Hinduja Ventures Ltd: High Unused Bandwidth

I have covered most of the technical details of the business of Hinduja Ventures in the earlier post on it. It has already touched 450 from last recommendation at 396. I am just pasting the old analysis again to get the complete picture.

(It is one of the biggest player in digital cable tv (Incable) and invested huge amount in next generation cable tv via satellite, HITS via name NXT Digital. MSO like Siti, Den, Hathway, Incable are still far away from realizing the full benefit of digital cable tv. People are thinking that with digitization now they are getting full revenue from Local cable operators, but it is not the case, LCO are still paying them Rs. 60-80-100 per connection (earlier it was around 30-40) and retaining the balance. Fight is still on to decide who will bill the customer and the revenue sharing. So just hold your stocks of these MSO’s as we will see the real benefit coming in the future when a more logical deal will be stuck between both.

Hinduja has launched HITS via NXT digital for catering to phase 3 of digitization covering around 5 cr subscribers by Dec-2015. Phase 3 is related to small cities (phase 4 will cover most of rural india by Dec-16) where small Local cable operators work and they lack funds to move towards digital cable from analogues. They would need huge money for digital move for having digital access system, conditional access system and subscriber management system apart from expensive hardware. HITS can save all these costs for them…so chances are big that HITS can give DTH a run for its money as DTH falters in rain, DTH can’t show local channels which are a must in small cities. Even small Goa has 13 local Konkani channels.

Actually in TV broadcasting what happens is that a TV channel like Colors uplinks its signals to a satellite. An MSO like Den downlinks the channels signals from different broadcasters from different satellites at a place in a geography (take Bhopal in MP) which is called Headend ( huge cluster of dishes, a single dish for every channel) where they are bundled together and transmitted to LCO via cables who then distributes the same to our homes. But a single Headend cannot serve entire country due to cable costs, signal weakness etc so MSO have to install Headends in the entire country ( Hinduja has around 40 Headends) which is very costly.

However in HITS things are done in a different manner, here HITS operator downlinks the channels from all broadcasters at a single earth station from where signals are uplinked to a satellite used by HITS operator, so it is called Headend in the Sky, HITS. The HITS satellite further downlinks the signals directly to LCO or MSO, who will need just one Dish type transmodulator to transmit the signal directly to consumer via cables. So need for costly Headends will be reduced greatly which will benefit both the LCO/MSO and customers. HITS operator will also handle the Conditional access system and subscriber management system on their behalf which are also very costly and there is no need to install them at every Headend as in the case of a normal MSO. I am sure this HITS can compete with DTH in phase 3 & 4 of the digitization in india.

I will cover more details on HITS later on but just today read that Hinduja has already acquired 10 lac customers in first 3 weeks of the launch. )

Its MSO business and new age television broadcasting business HITS can target huge untapped potential and become a big force. Its MSO business under the brand name of Incable with around 10 million subscribers and around 600 cr revenues is a stable business which was a profitable one continuously in the past before digitization drive in which Incable like other MSO’s have invested high amounts for providing STB’s at subsidized costs resulting in losses in past 1-2 years. Its HITS business which is operated under its another subsidiary Grant Investrade Ltd (GIL) is in its initial phases but Hinduja group has high expectations from this business and they are planning to invest around 5000 cr in next 1-2 years according to the response generated. They have already invested around 500-600 cr. They have already launched their HITS platform via brand name NXT Digital in Phase 3 of the digitization and got around 10 lac subscribers in the first 2 months of launch.

NXT Digital will offer around 500 channels in MPEG 4 format and the number of channels will be increased to 1000 with set top boxes with recording facility. MPEG-4 allows a service provider to use less bandwidth for video transmission into the home, freeing up bandwidth for other things, including more HD channels, more VoD capacity, and better broadband Internet — all important attributes to have in a competitive marketplace. 

They are expecting to get around 10 million subscribers for HITS in next 2 years. Earlier many biggies like zee via Siti cable tried their hands in HITS but only to taste failure. But now scene is different with different challenges as at that time there was no DAS system, no mandatory digitization which would make MSO and LCO to opt for a bit costly HITS although it was a great reply to DTH competition. So now I feel that HITS has all the foundations ready and it can really taste the success this time.

But in spite of these two very promising businesses, Hinduja ventures is way undervalued than most of its peers like Siti ( I am having it from 8/-), Den, Hathway. The first reason is the big investments in the books of HVL, in fact these are valued much more than the current market value of HVL of Rs. 900 cr. Lets add these investments:

A.  Shares of Indusind Bank: it is holding 2960196 numbers of shares of another group company Indusind bank. At the current prices these are valued around 285 cr. It is also holding 13416 nos. of shares of other group companies like Gulf oil and Gulf Lubricants; but I am leaving these due to small size. Another holding of 6957580 shares of Indusind Bank is pledged with banks for taking loans which are valued at around 626 cr. So total holding is 285+626=911 cr.

B.     Holding in Hinduja Leyland Finance Ltd: It is the financing arm of Ashok Leyland. Its net profit in 2014-15 is 111 cr up from 81 cr in 2013-14. So taking the growth factor and Ashok Leyland being 2^nd largest player in trucks, I am valuing it conservatively at 20 times, making it a 2200 cr company. Out of around 38 cr shares, 2 cr is held by HVL so valuing it around 230 cr.

C.    Land holdings at Bengaluru and Hyderabad: it is having big land holdings of 4.75 acre and 47 acre in Hyderabad and Bengaluru respectively which are developed by a joint venture group company Hinduja realty venture. I am valuing these around 500 cr at low end.

D.     Investments in Hinduja Energy india ltd: it is having 10% share in Hinduja energy india ltd at a cost of 187 cr which is developing power plants in india. Its 1040 MW plant at Vishakhapatnam is in final stages. Due to lack of data, I am valuing it at cost of 187 cr.

E.      Cash in the books as on 31.03.2015 was 84 cr.

So by adding A+B+C+D+E, 285+626+230+500+187+84= we are getting 1912 cr which is way higher than current market value of 900 cr. Most amazingly we are getting much valuable MSO and HITS businesses for free which are in fact valued much more than this investment part.

Hinduja ventures has around 10 million subscribers under Incable.net for its MSO business (I am leaving out potential HITS subscribers just in order to be conservative). Siti cable with around same set of subscribers is valued around 2350 cr, Den with around 14 million subscribers valued at 2000 cr, Hathway with around 12 million valued at 3400 cr. All of these have around 800-900 cr debt in the books except Den with 400 cr. So we can easily take 2000 cr value for HVL’s current Incable.net business which will make the value proposition to 1912+2000=3912 cr. And it is without any value for HITS business and without giving any value for the high growth future for MSO business which will grow at high rates due to solution of problems related to billing with LCO.

So just compare the Current market value of 900 cr to our conservative estimates of around 4000 cr indicating huge unused bandwidth. It is still a good investment at CMP of 441/- and add at every fall.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing)