Edelweiss securities values Star India at $14.3 billion

STAR India (STAR), India’s largest broadcaster, has been the undisputed leader in the Hindi GECs and is among the top players in almost every other genre. Recently, Edelweiss Securities Ltd. had pegged the company at USD 14.3 bn (including losses in sports business). Star is currently unlisted but if listed, it can become largest media company in India, and 2.5 times more valuable than Zee.

“As per our calculations (based on publicly available data), if Star gets listed on the bourses, its enterprise value (EV) could potentially be $14.3 billion and (it could) become India’s largest media company,” Edelweiss Securities Ltd said in a report.

Edelweiss has valued Star on SOTP (sum of the parts) basis for its valuations. Star’s entertainment business has been valued at Rs 633.60 billion, Hotstar at Rs 102.45 billion, and the sports business at Rs 180 billion.

“We expect Hotstar to garner revenues of over Rs 1,000 crore (Rs 10 billion) in FY20. Considering the high growth potential of the OTT platform, we valued Star’s Hotstar business at 15xEV/sales at FY20,” Edelweiss said in its report.

STAR is expected to deliver EBITDA (including sports losses) of USD 500 mn by FY18 and USD 1 bn by FY20 (~9.5x of FY14) which reflects strong business model of STAR and gradual transformation underway in subscription revenues. Star’s entertainment segment has been valued at 33x FY16E EV/EBITDA. The company is reinvesting 100 per cent of profits generated from entertainment business in building its sports businesses after acquiring ESPN Star Sports (ESS).

“Such investment in sports business is likely to phase out from FY16, leading to substantial jump in EBITDA growth in ensuing years. EBITDA margin for the company has fallen from 21 per cent in FY10 to 9.4 per cent in FY14 due to heavy sport losses,” the report said.
The company’s recent acquisition of MAA TV (second largest Telugu GEC) will bolster presence in South India.
Over long term, STAR could make disproportionate gains from: (i) investments done in sports; (ii) aggression in Hotstar; and (iii) huge capital from parent, 21st Century Fox. Longer term risk for listed peers is Star’s ability to get higher share of subscription revenues (given much stronger sports bouquet) and likely share gains in South India.

STAR broadcasts through 51 channels in 8 languages. Star Plus remains market leader for past many years in the Hindi GEC space. STAR’s EBITDA from entertainment business is expected to be ~USD 300mn in FY16. Foray in Telugu region through acquisition of MAA TV will further bolster growth. Edelweiss Securities expect STAR will continue to focus and increase investments in Tamil region (market share of ~15% in Tamil region versus ~65% market share of Sun TV). Increase in original programming hours, new HD channel launches and robust ad growth bode well for STAR’s entertainment business, said the financial broking firm in its report.

Ad rates and revenues

STAR clocked 31.2% revenue CAGR during FY09‐14, driven by 27.2% advertising CAGR during the period. Recently, lower crude prices have boosted gross margins of FMCG companies, which are being ploughed back into advertising. Rising competitive intensity and funding in ecommerce companies have seen a spurt in advertisements. FMCG contributes ~60% of the ad revenues, while ecommerce accounts for 10% for STAR. We believe STAR is better placed (numero uno in Hindi GEC) to charge premium ad rates due to higher demand for prime time slots, the company stated in a report.

Star Plus was launched in February 1992 first as an English GEC showing international content. The agreement between STAR and ZEE prohibited the former to launch a Hindi GEC. However, the agreement was short-lived and STAR Plus, a 100% GEC was launched by 1997. By 2001, it was the country’s number one Hindi GEC and since then has maintained its leadership position.

Sports and OTT

“STAR is committed to spend ~INR200 bn over coming years on its sports network to fuel expansion of sports coverage in the country and building new sports leagues. The company’s Pro Kabaddi League (viewership next only to Indian Premier League - IPL) is a big success. It has also enhanced focus on its digital platform, Hotstar, offering 40,000 hours of content available in 8 languages through entertainment, movie and sports channels. STAR also produces exclusive content for its digital platform,” as per the report.

The sports business which constitutes 25 per cent of Star’s revenues, will start generating profits after five years as per Edelweiss Securities Ltd. “Though sports segment is loss making, we believe it will start generating profits after five years. Star has invested in developing the sports ecosystem in India, which we believe will benefit in the long run. Further, Star has won most of the broadcasting rights to India cricket matches, which will help the company to promote other sports like kabaddi, soccer and hockey. We believe that sport business should be valued based on content, investments in league and the OTT platform being used for sports. Star is present in all the three areas, thus giving it an edge over competition,” the report said.

Subscription

STAR reported 42.6% subscription revenue CAGR during FY 14, aided by sports and expansion in southern India (STAR acquired Asianet Communication in 2009 and MAA TV in

2015). Regional channels contribute 15‐20% to the company’s overall revenues from entertainment and movie channels. We expect acquisition of MAA TV will further bolster STAR’s FY16 top line by INR 3bn, as per the report.

STAR One rebranded as Life OK

The channel was launched in November 2004 and gained popularity in 2005 and 2006 due to 2 exciting shows – The Great Indian Laughter Channel, the nation‐wide search for the best comic talent and Nach Baliye, a dance competition featuring popular celebrity couples.

Thereafter, the channel started losing appeal. It continued to struggle in the 30-45 GRP range since its launch and was clocking ~INR750-800mn revenue per year for STAR. The channel had a niche appeal and focused mainly on the youth. STAR wanted the channel to compete with other GECs and in December 2011, STAR One was rebranded as Life OK. Since then the channel has been doing well and currently occupies fourth position in the Hindi GEC Pay TV space after STAR Plus, Colors and Zee TV.

HotStar

In February 2015, STAR officially launched HotStar, its new mobile and online entertainment destination for television shows, movies and sports content, which achieved 20mn downloads in 4 months after launch. Initially, it was intended to serve as a mobile application that would support streaming of the Cricket World Cup with some entertainment content. However, HotStar expanded its offerings with 40,000 hours of content available in 8 languages through STAR’s entertainment, movie and sports channels. Hotstar is an advertising video on demand model. Hence all its content is available for free. Apart from content available on television, which can also be seen on Hotstar, STAR also creates original content for the digital platform. Some of it will air on TV at a later stage. Hotstar alone has over 100 advertisers, which may help STAR get a bite of digital advertising.

“We believe STAR will be able to avail early mover advantage as the OTT (non‐linear viewing) market picks up. Later on, STAR can re-evaluate its decision to shift from advertising video on demand to subscription video on demand model,” the report said.

Regional Bengali and Marathi channels

“The Bengali channels are a roaring success despite being pitched against the larger and more popular Hindi channels. Strong investment in content has seen Bengali channels garnering bigger share of eyeballs in West Bengal than the Hindi channels. STAR Jalsha, launched on September 8, 2008, created history by getting highest television ratings compared to other competing Bengali GECs since its debut. STAR Jalsha continues to lead the Bengali GEC market with ~45% market share among the top‐5 non‐news channels. STAR Pravah, a Marathi language GEC, was launched in 2008. ZEE remains leader with ~40% market share among the top‐5 non news channels and STAR Pravah has consistently maintained its ~10% market share in the region,” the report stated.

“We also looked at global sports companies for get better grip on valuation. Globally, ESPN, a multimedia sports entertainment company that operates eight domestic television sports networks, is unlisted but part of listed The Walt Disney Company. As per industry sources, ESPN is valued at USD50bn. ESPN has clocked revenues of USD11bn in CY14. Hence, ESPN is trading at 4.6x EV/sales. In OTT, we believe STAR’s Hotstar will continue to be based on advertising revenue model over medium term. Globally, Netflix (works on a subscription-based video on demand model) is trading at 10x EV/sales. To value Hotstar, we considered 4 important factors: 1) Hotstar is the proprietary digital service of STAR; 2) It has proprietary marketing channels. STAR is promoting Hotstar using its cable channels; 3) STAR owns the proprietary technology of Hotstar; and 4) digital advertising is picking up. With the pickup of digital advertising, we believe Hotstar, if successful can potentially start clocking more than half of Youtube’s revenues by FY20 (Youtube currently clocks ~INR8bn advertising revenues in India). We expect Hotstar to report revenues of ~INR10,000mn in FY20. With high growth potential in OTT platform, we valued STAR’s Hotstar business at 15x EV/sales at FY20,” according to report.