Excerpts from the exclusive interview with Manish Chokhani:

Q: How lucrative is this whole cable distribution or television distribution business, you think and the prospects for DTH?

A: This is the birth of a new industry, very much like what has happened with cellular telephony. I can’t be stricken by the similarities between what happened when Bharti listed for the first time and how there was skepticism, very similar to what is happening here. There are 70 million homes currently in India which are connected to cable and this number is only going to grow in the future years and probably double over the next 5-7 years to be at least consistent with what’s happened on cellular telephony.

One can imagine that at least 50-60 million homes will be connected to digital set top boxes with the rollout of conditional access into the country as you get better quality of transmission and television. Lot of these companies, which are now coming out will be large beneficiaries of this. It will be a 6000 crore company potentially in the next 5 years and you can see about a 30-35% EBITDA margins very similar to what you have seen in telecom for companies like this. So you are potentially looking at companies which are going to make couple of Rs 1000 crore of profit getting listed and this is just the first of that nature which is coming out. This is a great time and a good space to be in.

Q: How do you value such companies? Do you take a call on what kind of cash flows would be there in 3-4 years down the line given ARPUs? Do you try and use global benchmarks and ascribe a certain value to the number of subscribers that they have?

A: Naturally it’s a combination of everything. One immediate proxy of course is that Sun TV has just announced that it did a block to a Malaysian DTH operator, effectively valuing its yet to be launched DTH business at about USD 850 million valuation and Dish for instance has already more than 2 million subscribers. So you can see where the market is getting proxy from, these are businesses which lot of foreign players will want to come in and take stakes in.

You already have Tata Sky which is unlisted as yet but which also at some point will come out and get listed. The second of course is to use the telecom analogy that lot of these businesses invests capital upfront and you don’t have apparent profits for a year or two again.

I suspect the explosion in market cap across this space for content providers and distributors will be very large. The best way to do it is to project out 3-4 years, put a number and see whether this can company potentially make a couple of Rs 1000 crore of EBITDA. Its evidence by a large block that we were able to do today, which again the promoters will put back into the company to fund its ongoing growth.

Q: Who did you place the block to without mentioning names, how many players?

A: I think it is 6-7 people where about 85% would be FIIs and minor amount with local funds. These are serious players who have seen this sort of magnification of market cap across countries and across sectors including in cellular telephony and that’s the kind of bet that people want to take here.

I suspect this will play out a bit like it happened in telephony with companies like Bharti or even Idea cellular, which is really the number 5 player now, which already has USD 6 billion as market cap, which is now fairly matured. So I think there is great fun ahead for a lot of these DTH as well as cable businesses apart from the content providers themselves who effectively will start monetizing their content now.

Q: Who sold this block of 400 crore shares?

A: It has actually come from the promoter group because for regulatory reasons they cannot make a fresh issuance for a period of 6 months until the stock is listed. So they will use this proceeds and put it back into the company to finance its ongoing growth.

Q: What kind of an ARPU growth do you see in this business aside of the whole subscriber story and the volumes story, do you think you could build a good ARPU growth story as well or pretty much like cellular telephony?

A: You will have a bit of both happening because the whole cable business is currently coming into the conditional access regime plus the content itself is getting digitized and some people are choosing free to air whereas others are choosing content.
 

I suspect the outlay is very similar to cellular in the sense that you would pay Rs 300-400 per home for connection into a set top box. The set top box itself will cost you pretty much the same as what the cellular handset will cost you. So in that sense the outlays are common except in a cell phone it is 4 people in a family which are spending presumably Rs 300-400 a month whereas here it’s a box into a house where 4-5 people can sit down and watch television together.

There is a good case for ARPUs to actually go up here to probably USD 10-11 a month, if you then take the implied EBITDA multiples which are possible to make in these businesses, valuations can be extremely high over here.

Q: A quick though on the funding plan which TISCO unveiled yesterday. Were you a bit surprised at the higher level of equity that they are using rather than debt?

A: I am actually quite pleased because when you are at the 3:1 debt equity ratio and in a business which while it looks very bullish, there are cycles over there and as a prudent businessman I would always want to de-risk by having a lot more equity as part of my component of financing rather than stay extremely leveraged. So as a passive equity shareholder a dilution hurts me in the short run.

But it makes the company a lot stronger going forward. If you take the case the dilution is on the underlying earnings of TISCO today; the implied benefits are of getting Corus and not the price at which they bought it. Presumably at some point of time they will start shipping product out from here, there could be potentially to our mind about USD 800 million incremental EBITDA there.

Q: How is the whole global equity situation panning out? Is it quite rosy for the last couple of weeks?

A: We just spoke on Friday, so nothing significantly has changed, its hard to make a bear case for India, its hard to make a staggering bull case too, so 2007 seems to be the year of consolidation. But 2008 why should we not be 15-20% higher than where we are, that’s really the summary of thoughts.