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ICRA revises rating of DEN on concerns over profitability

MUMBAI: Rating agency ICRA has downgraded DEN Networks’ credit rating a notch lower on concerns over the multi-system operator’s (MSO) decline in profitability and losses in the broadband and soccer business.

The rating on DEN’s long-term funds has slipped from ‘A’ to ‘A-‘ while for short term it is at ‘A2+’ from ‘A1’.

ICRA said that the ratings assigned to DEN’s Rs 649.2 crore (Rs 6.49 billion) bank facilities have been revised. The outlook on the long-term rating is ‘stable’.

The revision in outlook takes into account weaker-than-expected performance of DEN’s cable business (contributing to nearly 97% of the consolidated revenues in 2014–15), marked by slow growth in ARPU and resultant subscription revenues due to industry-wide on-ground challenges in digitised markets.

The decline in profitability is due to increase in content costs and ongoing opex towards rollout of digitisation in Phase III and IV markets that are yet to be monetised.

Coupled with losses of the broadband and soccer business, this has constrained the overall profitability of the company over the last few quarters, ICRA said.

While the broadband business is expected to break even over a three-year horizon, the ability of the company to divest its stake in the soccer business is critical given the investment phase of core businesses.

The ratings, however, continue to draw comfort from DEN’s healthy revenue visibility with an existing 13 million subscriber base. While Phases I and II account for nearly five million subscribers, the Phase III and IV markets comprise around eight million subscribers. The MSO has a large analogue subscriber base that is waiting to migrate to digital cable.

Moreover, over the last two years DEN has diversified into the broadband segment that offers healthy business synergies with the cable business and opportunities of offering bundled solutions to consumers and foray into TV commerce and soccer business.

Comfort can be drawn from the lower incremental investment requirements, considering significant capex has already been incurred and content deals have been renegotiated with broadcasters.

“While activation revenues are expected to support revenue growth and cash accruals in the current fiscal, over the medium term the ability of the company to improve its ARPU and subscription revenues from the digitised markets will remain a key rating sensitivity,” ICRA said.

With carriage revenue expected to be muted, dependence on subscription revenues for cable operators is expected to increase and the ability of DEN to improve ARPU will remain a key rating sensitivity, ICRA stated.

ICRA expects DEN’s broadband business to continue reporting losses in the near term (cash burn of nearly Rs 5–6 crore) as the company plans entry into new markets in the current fiscal. But the business is expected to turn EBITDA positive in 2018–19.