out cheaper for us.

Q. Isn’t your estimate of the STB requirement too high as IMCL operates in only 15 out of the 38 cities that fall under digitisation in the second phase?
It is easier now to get into new cities because there is less entry cost. You don’t have to pay broadcasters for an assumed number of subscribers as digitisation would reflect your actual subscriber base. Capital expenditure, of course, is going to be higher but there is an assured revenue model.

We plan to enter into 15 more cities and anticipate a requirement of two million STBs from the new operations. For our existing operational cities, we would need two million STBs.

Q. How are valuations getting decided?
We look at the profits made in the last fiscal and offer four times that value. The other option is to look at future profits (sans STB investment) made from the first six months of digital operations and then fix a value. But this has few takers as nobody wants to take the risk.

Q. Are you not looking at last mile acquisitions that will give IMCL direct ownership of the consumer homes without having to share a portion of the subscription revenue with the local cable operator?
We have an aggressive plan to own last mile. Our target is to own one million primary points in two years, up from our current base of 300,000. The acquisition of primary points, however, is much costlier and the price could be in the region of ten times the subscription fee. In Mumbai, this could go up to 20 times. But with digitisation necessitating billing systems, the primary points will be up for grabs.

Q. Has DTH been able to eat into IMCL’s subscriber base in the first phase?
We have hardly felt the impact. Even in the second phase, DTH will not be able to win over cable TV consumers in a big way. Since most of the cities that fall in this round of digitisation are carriage markets, the national MSOs have a presence in them. Already 10 per cent of this market is digitised by the MSOs. DTH will stand a better chance in tier III and IV towns. Acquisition of primary points in these smaller places will be a good strategy for MSOs to follow.

Q. How many STBs has IMCL deployed across three cities in the first phase?
We have already seeded 1.3 million boxes and our target is to touch 1.5 million. In Mumbai we will do 850,000 million and 0.5 million in Delhi. The progress in Kolkata is slow but it will also pick up.

Q. Is the conversion into second TV homes significant?
The demand for second TV sets is higher in Delhi than in Mumbai. But at a combined level we are talking of a 25-30 per cent conversion rate. We are working out a pricing for second and third TV sets as we have to match the DTH offers. But we are yet to ink deals with broadcasters on this.

Q. What is the kind of content deals that you have stitched with broadcasters?
We have done cost-per-subscriber deals. This works out better in the long term and is a more transparent system. We get to know our cost per box and it is easier to work out negotiations later. Our content cost would work out to 33 per cent of our subscription revenue.

We wanted to do three-year deals with broadcasters but they were not ready for it. Most of our content deals are on a yearly basis.

Q. What is the revenue share you are giving to local cable operators?
The value chain will take away 33 per cent of our subscription revenue. We also have operational costs and an investment on the STBs, but we also earn carriage or placement revenue. We are seeing a 10-15 per cent drop in our carriage deals for DAS (digital addressable system).

Q. Will ARPUs go up?
In the first phase, we are looking at a 15 per cent increase and believe our ARPU would settle at Rs 225. If the ARPU is lower than this, the local cable operator will not survive.

ARPUs for MSOs should at least be Rs 300 for them not to be dependent on carriage income. MSOs with ARPUs below Rs 300 will have to be carriage dependent.

Our forecast is that cable TV ARPUs would rise to Rs 500 by 2015. What will lift up ARPUs is HD and regional packages. Premium packages will also get sold.

Q. So are we talking of financially healthy MSOs in digitised India?
A lot on how the market shapes up will be decided over the next six months. We will know the actual seeding of boxes in consumer homes once the subscription collections happen.

Q. Will IMCL rely only on video services or there is a serious plan to pump up broadband investments?
We will be investing Rs 1 billion on broadband infrastructure in the next fiscal. We are also going to prepare for IPTV and OTT (over-the-top) services.

Q. What about launching local cable channels?
Yes, this is very much a part of the plan. Since there will be no constraints on bandwidth in the digital era, we are planning to put together 10-12 local channels, including local news. We are also looking at ad-free channels.