Following the announcement of foreign direct investment (FDI) reforms in the media sector, stocks of media companies have moved up in the last two trading days.

Broadly, potential beneficiaries of the FDI-related development include Hathway Cable and Datacom Ltd, Den Networks Ltd and Dish TV India Ltd. The proposed increase in FDI limits is expected to support the process of digitization. “Digitization requires large capex, to be supported by higher FDI limits. Surprisingly, bottom-up analysis reveals net loss of foreign, strategic investors despite digitization announcement: Star’s exit from Hathway and Ashmore’s exit from Digicable. Therefore, accrual of benefits will be dependent on willingness of the promoters to dilute and clarity on asset/ opportunity," wrote analysts from Kotak Institutional Equities on Monday.

The latest deadline for digitization covering metros (first phase) is 31 October 2012. Analysts expect the process of digitization to pick up pace following the recent announcements. Moreover, funding requirements will now no longer pose a problem.

Meanwhile, even as media stocks have seen positive action post the FDI announcement, it’s important to note that since the beginning of this fiscal year too, these stocks have outperformed the benchmark Sensex. For example, the Dish stock has already increased by 23% so far in this fiscal. For two consecutive quarters now, the company has delivered good financial results and investors are cheering that. Dish delivered strong operating profit margin last quarter and also remained free cash flow positive for successively for two quarters.

Similarly, the Hathway stock price has moved up by 34% so far this fiscal year. Analysts maintain that the company is best placed among all the MSOs or multi system operators, to fully digitise its subscriber base by the new deadline. On the other hand, the Den stock price has gone up 44% already so far this fiscal year. Den delivered strong June quarter results and the company is expected to be one of the key beneficiaries of digitization in the MSO space.

While investors seem optimistic about the prospects of these companies, the sharp appreciation also means that the stocks already seem to be capturing most of the positives at the current levels. This leaves little room for meaningful near-term upsides.