by Nikhil Pahwa and Shashidar KJ

ortel

Ortel, an Odisha-based cable and broadband provider, is looking to raise Rs 217.2- 240 crore through its initial public offering (IPO) by issuing up to 12 million equity shares of face value Rs 10 each. The price band is fixed from Rs 181 to Rs 200 per equity share.

Ortel is a regional cable and broadband provider focused in the states of Odisha, Chhattisgarh, West Bengal and Andhra Pradesh. It currently offers services in 48 towns and certain adjacent semi-urban and rural areas with over 21, 600 kms of cables and supported by 34 analog-heads and five digital head-ends.

The Last Mile Pitch

In the RHP, Ortel makes a very strong pitch of its ownership of the last mile as being a competitive advantage. It says that in comparison, in a franchise model, the Local Cable Operators can shift from one MSO to another, causing large scale customer churn. Control in a ‘last mile’ model like Ortel’s, it says, reduces risk of a large scale loss and helps in stable business operations. Apart from this, it enables the company to collect subscription revenues directly from customers, cross selling services and increasing revenues per user. As on March 31, 2014 88.02% of Ortel’s cable subscriber base is on their own ‘last mile’ network and the remaining is connected through LCOs.

Ortel acquired this last mile by entering into agreements with 486 Multiple System Operator (MSO) / Local Cable Operators (LCOs) between April 1, 2009 and June 30, 2014, resulting in an acquisition of 212,980 cable television subscribers. As a part of its ‘last mile’ connection strategy, the company intends to continue to selectively acquire from MSOs/ LCOs.

How this works: As a strategy, Ortel buys out the equipments, infrastructure and subscribers of an MSO/ LCO through a series of agreements for different stages of the transaction. Typically, the company enters into a sale deed for the purchase of the network equipments and infrastructure of an MSO/LCO in consideration of one-time payment. However, in case of buyout from the LCOs, there’s also an additional agreement with the LCO, whereby it is agreed that the LCO will assist the company  in guarding and protecting the network systems, including the equipments, cables, distribution chain and help prevent any untoward occurrence and illegal growth of connections in the operating area.

Non-compete deals with LCOs: As pert of  acquisition deals with LCOs, Ortel pays a non-compete fee to the LCOs typically at the rate of 25-30% of the monthly collection per subscriber transferred to the company.

Triple play plans: Ortel says it is capable of offering Triple play services on their network which helps them earn from multiple streams of revenues with marginal additional capital expenditure. Triple play is a combination of video, data and voice capabilities from a cable/broadband provider, and something we haven’t heard of since 2008-09, which is when it was a hot topic of discussion. Ortel says it also offers a range of services to sell cable broadband services, HD services, NVoD and other interactive video content.

Broadband plans

– Broadband ARPU at Rs 325: Bibhu Prasad Rath, chief executive officer at Ortel, said that the average revenue per user (ARPU) for the analog cable services was Rs 150, digital cable television services was Rs 190 and the ARPU for broadband subscribers was Rs 325. Rath added that 20% of the total revenues of the company comes from its broadband services.

– Internet subscription fee based revenues for FY14: Rs 25.78 crore, which grew by 4.61% from Rs 24.64 crire in FY13.

broadband-fees-ortel

– Internet hardware costs and charges: “We procure cable modems Docsis 2.0 (without home wireless) at an average cost of Rs 1,360 for installation at the customers’ premises for providing broadband services and collect a one-time connection fee from the customers. The average one-time connection fee charged for three months ended June 30, 2014 is Rs 827. Our average procurement cost for cable modems with home wireless is Rs 3,133 while the average one-time connection fee charged for three months ended June 30, 2014 is Rs 1,182.”

Majority of funds for network expansion: The  funds raised will be used expansion of the network for providing video, data and telephony services, capital expenditure on development of its digital cable services,capital expenditure on development of broadband services.

issue

– Over 50,000 Broadband subscribers: As of September 2014, Ortel had 3,88,115 retail subscribers for its analog cable television services, 74,213 retail subscribers for our digital cable television services and 58,277 broadband retail subscribers adding up to a total of 5,26,551 revenue generating units (RGUs) and provisioned bandwidth of 813 mbps.  As of June 30, 2014, broadband subscribers, digital and analog cable television subscribers were 10.78%, 14.32% and 74.90%, respectively, of the company’s total RGU base.

– Corporate broadband customers: Ortel also provides high bandwidth dedicated leased line services to corporate subscribers. As on June 30, 2014, it had 132 corporate customers with provisioned bandwidth of 813 mbps.

Strategy for increasing broadband services: (i) improving network uptime by providing for power backups at nodes; (ii) expanding to newer locations and deeper penetration in existing locations; and (iii) improving the customer service delivery infrastructure (iv) Aggressively offer bundled cable and data services.

– Leasing of Fibre Infrastructure: “As on June 30, 2014, we have leased approximately 513.86 kms of optical fibre cable network to certain corporate customers and have recently signed an agreement for further leasing a minimum 500 km of optical of optical fibre cable network.” For FY14, its revenue from leasing fibre was Rs 0.78 crore, which accounted for 0.59% of its total income.

Shareholding

– Top shareholders

shareholders-ortel

 

The promoter group, which owns MP Baijayant Panda and his wife Jagi Mangat Panda (the MD of the company)
own 64.03% of shares, and will own 26.23% once the company is listed.

“The average cost of acquisition of Equity Shares by our Promoters, Mr. Baijayant Panda, Ms. Jagi Mangat Panda, Panda Investments Private Limited and UMSL Limited is Rs 75.07, Rs 27.81, Rs 3.88 and Rs 55.98 per Equity Share (respectively)”

– Who is selling shares: Ortel received the markets regulator SEBI’s nod in November and the company had filed its draft Red Herring Prospectus (pdf) in September.

The issue comprises a fresh issue of six million shares to the public and an offer for sale of up to six million shares by private equity firm New Silk Route (NSR). NSR currently holds 33.8% of the total shares in the company and post the offer for sale will hold 7% in the company. NSR bought shares in the company at approximately Rs 103 per share in FY09, the management added during a press conference.

Other notes

– Valuation: As per the price band, Ortel’s pre-money valuation is Rs 441 crore at the lower band and Rs 487 crore  at the upper end. Post-money valuation is at Rs 550 crore  at the lower band and Rs 607 crore  at the upper end.

– Number of employees: As of June 30, 2014, Ortel has 884 full-time employees and 158 temporary employees. Ortel mentions in its risks that

Group companies: Four of Ortel’s group companies are in the same line of business. Ortel  promoter and  managing director, Jagi Mangat Panda, is on the board of directors of  Metro Skynet Limited, Odisha Television Limited, Tarang Broadcasting Company Limited and Ortel Wireless Services Private Limited.

Ortel chairman Baijayant Panda is also on the board of directors of Metro Skynet Limited. However, the RHP adds that currently, Metro Skynet Limited, Tarang Broadcasting Company Limited and Ortel Wireless Services Private Limited are not carrying out any business activities.

Income from operations: For the year ended March 31, 2014, Ortel’s total income was Rs 132.16 crore and PBDIT was Rs 45.2 crore; in Fiscal 2013 its total income was Rs 121.63 crore and PBIT was Rs  35.32 crore; in 2012 it was Rs 121.2 crore and PBIT was Rs 39.94 crore.

– Revenue split: for FY14, 58.89% of Ortel’s total revenues came Cable TV subscription fees (Rs 75.66 crore, up 12.29% YoY), 15.92% from channel carriage fees and 20% from broadband services.

– How carriage fee is determined: Carriage fees are paid to the company by broadcasters for carrying their channels and placing their channels on their preferred signal and frequency band. Carriage fees are determined by the number of households Ortel reaches, the availability of preferred frequency bandwidth, the geographic regions, and competition among television broadcasters for the preferred frequency band.

– Capability to shift to digital cable: The company mentions that even though only 16.05% of their cable television subscribers are digitsed,  their network is 100% digital ready and we possess the capability to digitise our customers on analog platform as they have invested in digital head-ends, billing systems, CAS and ‘subscriber management systems.

Cable penetration: The average cable penetration ratio (cable television subscriber base as a percentage of estimated homes passed) is approximately 50.55% as of June 30, 2014.

Set top box procurement: Ortel  procures set up boxes at a cost of Rs 1,440 for installation at customer’s premises for providing digital television services and collect a one-time connection fee per customer. The average one-time connection fee charged for three months ended June 30, 3014 is Rs 600. Ortel procures 134 equipment from reputed vendors such as Cisco Systems International B.V., Sumavision International Group Co. Limited, Irdeto B.V, PPC Broadband INC. and Shenzen Skyworth Digital Technology C.o. Ltd.