Reliance Communications Digicable acquisition – Growth Dilutive

RCOM has acquired >60% of Digicable, a cable TV service provider, in return for combining its DTH business into the new company to be called Reliance Digicom. The company explained that: 1) there would be synergies relating to content (currently
related to 2.5m DTH subscribers); 2) economical digitalisation of cable homes through provision of set-top boxes that can do digital cable as well as DTH (and perhaps IPTV as well); and 3) conversion of these homes gradually into broadband homes.

Can we BUY the Reliance ADAG Story ? No. Consider for instance, Hathaway Cable, a competitor to Digicable, also has a distribution reach of 8m homes, with 1.1m digital subscribers, and 0.5m owned subscribers, largely out of which we believe 0.3m broadband subscribers are drawn. Hence,broadband as a % of the total subscriber base is fairly small, and this should be no different for RCOM.

Adding to the Woes of Anil Ambani’s Fairy Tale is the ground reality that cable for broadband usage suffers from two problems (inter alia): 1) poor reliability (usually these cables hang in the air between buildings); and 2) the cables operate on shared bandwidth, and 100MB/s at the head-end does not equate to any similar speed at home.

There is already EVDO Wireless Broadband gaining exceptionally good traction in the market served by BSNL, MTS MBlaze, Reliance Netconnect+ and Tata Photon. We advise Reliance communications to upgrade the Digicable network to serve Broadband, Voice and TV. It should also consider upgrading its ~ 1mn Optical Cable Broadband business in CBDs of Tier-I cities to complete FTTH network as well.