Nomura Equity Research on the media sector believes that that the initial seeding of STB by cable operators, which has not been backed up by proportionate increase in service infrastructure, will mean that a significant part of these subscribers can still churn away to the DTH industry in the medium term
As per the latest data release by the ministry of information and broadcasting (MIB), between 1 March 2013 and 12 April 2013, multiple system operators (MSOs) have seeded 4.45 million set-top box (STB) compared to 0.38 million STB seeded by direct-to-home (DTH) players. This highlights that, in the short term, MSOs have gained more market share versus the DTH industry which is now focussing on profitability (package price increase), cash flows (reducing subsidy on STB) and adding “value conscious” and not “price conscious” customers, which will impact churn positively.
Dish TV increased the price of its STB in February, which was followed by similar action from other players like Tata Sky in February. While some of MSOs have also increased prices (Den Network increased the price of its STB by Rs200), but clearly the differential versus DTH has increased as the DTH companies choose to position themselves as an “upgrade option”.
Nomura Equity Research in its Quick Note on the media sector believes that that the initial seeding of STB by cable operators, which has not been backed up by proportionate increase in service infrastructure, will mean that a significant part of these subscribers can still churn away to the DTH industry in the medium term.
Nomura expects Dish TV’s reported ARPU in 4Q to improve to Rs161.8 (versus Rs160 in 3Q and Rs159 in 2Q). The brokerage has factored in the following impact to arrive at this number:
Package price increase of July 2012 to be reflected partially in 4Q ARPU—The company hiked the price of its non-south pack by Rs20 in July 2012 which has been partially captured in 2Q-3Q ARPU. Nomura expects its effect to be visible in 4Q as well (building in Rs3 increase in 4Q).
Lower number of days in 4Q—As per the company, billing to customer is done on per day basis. Since 4Q will have two lesser days than 3Q (as February 2013 had 28 days), reported average revenue per user (ARPU) will be depressed by around 2.2% compared to 3Q assuming everything remains same.
Removal of free one-month subscription period for new subscribers—The company has removed the one-month free viewing period on purchase of new connection from February 2013 end (at the time of its latest STB price hike). This would have a positive impact on ARPU.
Content negotiation for FY13 between Dish TV and Media Pro was partially (around 27% as per Nomura’s estimate) completed in 3Q. The brokerage expects the negotiation to be complete in 4Q and, therefore, as in 3Q, Dish TV will pay increases pertaining to prior
FY13 quarters as well in content cost to Media Pro in this quarter.
On other hand, Zee Entertainment has not yet accounted for any incremental revenue from increase in content cost post partial competition of negotiation between Media pro (JV between Zee and Star) and Dish TV in 3Q. Nomura analysts expect Zee’s subscription revenue to be boosted in 4Q as the company will retrospectively capture increase in content revenue from Dish TV.
The brokerage expects no major surprises in the Dish TV results except that subscriber addition will be lower given that it took a lead in increasing the set top box price:
Content cost increase—Assuming 12% y-y increase in content cost as guided for FY13, the brokerage expects content cost to increase by around Rs693 million in 4Q y-o-y.
ARPU—Nomura expects the company to report 4Q APRU of Rs161.8 as it factors in the remaining impact of the July price increase, impact of fewer number of days in February and removal of one-month free subscription period for subscribers in February.
Subscriber addition—As highlighted above, STB price increase will mean subdued subscriber addition in the short term for DTH players. Nomura expects Dish TV to add 0.35 million subscribers in 4Q (versus 0.8 million in 3Q).
Strong growth in subscription revenue to continue—The brokerage expects Zee’s subscription revenue to be boosted (it will get around Rs391 million based on Nomura’s assumption of around 40% market share ) in 4Q from increase in content cost post negotiation between Media Pro and Dish TV which Zee will book retrospectively for FY13 in 4Q. In 4QFY12, Zee captured July 2012-March 2013 (nine months) revenue from Media Pro of Rs506 million. Adjusted for July 2012-Dec 2012 revenue in 4QFY12, it expects Zee’s domestic subscription revenue to grow by nearly 30% y-o-y in 4QFY13.
Management has indicated increased losses in the sports business in the quarter—In 4Q, Zee broadcast the South Africa-Pakistan (3 Tests, 5 ODIs and 2 T20s) and South Africa-New Zealand (2 Tests, 3 ODIs and 3 T20s) cricket series which will lead to higher losses in the sports business. The brokerage is building in around Rs435 million loss in sports business in 4Q.
Steady growth in advertising—The brokerage expects advertisement revenue to grow by around 15% driven by a combination of robust advertising spend especially by FMCG companies, and uptick in advertising revenue from sports.
The demerger does not in any way change the prospects of Wipro and shareholders should chose the option to get shares of a known entity that is listed on the stock market
Azim Premji-led Wipro has come out with its share sale through offer for sale (OFS) route, following approval from the Karnataka High Court and market regulator Securities and Exchange Board of India (SEBI). Wipro, India’s third largest software company, had announced that it will demerge its non-IT businesses such as consumer care and lighting into a new company and focus exclusively on IT. The board of directors approved the demerger of Wipro Consumer Care & Lighting (including Furniture business), Wipro Infrastructure Engineering (Hydraulics & Water businesses), and Medical Diagnostic Product & Services business (through its strategic joint venture), into a separate company. Wipro will remain a publicly listed company focussing exclusively on information technology. Last year in December, its shareholders had approved the scheme of arrangement between Wipro (demerged company), Azim Premji Custodial Services Pvt Ltd (resulting company) and Wipro Trademarks Holding (trademark company). The scheme was approved by the Karnataka High Court in March 2013.
The “resulting company” is a private limited company whose equity shares are not listed on any stock exchange. It proposes to carry on the diversified non-IT businesses after the effective date.
Under the scheme, each holder of equity shares of Wipro shall be entitled to receive equity shares or redeemable preference shares in the Resulting Company as follows:
(i) Resident shareholders of Wipro can choose from the following options: receive
(A) One share with a face value of Rs10 of the Resulting Company for every five shares of Rs2 each of Wipro held by such shareholder,
(B) One 7% redeemable preference share (RPS) with a face value of Rs50 of the Resulting Company, for every five shares of Rs2 each of Wipro
(C) One share of face value of Rs2 each of Wipro from transferring promoters in exchange for every one and sixty five hundredths (1.65) shares of the Resulting Company
(ii) Non-resident shareholders of Wipro, excluding holders of Wipro ADSs, shall receive
(a) One share with a face value of Rs10 in the Resulting Company for every five shares of Wipro held by such shareholder and
(b) One share of face value of Rs2 each of Wipro from transferring promoters in exchange for every one and sixty-five hundredths (1.65) shares of the Resulting Company
What should you be doing if you are a Wipro shareholder?
While TK Kurien, CEO, IT Business and executive director claims that “Creating a technology-focused company will allow us to better serve the needs of our customers, and accelerate investments necessary to capitalize on market growth opportunities”, you must remember the demerger does not in any way change the propspects of Wipro.
Suresh Senapaty, CFO and executive director, Wipro says, “The businesses of Wipro Enterprises are diverse, and this demerger gives them an opportunity to pursue their independent growth plans. I believe the demerger scheme reflects a high standard of governance, transparency and fairness for all stakeholders”. Once again, this will not change the prospects of Wipro.
According to us, Option A is the worst of the lot. Here is why…
1. You will be stuck with the shares of an unlisted company, which may not be the best in its field.
2. The “Resulting Company” itself will be a diversified company. What is the connection between lighting, soap and medical equipment? None.
3. This the also less profitable part of the business. The IT business contributed approximately 86% of revenue and 94% of profit, before interest and tax.
Option B is no better because you are getting only redeemable preference shares, which will be converted into the shares of the unlisted resulting company at an unkown valuation at a future date.
Option C is the best option. You get the shares of a known entity, listed in the stock market. You can exit when you want to.
Now, here is the final suggestion. Either now or later (after you have got more shares of Wipro under Option C), sell them and buy shares of TCS. TCS has a much better exposure to the IT sector than Wipro, which is struggling to grow.
Nomura believes the most damaging provision of the US Immigration Bill for Indian IT remains the restriction on outplacement of H1 B visa holders at client locations, which hurts outsourcing in a big way
Nomura Equity Research hosted a conference call on Tuesday, with Ameet Nivsarkar (VP,
NASSCOM) to understand how the new immigration bill unveiled by the “gang of eight” US senators could potentially impact India’s IT industry. The proposed Immigration Bill aims to reform border security, employment verification, legalization of illegal immigrants and legal immigration and temporary visas.
Key negatives of the proposed Immigration bill
1. No access to visas from 2015 for employers who have high share of foreign staff: According to the Bill, in 2014 companies will be banned from obtaining further visas if more than 75% of their staff are H-1B or L-1 employees. In 2015, the ban applies to companies if more than 65% of their workforce is H-1B and L-1 workers. In 2016, the ban moves to 50%.
Most Indian IT companies have 50%-80% of their staff as H-1B or L-1 visa holders currently, according to Mr Nivsarkar.
2. Reduced ability to place employees at customer site: According to the Bill, “an H-1B-dependent employer may not place, outsource, lease, or otherwise contract for the services or placement of an H–1B non-immigrant employee”. This means that employees on H1B visas may be restricted from working at the customer sites, although they can work from global delivery centres. This would require a business model change for Indian IT companies and raise the cost on onsite staffing for projects, according to Nomura.
3. Increased visa fees: The bill proposes to significantly increase the fees for employers who are H-1B dependant compared to normal users of the program. Specifically, if the employer has 50 or more employees, and more than 30% but less than 50% of staff are H-1B or L-1 employees (who do not have a green card petition pending), the employer must pay a $5,000 fee per additional worker in either of these two statuses. Similarly, if the employer has 50 or more employees, and more than 50% are H-1B or L-1 employees (who do not have a green card petition pending), the employer must pay a $10,000 fee per additional worker in either of these two statuses.
4. Increased lead time for hiring: The bill stipulates that employers post a detailed job opening on the Department of Labour's website for at least 30 calendar days before hiring an H1B applicant to fill that position. This would increase lead times for execution and would reduce competitiveness of Indian IT compared to MNC IT, Nomura believes.
Key positives of the Bill:
1. Higher H1B cap limit: The Bill proposes to raise the cap of 65,000 H1B visas (annual) to 110,000 which could go to as high as 180,000 in future years. This is a positive as against the current cap of 65,000, there were around 125,000 visa applicants this year—this forces the Immigration authorities to resort to a lottery system to decide who will receive visas.
2. Green card reform: The Bill proposes to exempt certain categories of skilled labour from annual numerical limits on employment-based immigrants—e.g. doctoral degree holders in STEM (science, technology, engineering, and mathematics) field would be exempted. In addition, 40% of the worldwide level of employment-based visas would be allocated to a certain set of people which include holders of a master’s degree or higher in a field of science, technology, engineering or mathematics from an accredited US institution of higher education.
According to Mr Nivsarkar, the Bill has been introduced in the Senate and it will first go to a judiciary committee and post that a mark-up committee. At every stage there could be amendments. Post that it is put to vote in the Senate and has a high chance of being passed there since the ruling Democrats have a majority.
If passed in the Senate, then the Bill is sent to the House where it goes through the same process. The final compromise bill, which has amendments from both Senate and the
House, is sent back for vote one more time at the Senate and House. If passed, it will then be sent to the president who can either sign it into a law or veto it. There is a possibility for the language to be changed at every stage.
If everything goes fine, the Bill can be made a law by October 2013 at the earliest, according to Mr Nivsarkar. The Bill, however, has less chance of being passed at the House since Republicans have a majority there. As well, Mr Nivsarkar noted that the bigger concerns in the Bill are around the fate of the 11 million illegal immigrants and not temporary work visas.
According to Mr Nivsarkar, the Bill, if passed, would require a change in the way Indian IT does business currently. Indian IT will have to consider one or a combination of the following options to continue doing business normally:
1. Acquire companies based in the US and increase local staff percentage.
2. Start onsite development centres in Tier2/Tier-3 cities, where costs are lower,
3. Tweak the onsite offshore model so as to increase offshore proportions.
Mr Nivsarkar thinks the Bill creates an unfair advantage for MNC vendors against Indian IT players. This is as they would already be in compliance with the 50% local staff provision and hence will not have to do material local hiring or bear increased visa fees with which the Indian IT would have to contend.
Top five Indian IT players which secured around 29,000 H1B visas in 2012 (Cognizant Technology Solutions – 9,281, TCS – 7,469, Infosys – 5,600, Wipro –- 4,304, HCL Technologies – 2070) compared to around 6000 for MNC players (Accenture – 4,037 and IBM –1,846).
Rejection rates continue to remain high especially for L1 and B1 visa and there has been no material decline in the same, even after the US elections, says Mr Nivsarkar.
Nomura believes the most damaging provision for Indian IT remains the restriction on outplacement of H1 B visa holders at client locations, which hurts outsourcing in a big way. This would be followed by the need to comply with the 50% local staff requirement by 2016 in terms of severity. For most of tier 1 IT, it would not be a stretch to meet the 2015 target of 35% local staff in the US. The brokerage believes the visa fee increase of usd10,000 per incremental application for companies having less than 50% local staff, is a minor depressant on margins and could also be potentially passed on to clients. Overall passage of the bill in the current form would be negative for the sector and weaken competitiveness versus MNC IT players and depress margins.