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Dish TV
Overweight
DSTV.BO, DITV IN
Management meeting: Growth trajectory remains strong; increase PT to Rs79
We recently met with DITV management. Industry growth is exceeding
expectations, and management expects this to continue. While STB prices
have been cut, free-month offers have been reduced and customers are
migrating to higher-ARPU packs. Subscriber additions for new entrants
have picked up, although firms are maintaining pricing discipline.
• Growth outlook remains robust: Management indicated strong
growth visibility – industry subscriber additions saw a strong pick-up
in Oct. (1.45MM additions) and Nov. (1.90MM additions). Additions
are likely to accelerate with the Cricket World Cup commencing in
Feb 2011. (See appendix for a detailed World Cup 2011 schedule.)
• Customers migrating to premium packs: DITV had 55% customers
at the base ‘silver pack’ in April 10, but this is down to 20% now.
High-end Gold and Platinum now account for 50% of total customers.
DITV is withdrawing its base pack (it has stopped offering this pack to
new customers) and has raised the entry ARPU to Rs160 from Rs135.
Blended net ARPU is up from Rs139 in August to Rs144 currently;
management is confident of exiting FY11 at an ARPU of Rs155.
• New entrants seeing pick-up in subscribers: While DITV maintains
its leadership, Airtel and Videocon have seen a strong pick-up in
subscribers. Management sees firms maintaining price discipline –
while STB prices have been cut, free subscription months have also
been reduced. In our view, recent market share changes increase the
risk of potential pricing action from incumbents.
• Change in forecasts, PT: We revise our FY11-FY13 estimates and
roll forward our PT from Mar-11 to Sep-11. Our new PT is Rs79 (up
from Rs70), based on 15x Sep-12 forward EV/EBITDA. As this
implies only around 15% upside from the current share price, we
remove the stock from our Asia Analyst Focus List.
Management meeting takeaways
We recently met with the management of Dish TV (DITV). According to
management, subscriber additions for the industry are exceeding expectations, and
the growth outlook remains strong. Industry added 3.4MM subscribers in the first
two months of 4Q10, significantly higher than additions in any previous quarter.
DITV management expects the subscriber addition trend to remain strong over the
next few months, buoyed by the Cricket World Cup that will start in February 2011.
Dish TV maintains market leadership
DITV maintains its leadership position, with 32% share of total subscribers. It has
also maintained its leadership in share of incremental subscriber additions.
According to the management, Videocon has recently gained strong ground, with its
share of incremental additions running above 27% over the past few months. The
subscriber addition trend for Airtel also remains strong. According to DITV
management, firms are maintaining pricing discipline and do not see any pricing
action on account of recent shifts in customer addition trends. Most recently, players
have cut STB prices from Rs1400 to Rs899, but this has been accompanied by free
subscription months being reduced from 3-4 months to 1-2 months. While we are
cognizant of industry ARPUs having stabilized over the past 2-3 quarters, we still
believe that the subscriber addition trends need to be monitored closely. In our view,
recent gains achieved by new entrants increase the risk of incumbents reacting
through pricing measures.
Customers trading up to higher-ARPU packs
According to management, customers have been up-trading to higher-ARPU packs
offered by DITV. DITV is running promotions to encourage its customers to trade up
to higher-ARPU packs, by offering 10 days of free viewing. It is also actively
promoting its HD set top box DITV as well as multiple connections for multi-TV
households. DITV had 55% customers at the base ‘silver pack’ in April 10, but this is
down to 20% now. High-end packs – Gold and Platinum – now account for 50% of
total customers. DITV is withdrawing its base Silver pack and has stopped offering
this pack to new customers. Blended net ARPU for DITV is up from Rs139 in
August 2010 to Rs144 currently, and management is confident of exiting FY11 at an
ARPU of Rs155/month.
FY10 annual report highlights
1. HITS business wound up: DITV has exited the headend-in-the-sky (HITS)
business. As a result, its HITS-related revenues will cease to exist in FY11
(Rs624MM in FY10). Accordingly, its transponder lease rentals will also
decrease going forward (Rs961.7MM in FY10, likely to fall to Rs600MM in
FY11, according to our estimates).
2. Financial lease on set top boxes: DITV has entered into a financial lease for
leasing set top boxes. According to the annual report, the present value of the
financial leases is Rs1.25B, which is reflected under current liabilities in the
balance sheet. According to DITV management, this is a one-off transaction, and
going forward all set-top boxes will be purchased, consistent with the previous
policy.
3. Litigation related to termination of transponder lease: According to the
annual report, DITV’s subsidiary ASSL has terminated an agreement for renting
transponder space on account of exiting the HITS business. As a result, the
supplier has initiated an arbitration process in ICC International Court of
Arbitration in Singapore, claiming US$190.6MM. In addition, a separate claim
of US$15.8MM has also been made relating to the transponder agreement.
According to the annual report, both these disputes have been settled and the
arbitration proceedings will be terminated in due course. According to DITV
management, DITV is unlikely to pay any material damages to the suppliers
after the settlement.
We increase our price target to Rs79, revise our estimates
We increase our price target for DITV to Rs79 (from Rs70 earlier). Our change
reflects the rolling forward of our price target from March-11 to Sep-11. Our price
target is based on 15x Sep-12 EV/EBITDA.
We revise our earnings estimates for FY11-FY13, incorporating the FY10 balance
sheet and taking into account the exit from the HITS business. We also incorporate
higher subscriber numbers (which will entail higher capex and higher debt) into our
estimates following the recent subscriber addition disclosures. Our key operating
assumptions and earnings revision summary are shown below.
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