MANAGEMENT DISCUSSION AND ANALYSIS

Almost three years after the cable digitisation drive in India began, the Cable & Satellite (C&S) segment of the Media and Entertainment industry has many changes on its landscape. Of the total C&S subscriber base of 149 million, over half or approximately 79 million are receiving signals digitally, as at the end of CY 2014. These figures are expected to rise considerably once the transition to digital is complete and both MSOs and Direct To Home (DTH) operators will stand to benefit in the new scenario as customer value propositions and paying ability are more optimally tapped.

Another revolution that brsents itself as a great opportunity before MSOs is the data traffic explosion that has erupted with the smart phone penetration in India. It is estimated that while mobile data traffic is growing at around 60% YoY across the globe, in India it is far higher at approximately 100% on a YoY basis. A bulk of this data usage, despite being through mobile phones, takes place through Wi-Fi networks that are linked to cables. As a result, well placed MSOs are in a good position to tap the large latent demand for broadband.

With considerable investments already in place during Phase I and II of the digitisation mandate and as the largest Indian cable MSO, with a cable universe of 11.8 million and 0.46 million broadband subscribers, we are ready to ride both waves - cable digitisation and data traffic explosion - and benefit from them.

DIGITAL CABLE

Industry Overview

With Phase I and II of cable digitisation complete, India has an estimated digital C&S subscriber base of around 149 million, as at the end of CY 2014. In order to provide adequate time for the manufacture of set-top boxes locally, the government has relaxed the deadline for Phase III and IV to December 2015-16. Accordingly, nationwide digitisation will become a reality only by the beginning of CY 2017. The growth opportunity and investments requirement until then are enormous.

Since the advent of digitisation, there has been a continuous increase in net realisations for pan-India MSOs during Phase I and II. The net ARPU for cable MSOs in these cities has increased from Rs. 10-15 earlier to Rs. 80-100 at brsent and is still on the rise as gross billing gets implemented in more cities. It is expected that by FY 2018, net ARPU could reach approximately Rs. 120 for pan-India MSOs, translating into a growth of 300-400% over FY 2014 ARPU of Rs. 24-40. This will be driven by a combination of an increase in the proportion of digital subscribers and better monetisation as well.

Business Overview

Of our cable universe of approximately 11.8 million at brsent, the current digital subscriber base of around 8.5 million comprises about 2.4 million Phase I, 4.3 million Phase II and 1.8 million Phase III and IV subscribers. Accordingly, we have already made significant investments towards capturing the digitisation opportunity as is apparent from the fact that a lion's share of 7.1 million of the 11.8 million subscriber universe is from Phase I and II. Further, we have a diversified operational brsence in 160 cities and towns across 20 states and a market share of 30-85% in the top 15 Phase I/II cities.

Our current net exit ARPU from Phase I stands at around Rs. 100/month and at Rs. 67/month from Phase II monetisation. In addition, with a dominant brsence in the Phase I metros of Mumbai, Delhi and Kolkata, we enjoy one of the highest Carriage and Placement (C&P) yields per universe subscriber in the industry.

Looking ahead, we expect a significant rise in net content cost from digitised subscribers. As the proportion of digitised subscriber's increases, we expect net content costs to increase too.

BROADBAND

INDUSTRY OVERVIEW

While India has 252 million internet connections, 187 million are on 2G wireless, 46 million are on 3G/4G wireless, while only a small fraction are wireline based. Of these wireline based connections, barely 5% or a total of less than 1 million subscribers are via cable. Since wireless tends to be the brferred mode of connectivity due to infrastructure bottlenecks, it brsents MSOs focussed on the broadband segment with a huge untapped opportunity, especially in the home segment as the wireline household penetration stands at less than 8%.

At the same time, the broadband segment in India enjoys a steady-state margin of 35-40% which is superior to the 20-25% achieved by cable TV. This is due to the fact that the broadband business is incremental in nature and requires much lower revenue sharing with LCOs than cable TV and no pay-outs are due to broadcasters, etc.

With DOCSIS 3.0 technology, which provides speeds of 50-100 Mbps, being deployed by leading MSOs like ours and better steady-state margins, the ARPU for the broadband business, is expected to increase tremendously .

Business Overview

We continue to be the largest broadband player in India in the cable broadband market with a 40% share of the cable broadband market and a 2% share of wireline internet connections. Our networks pass approximately 2.3 million homes. We leverage ourstrong and extensive brsence in the cable TV market, which has become the foundation for our internet initiatives.

Post the launch of our high speed DOCSIS 3.0 technology-based internet service in October 2013, we have already upgraded approximately 20% of our subscriber base to this service, which offers speeds of 50 Mbps at competitive price points. This has resulted in better subscriber retention and boosted ARPU too.

Performance Review

The standalone operating revenue of the Company for the year ended March 31, 2015 stood at Rs. 1,023.5 Crores, which rebrsents a growth of 4.4% over the brvious year. The EBITDA was at Rs. 139.4 Crores (brvious year Rs. 191.9 Crores).

The consolidated operating revenue was Rs. 1,831.6 Crores (brvious year Rs. 1,583.3 Crores), up by 15.7%, and the EBITDA at Rs. 259.9 Crores (brvious year Rs. 309.8 Crores). The consolidated PAT loss stood at Rs. 174.5 Crores (brvious year PAT Rs. 140.7 Crores).

Key Growth Drivers

Significant investments already completed in Phase I and II

With almost 60% of our subscriber universe already digitised in Phase I and II, we have already completed a bulk of investments towards the digitisation opportunity and can now look forward to reaping the returns on that investment.

Higher C&P driven by a diversified brsence in HSM

While we enjoy a dominant market share across several metros, including the high profile Phase I cities of Mumbai, Delhi and Kolkata, we have also expanded our universe by further consolidating our brsence in the Hindi speaking markets (HSM).

Value-Added Services & Bundling

Value-added services such as HD, VoD and niche channels are expected to continue to be key revenue drivers in the future. Hathway has developed the necessary backend infrastructure and ecosystem for the roll-out of these services. It currently offers 30+HD channels on its network and bundled services (Cable TV + HD + Broadband DOCSIS 3.0) to its customers. This acts as a barrier to customer churn.

Branding and Customer Service

Over time, customer service, brand identity and value have become critical differentiators among the industry participants. Brand Hathway is well established in the minds of consumers in several pockets and hence, we are potentially well placed to ensure 'consumer mind-space'.

HUMAN RESOURCES

We have successfully transitioned from a B2B to B2C player. This requires a completely different customer interface, which can be done only by leveraging quality human resources that enhance our customers' experiences.

The talent sourcing drive that we started a couple of years ago, continues to gain momentum during the year as we went on to recruit additional human resources with experience in the telecommunications and media space. This has enabled us to secure our leadership position as the digitisation process picks further pace. Nearly 2,000 employees (including employees on contract and sub-contract basis) were added during the year. With that, the total employee count crossed 4,700 for the year ending March 31, 2015.

Various initiatives have been undertaken during the year to restructure and retrain our in-house human resources towards making the organisation more customer-centric.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Company's objectives, projections, estimates and expectation may be "forward-looking" within the meaning of applicable laws and regulations. Actual results might differ materially from those exbrssed or implied.