DEN Networks gets a boost as ICRA upgrades its credit ratings

MUMBAI: Multi system operator (MSO) DEN Networks’ credit ratings have been upgraded by ICRA for fund based- Term Loans, fund based- Working Capital Facilities, Non- fund Based- Working Capital Facilities and unallocated limits.

For fund based- Term Loans, ICRA has revised credit ratings to AA-(Stable); fund based- Working Capital Facilities credit ratings has been revised to AA-(Stable); Non- fund Based- Working Capital Facilities revised credit rating is A1+ and unallocated limits has been upgraded to AA-(Stable)/A1+.

The rating upgrade factors in the significant improvement in the credit profile of DEN emanating from a favourable change in its ownership and infusion of significant equity funds, coupled with favourable regulatory developments in its key operative segment of cable TV.

In H2 FY19, Reliance Industries Limited (RIL) invested nearly Rs. 2,700 crore (both through primary infusion and secondary market) in DEN and acquired a controlling stake (78.62%) in the company. RIL’s equity infusion of Rs. 2,045 crore led to significant improvement in DEN’s capitalisation and coverage indicators as on March 31, 2019, and significant unencumbered cash balances.

The acquisition provided RIL’s ambitious fibre-to-the-home (FTTH) expansion strategy a significant boost with instant access to DEN’s 8-million plus digital subscribers1 and its established local cable operator (LCO) network for last-mile connectivity.

The strategic importance of investing in DEN was evidenced by strong managerial oversight, with three of DEN’s eight directors being senior officials from RIL, along with integrated treasury operations.

Over the medium term, ICRA expects DEN’s focus to be on broadband expansion under the tutelage of Reliance Jio and receive need-based technical and operational support from the latter.

DEN, it noted, is also expected to enjoy significant financial flexibility, as a subsidiary of RIL, which is critical given its significant capex plans and repayment obligations over the next three years. The ratings also derive comfort from expected synergistic benefits to DEN from RIL’s large scale of operations2 and a presence across the digital and media value chain.

This would enable it to navigate the competitive pressure from other multiple system operators (MSOs), direct-to-home (DTH) and telecom players through access to funds for rapid expansion, latest technology and improved bargaining power against equipment vendors, content providers as well as enhanced financial flexibility.

According to ICRA, the company witnessed decline in operating performance during FY19 over the previous fiscal, however, favourable regulatory change in the cable TV industry are expected to drive performance over the medium term.

During H2 FY2019, the New Regulatory Framework for Broadcasting and Cable services, notified by the Telecom Regulatory Authority of India (TRAI), finally cleared major legal roadblocks and came into effect. Barring transitioning issues over a few quarters, the new tariff regime offers revenue stability and significant profitability improvement for MSOs as content cost becomes pass-through.

The rating is, however, constrained by expectations of subdued profitability and return indicators over the medium term, given RIL’s extensive broadband expansion plans, notwithstanding the competitive pressures on segment’s average revenue per user (ARPU) from telecom players (wireless broadband). This is likely to result in significant cash burn till the time synergies of scale start flowing through.

In the cable segment, while the new tariff regime is expected to be positive, teething issues are expected to continue during implementation and continued competition among MSOs, DTH players and internet-based over-the-top (OTT) services for acquiring a subscriber base.

Going forward, the ability of the company to quickly transition its cable TV subscribers to the new tariff regime and expand the presence and penetration of its broadband business, while generating remunerative ARPUs and maintaining a comfortable capital structure, shall be the key rating sensitivities.

The Stable outlook reflects ICRA’s expectation that despite near term volatilities emanating from the pay TV industry from tariff order implementation, DEN will continue to benefit from its established market position and financial flexibility from its strong parentage. The outlook may be revised to Positive if sustainable growth in profitability aided by rapid transition into new regime and monetisation of its digital subscriber base improves its financial risk profile.

The outlook may be revised to Negative if cash accruals are lower than expected, or if any major debt capital expenditure or stretch in working-capital cycle, weakens liquidity.

DEN had outstanding term loans of Rs. 394 crore as on April 30, 2019, most of which is repayable over the next three years (FY2020-FY2022). In addition, it had working capital borrowings of Rs. 58 crore as on April 30, 2019. Against the same, it had unencumbered cash and liquid investments of nearly Rs. 2,100 crore, making it a net cash company.

Additionally, the release of margin money of 15-20% against the term loans, indicated by the lenders, is expected to provide additional liquidity of Rs. 115-120 crore. The company has sanctioned fund-based bank lines of Rs. 105 crore, with an average utilisation of 56% in the 12 months leading up to September 2018, which provides adequate cushion for the existing scale of business.

ICRA derives significant comfort from the company’s strong parentage and its strategic importance to the RIL Group, which lends considerable financial flexibility towards meeting any funding mismatch. ICRA has not factored in any organic/inorganic expansion plans, which may require additional funding support.

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