indusind media and communications ltd Management discussions

INDUSIND MEDIA AND COMMUNICATIONS LIMITED ANNUAL REPORT 2006-2007 MANAGEMENT DISCUSSION AND ANALYSIS REVIEW OF OPERATIONS: The Company streamlined its operations during the current year by successfully implementing Conditional Access System (CAS) from 31st December 2006 in two metro cities, Mumbai and Delhi. Your company had taken the lead in ensuring that CAS was remandated in terms of Delhi High court order of March 2006. Your company also successfully defended the appeals in the High Court and Supreme Court. Your company worked closely with Telecom Regulatory Authority to bring in fair and transparent CAS regulations. Your company also successfully defended broadcaster petitions, which sought to stay the beneficial CAS notifications. Your Company has signed 145 agreements in Mumbai and 110 agreements in Delhi with Cable Operators to service the customers in CAS areas of both these cities. About 1,18,000 Set Top Boxes (STBs) have already been installed in CAS zones of both the Metros. Various attractive schemes comprising of Bouquets and A la Carte channels have been launched by the Company and well received by customers. The key impact of Post CAS may initially lead to a fall in the Top line in the near future for a short period. But the bottom line will gain, as assured percentage of returns will flow in from pay channel subscription. This is because in non-CAS analogue areas broadcasters had so far been signing contracts on a negotiated declaration basis, which did not leave any margin for MSOs. Now with the new CAS regulation 30% of every rupee paid for watching pay TV will be retained by the MSO. Your Company continues to be Indias premier media distribution and Entertainment Company engaged in transmission of more than 170 digital channels as against 90 in analog mode. The Company has continued to exploit the excess dark fiber capacity out of its 6000 kms of its hybrid fiber optic network by leasing it out to major telecom companies and Internet Service Providers (ISPs). INDUSTRY STRUCTURE, MARKET SHARE AND DEVELOPMENT: According to MPA 2007 forecasts, net new digital subscribers will hit an absolute peak of 30 million in Asia by 2010 fuelled by explosive growth in China and India. Digitalization and proliferation of broadband across multiple distribution pipes will continue to fuel the consumption of video content and communication services in Asia. Asias pay TV and broadband industries will remain among the fastest growing in regional media. MPA forecasts shows that regional pay TV and broadband revenue will grow at a Cumulative Average Growth Rate (CAGR) of 11% over the next five years to reach US $ 86 billion by 2012. MPA forecasts show Indias Pay TV penetration growing from 61% of TV Homes in 2006 to reach 84% by 2011 and almost 90% by 2015. More than 37% of pay TV users will be connected to a digital network by 2015 implying 62 million digital subscribers by 2015. Significantly, MPA holds the view that cable will remain the dominant distribution platform for cable and satellite channels in India over the long term but warns that digitalization in the cable industry most gain momentum and should be supported by liberalized regulatory framework. It expects the total number of subscribers to increase to 93 million in 2010 and 106 million by 2015, implying that over 60% of subscribers in 2015 numbering 106 million customers would be viewing television through cable. The Company has taken note of the emerging technological challenges from DTH and IPTV and is in the process of drawing up a detailed plan to expand the Companys operations beyond 14 cities and also reaching out to thousands of operators and lakhs of customers through a unique partnerships programme with cable operators. Subscription revenues are projected to be the key growth driver for the Indian television industry over the next five years. Subscription revenues will increase both from the number of pay TV homes as well as increased subscription rates. The buoyancy of the Indian economy will drive the homes, both rural and urban (second TV set homes) areas to buy televisions and subscribe for the pay service. As a result of increase in both subscription revenues and thereby advertising revenues, approximately 70 new channels are being added to the existing 300 channels being beamed across Indian skies. But that is not discouraging the investors who believe that there is still room for more. Their belief is based on the fact that television as a medium has immense potential to reach a larger number of people, which no other medium can match. This has resulted in an increase in demand for content for these. Hence, the TV software market is expected to grow from the present size of Rs.8 billion to Rs. 18 billion by 2011, implying an 18 % cumulative annual growth over the next five years. REGULATORY DEVELOPMENTS: Your Company has been interacting with the Regulator TRAI and the Ministry of Information and Broadcasting to establish a transparent regulatory framework ensuring a level playing field for the incumbent cable TV industry. For tariffs for pay channels, mandatory Rental Scheme for STBs to facilitate easy availability to customers across all economic segments. The Standard Interconnect terms are already in place along with Quality of Service (QOS) specified by TRAI for delivery of services through STBs. The tariff structure for CAS areas has been fixed on the low prices - high volume similar to the highly successful mobile phone market. The second phase of CAS is likely to commence from January 2008, which would include rest of the cities of Mumbai, Delhi and Kolkatta, to be further extended to another 57 cities by May 2011 covering almost 20 million C&S Homes. Further, Broadband recommendations for cable and other sectors has been recently published by TRAI. Successful implementation of CAS in the first phase has opened up CAS connections to 3.25 million homes in Mumbai, 2.61 million homes in Delhi and 2.10 million homes in Kolkatta. OPPORTUNITIES AND THREATS: Your Company has a Global delivery model delivering signals from its centralized Headends with the Highest Homes passed through its 6000 kms of valuable resource of fibers on a long term basis for Video / Data on Internet Triple play. Our company has a distinct advantage in expanding its reach in digital transmission across 57 cities to be covered under CAS in the current year. During the year till date, two more DTH Operators, namely Sun TV and Reliance have been granted DTH licenses, thereby making four dominant players in the DTH area of operations. According to MPA survey 2006 the total number of estimated DTH subscribers in 2015 would be 15 million as compared to 106 million cable subscribers. During the year 2007 deployment of IPTV by Companies like MTNL, BSNL, Bharti, Reliance is expected to gain momentum through video signals through a triple play bundle. At the same time your Company has to gear up to the technical up-gradation of cable operators Network vis-a-vis ARPU on investment as well as the last mile addressability issue. FUTURE OUTLOOK: Your company will focus on the business synergies of the merged companies by adopting a dynamic and proactive approach. The Company intends to concentrate on co-option and/or acquisition of existing networks or entering into joint ventures with existing cable operators in cities with Cable TV advancing digital delivery systems. Its other thrust area would be Internet Broadband service, Content Aggregation and Content Creation. Plans of providing broadband service would be through consolidation through modem installation, establishing Cyber Cafes. Content acquisition will be achieved by increasing the collection of new movies to the existing libraries of CVO. Also options of taking over existing TV Serial production houses would also be looked into. Efforts would also be made to double the ARPU by increasing and blending of pay channels, FTA channels, premium channel, pay per view TV channels (PPV). For pay per view TV channels, it would not involve any acquisition but would be based on Revenue Sharing model. Your company will also offer management services to Shop24Seven India Ltd to start and grow its content aggregation business. HUMAN RESOURCES: Employees are your companys most valuable asset and believe that your companys employees are central to its sustainable success. Developing, motivating, rewarding and retaining talent at all levels, is a business priority and a key responsibility of your Companys senior Management. Your Company has a competitive team of professionals to manage its day-to-day affairs and has in place, a suitable training program to upgrade skills of its employees at regular intervals. As on 1/4/2007, the total people involved in the operations of your Company stands at 859 as compared to 745 at the beginning of the financial year. In view of the merger of In2cable (India) Ltd. and InNetwork Entertainment Limited with the company 52 employees of In2Cable (India) Ltd. and 76 employees of InNetwork Entertainment Ltd. became part of the work force of our company. During the period under review, none of the employees of your Company was in receipt of remuneration in excess of the limit prescribed under section 217 (2A) of the Companies Act, 1956 read with the Companies (Particulars of Employees) Rules, 1975 as amended from time to time. INTERNAL CONTROL SYSTEMS: Working Committee of senior and middle level executives meets on a weekly basis to review operations and also all aspects of the business of the Company. Copies of the Working Committee minutes are made available to the Committee of Directors for their perusal and guidance. Additionally, the Audit Committee meets periodically for intensive review of the fiscal performance of the Company and gives regular suggestions for streamlining processes and systems of the Company.