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DishTV (DITV)
Media
Good outlook, fair valuations. Dish TV reported 3QFY11 EBITDA at Rs667 mn (+475%
yoy, +34% qoq), marginally below our Rs700 mn expectation but hardly a cause for
pessimism given the emerging stage of development of the business. More important,
operating metrics were largely positive led by volume growth (1.14 mn gross, 0.93 mn net
additions) and ARPUs (Rs142; +5% yoy, +2% qoq) but for higher-than-expected churn rate
(11.6% annualized). We note the Dish TV valuation challenge given (1) emerging operating
environment and (2) high sensitivity to operating metrics. Upgrade to ADD but recommend
only for high-risk, high-reward portfolios.
3QFY11 results analysis—led by strong volume growth; high content costs, churn key negatives
We highlight that 3QFY11 results not directly comparable on a yoy basis since Dish TV was
engaged in the HITS (Headend-in-the-Sky) business on behalf of sister company WWIL (EBITDA
neutral basis), which it exited by end-4QFY10.
Dish TV reported largely in-line 3QFY11 EBITDA at Rs667 mn (+475% yoy, +34% qoq) led by
robust revenue growth (further on account of robust volume growth). However, 3QFY11
content costs at Rs1.43 bn (+19% yoy, +16% qoq) surprised negatively with EBITDA supported
by savings on account of (more) discretionary A&P expenses.
Dish TV reported 3QFY11 gross additions of 1.14 mn, ahead of our 1.0 mn expectation.
3QFY11 churn rate increased to 11.6% (annualized) but net paying subscriber addition at 0.93
mn was still ahead of our expectations.
Upgrade to ADD with TP of Rs66—rather we would discuss the Dish TV valuation challenge
Dish TV valuation is a challenging task given (1) an emerging operating environment (regulation,
taxation, competition) as well as (2) high sensitivity to operating metrics, where trends are anyway
hard to discern (except maybe volume growth); some metrics may be expected to react differently
in different stages (low churn during initial explosive volume growth stage) but are also dependent
on local market-specific conditions (relatively low churn in India may be supported by limited
competition from cable, notably in semi-urban/rural areas).
Given that uncertainty is the only certainty, we assume a higher WACC (13% versus 12-12.5% for
our coverage); unfortunately, we still offer no protection from the ‘cry wolf’ scenario on the upside,
where none of the expected risks bear fruit. Thus, we provide (1) an extensive discussion of our
key assumptions, (2) valuation sensitivity and (3) a blue-sky valuation scenario. Our ADD rating
largely reflects 50% higher transponder capacity available with Dish TV now, which reflects
(1) management initiative and (2) competitive differentiation.
Dish TV reported 3QFY11 ARPUs at Rs142/month (+5% yoy, +2% qoq) though below
our Rs145/month expectation. However, strong subscriber addition has a moderating
effect on ARPUs and management was confident of exit-4QFY11 ARPUs of ~Rs150 levels
led by pass-through of Rs10-15 increase in basic package prices.
Dish TV reported 3QFY11 content costs at Rs1.43 bn (+19% yoy, +16% qoq), ahead of
our Rs1.3 bn estimates and company guidance of 10-12% content cost inflation. Dish TV
noted higher content investments in new channels (sports, regional and movie channels).
3QFY11 other direct costs at Rs675 mn (+11% yoy, +14% qoq) are not exactly
comparable due to HITS costs included in 3QFY10 financials.
Lower-than-expected advertising expenses of Rs152 mn (-44% yoy, -14% qoq) helped
support 3QFY11 EBITDA. However, Dish TV noted higher advertising investments to
support upcoming cricket/sports season starting 4QFY11.
Dish TV reported 3QFY11 distribution expenses of Rs530 mn, largely in line with our
expectation but on higher gross subscriber addition. Dish TV has been able to command
better terms with its distributers given strong volume growth.
Dish TV reported higher-than-expected interest expenses on account of Rs80 mn LC
(letter of credit) to support higher STB imports during the cricket season.
Dish TV operating metrics and assumptions
We upgrade Dish TV stock to ADD (REDUCE previously) with revised DCF-based target price
of Rs66 (Rs57 previously). We have made the following changes to our estimates for Dish TV:
(1) Increase in our gross subscriber addition estimates to 3.3 mn for FY2011E and 3.0 mn for
FY2012E from 3.0 mn and 2.8 mn previously (increase of 0.2 mn additions in later years as
well), (2) increased churn rate to 10% for FY2011E, (3) modest 1-3% decline in our ARPU
assumptions, (4) increase in our transponder costs reflecting additional transponder capacity
contracted between FY2012E and FY2015E (already assumed for later years), (5) increase in
our content costs estimates given incremental channels on platform, (6) changes in cost
variables (distribution, subscriber management) associated with volume growth as well as (7)
DCF roll-forward. Stronger-than-expected volume growth resulting in robust margin
expansion is the primary driver of our increased valuation.
Exhibit 2 presents the summary of historical and assumed key operating and financial data
of Dish TV. We discuss the key operating metrics and our assumptions below. Additionally,
we highlight the relationships between the metrics.
Subscriber volumes. Exhibit 3 presents the strong growth in C&S households and rising
DTH penetration in India. Robust subscriber volume growth remains by far the only clear
trend in the DTH segment driven by (1) rising rural penetration (largely cable-inaccessible
areas) and (2) conversion from analog cable to digital DTH in urban areas. However, we
present two caveats as regards volume growth below.
FY2011E is proving to be very strong for the DTH segment in India, notably on
account of a phenomenal sports calendar (see Exhibit 4). Everything from a strong
international cricket calendar (T20 World Cup, ODI World Cup in 4QFY11 in India),
niche sports (FIFA football world cup) and mass sports (Commonwealth Games in
India) were on display and DTH platforms made good use of the capacity advantage
(more number of channels) versus analog cable. However, the sustainability of
growth (>10 mn sub adds) is difficult to predict. Nonetheless, we expect strong
subscriber growth to continue in 4QFY11E-1QFY12E.
Dish TV’s market share. Exhibit 5 presents the trend in DTH industry volumes and
Dish TV’s subscriber additions. Though Dish TV subscriber additions have remained
strong, its market share has dropped from ~50% (reflecting first-mover advantage)
to ~30% with entry of 4 new players in the market. The market has also expanded
to accommodate the new players, resulting in Dish TV’s absolute subscriber additions
in any given year being higher that the prior year. However, a 6-player competitive
market (FY2012E will be first full year of operation for Videocon D2H) may begin to
hurt in case industry subscriber numbers slow down
Churn rate. The annualized churn rate for Dish TV has remained within the 8-10%
region historically. However, we highlight that we are currently witnessing the initial
explosive growth phase for the industry in general and Dish TV in particular, which would
tend to depress the actual churn rate. We note the churn policy used by Dish TV –
subscriber inactive for 120 days in succession. A theoretical exercise assuming a 30-day
churn policy (churn reported in current quarter is actually the churn for the previous
quarter given 120 day recognition gap) shows that steady-state churn rate may be ~200
bps higher versus reported churn rate.
Competition. The competitive situation in India remains dynamic with a 6-player DTH
market notwithstanding the legacy dominant position of cable. Competitive intensity is
on the rise post capital infusion by strategic investors into two competing DTH operators
Tata Sky (dominant in metro markets) and Sun Direct (strong in South Indian markets;
also faced some technical issues with its satellite in FY2011E). So far, we have seen the
impact of competition largely on teaser schemes and higher SAC (entry price is down to
~Rs1,000 currently from ~Rs3,000 in one year) but action may quickly shift to pricing of
basic packages. Tata Sky has reviewed the pricing and content mix of its basic package
recently; it is difficult to compare operators packages since the content mix would be a
function of consumer preference, but Tata Sky is more competitive on regional and sports
channels and Dish TV on Hindi and niche channels.
ARPUs. We have highlighted the trade-off between volumes and pricing as well as the
impact of rising competitive intensity on pricing previously. The competition among
various DTH operators (in rural and urban markets) as well as cable (largely in urban
markets) will result in (1) strong DTH industry growth (as discussed) but (2) keep the lid on
pricing as bargaining power rests with the consumer. However, we would also like to
highlight the ‘ARPU myth’ that India is an underpriced market. We believe that given
entertainment is a discretionary service, it needs to be viewed from the lens of the ability
of households in a market to pay for entertainment.
Content and operating costs. We note that content costs at 39% of revenues are the
single-largest cost-item for DTH operators. DTH operators like Dish TV have benefitted
from fixed and semi-fixed content contracts with broadcasters given positive operating
leverage from strong subscriber growth. However, the gap between Dish TV’s content
costs and Zee’s DTH subscription revenues has increased considerably (Zee benefits from
industry volume growth given variable and semi-fixed contracts with other operators).
Additionally, we note margin pressure on broadcasters from rising cost of content (sports,
movie), which may result in demand for more compensation for their channels. Dish TV’s
legacy contracts are up for renewal in FY2012E-13E.
Transponder costs. Dish TV has contracted additional transponders on Asiasat,
which increases its channel capacity by 50% (~300 SD channels versus ~250
currently; ~35 HD channels versus ~5 currently). Though this increases cost in the
near term (with associate impact on valuations), we believe it provides competitive
differentiation (~200-250 SD channel capacity available with other DTH platforms in
India) and allows Dish TV to strengthen its HD offering, thus providing it with a firstmover
advantage in this high-value segment.
Regulations. Another feature of an emerging industry is an emerging regulatory scenario.
One does not have to look any further that the cable industry in India to realize the
importance of regulations (or the lack of them). The telecom regulator, TRAI, has been
assigned the task of regulating the broadcasting and distribution market in India but
continues to struggle with regulatory issues. Additionally, barring a couple of modest
successes, the will of the government of India has been found wanting. We discuss two
key issues hanging fire for quite some time.
Content costs. The legacy of analog cable system in India continues to be a shadow
on the DTH segment in India as well. The cable market is fragmented (~100K local
cable operators) and being analog, also un-addressable. Currently, local cable
operators declare a tiny fraction (~15%) of their real subscriber base, keeping their
content costs low. DTH being digital is also completely addressable (100% subscriber
declaration); current regulations place a cap on channel rates for DTH at 50%, which
does not provide a level playing field. TRAI had mandated a lower 35% cap instead
but it is hanging fire in the legal system.
License fees. DTH operators in India pay 10% of their revenues as license fee to the
government of India. Again, analog cable in India being a largely legacy, unregulated
system is not required to pay any license fee. More surprisingly, both TRAI and the
government of India seem to have agreed a while back that that 10% quantum of
license fee was heavy burden indeed and publically discussed reduction to 6% of
DTH revenues. We are yet to hear from them again. We assume 6% license fee in
our DCF valuation in the terminal years.
Taxation. However, license fee is just one form of taxation that the DTH industry has to
bear; the taxation burden on the industry includes service tax (by the government of India)
as well as entertainment tax (by the respective state governments), besides the usual tax
on income. The DTH industry has been crying afoul as regards the two level of taxation
(service as well as entertainment tax) at the revenue level. However, the entertainment tax
burden has only increased (~5.0% in FY2012E from 2.5% in FY2010). The only hope is
the implementation of a uniform Goods and Services Tax (GST) in India, provided
Entertainment Tax is not left out of its preview.
Blue-sky valuation and valuation sensitivity
Exhibit 11 presents our blue-sky valuation for Dish TV. We discuss the key assumptions and
differential versus the base case.
We assume steady-state (FY2015E) ARPU at Rs200/month, versus average of
Rs142/month in FY2011E and Rs186/month in our base case.
We model FY2012E-15E (initial explosive growth phase) gross subscriber addition at 3.0-
3.3 mn subs versus our assumed 2.8-3.0 mn in the base case. We assume a churn rate of
9% throughout versus 10% in our base case.
We assume a steady-state EBITDA margin of 40% versus ~17% in FY2011E and 36% in
our base case; we note that higher ARPU and subscriber base will also result in improved
bargaining power versus broadcasters resulting in higher margins.
Most important, we assume an 8X EV/EBITDA valuation in FY2015E, at the high-end of
global comparables; this implies a 20X FY2015E EV/FCF. We assume hardware (STB +
antenna) costs dropping to ~Rs2,000 from ~Rs2,500 currently. We note that the DTH
industry is highly capital intensive, and DTH operators may also be forced to subsidize
possible subscriber migration to HD.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
DishTV (DITV)
Media
Good outlook, fair valuations. Dish TV reported 3QFY11 EBITDA at Rs667 mn (+475%
yoy, +34% qoq), marginally below our Rs700 mn expectation but hardly a cause for
pessimism given the emerging stage of development of the business. More important,
operating metrics were largely positive led by volume growth (1.14 mn gross, 0.93 mn net
additions) and ARPUs (Rs142; +5% yoy, +2% qoq) but for higher-than-expected churn rate
(11.6% annualized). We note the Dish TV valuation challenge given (1) emerging operating
environment and (2) high sensitivity to operating metrics. Upgrade to ADD but recommend
only for high-risk, high-reward portfolios.
3QFY11 results analysis—led by strong volume growth; high content costs, churn key negatives
We highlight that 3QFY11 results not directly comparable on a yoy basis since Dish TV was
engaged in the HITS (Headend-in-the-Sky) business on behalf of sister company WWIL (EBITDA
neutral basis), which it exited by end-4QFY10.
Dish TV reported largely in-line 3QFY11 EBITDA at Rs667 mn (+475% yoy, +34% qoq) led by
robust revenue growth (further on account of robust volume growth). However, 3QFY11
content costs at Rs1.43 bn (+19% yoy, +16% qoq) surprised negatively with EBITDA supported
by savings on account of (more) discretionary A&P expenses.
Dish TV reported 3QFY11 gross additions of 1.14 mn, ahead of our 1.0 mn expectation.
3QFY11 churn rate increased to 11.6% (annualized) but net paying subscriber addition at 0.93
mn was still ahead of our expectations.
Upgrade to ADD with TP of Rs66—rather we would discuss the Dish TV valuation challenge
Dish TV valuation is a challenging task given (1) an emerging operating environment (regulation,
taxation, competition) as well as (2) high sensitivity to operating metrics, where trends are anyway
hard to discern (except maybe volume growth); some metrics may be expected to react differently
in different stages (low churn during initial explosive volume growth stage) but are also dependent
on local market-specific conditions (relatively low churn in India may be supported by limited
competition from cable, notably in semi-urban/rural areas).
Given that uncertainty is the only certainty, we assume a higher WACC (13% versus 12-12.5% for
our coverage); unfortunately, we still offer no protection from the ‘cry wolf’ scenario on the upside,
where none of the expected risks bear fruit. Thus, we provide (1) an extensive discussion of our
key assumptions, (2) valuation sensitivity and (3) a blue-sky valuation scenario. Our ADD rating
largely reflects 50% higher transponder capacity available with Dish TV now, which reflects
(1) management initiative and (2) competitive differentiation.
Dish TV reported 3QFY11 ARPUs at Rs142/month (+5% yoy, +2% qoq) though below
our Rs145/month expectation. However, strong subscriber addition has a moderating
effect on ARPUs and management was confident of exit-4QFY11 ARPUs of ~Rs150 levels
led by pass-through of Rs10-15 increase in basic package prices.
Dish TV reported 3QFY11 content costs at Rs1.43 bn (+19% yoy, +16% qoq), ahead of
our Rs1.3 bn estimates and company guidance of 10-12% content cost inflation. Dish TV
noted higher content investments in new channels (sports, regional and movie channels).
3QFY11 other direct costs at Rs675 mn (+11% yoy, +14% qoq) are not exactly
comparable due to HITS costs included in 3QFY10 financials.
Lower-than-expected advertising expenses of Rs152 mn (-44% yoy, -14% qoq) helped
support 3QFY11 EBITDA. However, Dish TV noted higher advertising investments to
support upcoming cricket/sports season starting 4QFY11.
Dish TV reported 3QFY11 distribution expenses of Rs530 mn, largely in line with our
expectation but on higher gross subscriber addition. Dish TV has been able to command
better terms with its distributers given strong volume growth.
Dish TV reported higher-than-expected interest expenses on account of Rs80 mn LC
(letter of credit) to support higher STB imports during the cricket season.
Dish TV operating metrics and assumptions
We upgrade Dish TV stock to ADD (REDUCE previously) with revised DCF-based target price
of Rs66 (Rs57 previously). We have made the following changes to our estimates for Dish TV:
(1) Increase in our gross subscriber addition estimates to 3.3 mn for FY2011E and 3.0 mn for
FY2012E from 3.0 mn and 2.8 mn previously (increase of 0.2 mn additions in later years as
well), (2) increased churn rate to 10% for FY2011E, (3) modest 1-3% decline in our ARPU
assumptions, (4) increase in our transponder costs reflecting additional transponder capacity
contracted between FY2012E and FY2015E (already assumed for later years), (5) increase in
our content costs estimates given incremental channels on platform, (6) changes in cost
variables (distribution, subscriber management) associated with volume growth as well as (7)
DCF roll-forward. Stronger-than-expected volume growth resulting in robust margin
expansion is the primary driver of our increased valuation.
Exhibit 2 presents the summary of historical and assumed key operating and financial data
of Dish TV. We discuss the key operating metrics and our assumptions below. Additionally,
we highlight the relationships between the metrics.
Subscriber volumes. Exhibit 3 presents the strong growth in C&S households and rising
DTH penetration in India. Robust subscriber volume growth remains by far the only clear
trend in the DTH segment driven by (1) rising rural penetration (largely cable-inaccessible
areas) and (2) conversion from analog cable to digital DTH in urban areas. However, we
present two caveats as regards volume growth below.
FY2011E is proving to be very strong for the DTH segment in India, notably on
account of a phenomenal sports calendar (see Exhibit 4). Everything from a strong
international cricket calendar (T20 World Cup, ODI World Cup in 4QFY11 in India),
niche sports (FIFA football world cup) and mass sports (Commonwealth Games in
India) were on display and DTH platforms made good use of the capacity advantage
(more number of channels) versus analog cable. However, the sustainability of
growth (>10 mn sub adds) is difficult to predict. Nonetheless, we expect strong
subscriber growth to continue in 4QFY11E-1QFY12E.
Dish TV’s market share. Exhibit 5 presents the trend in DTH industry volumes and
Dish TV’s subscriber additions. Though Dish TV subscriber additions have remained
strong, its market share has dropped from ~50% (reflecting first-mover advantage)
to ~30% with entry of 4 new players in the market. The market has also expanded
to accommodate the new players, resulting in Dish TV’s absolute subscriber additions
in any given year being higher that the prior year. However, a 6-player competitive
market (FY2012E will be first full year of operation for Videocon D2H) may begin to
hurt in case industry subscriber numbers slow down
Churn rate. The annualized churn rate for Dish TV has remained within the 8-10%
region historically. However, we highlight that we are currently witnessing the initial
explosive growth phase for the industry in general and Dish TV in particular, which would
tend to depress the actual churn rate. We note the churn policy used by Dish TV –
subscriber inactive for 120 days in succession. A theoretical exercise assuming a 30-day
churn policy (churn reported in current quarter is actually the churn for the previous
quarter given 120 day recognition gap) shows that steady-state churn rate may be ~200
bps higher versus reported churn rate.
Competition. The competitive situation in India remains dynamic with a 6-player DTH
market notwithstanding the legacy dominant position of cable. Competitive intensity is
on the rise post capital infusion by strategic investors into two competing DTH operators
Tata Sky (dominant in metro markets) and Sun Direct (strong in South Indian markets;
also faced some technical issues with its satellite in FY2011E). So far, we have seen the
impact of competition largely on teaser schemes and higher SAC (entry price is down to
~Rs1,000 currently from ~Rs3,000 in one year) but action may quickly shift to pricing of
basic packages. Tata Sky has reviewed the pricing and content mix of its basic package
recently; it is difficult to compare operators packages since the content mix would be a
function of consumer preference, but Tata Sky is more competitive on regional and sports
channels and Dish TV on Hindi and niche channels.
ARPUs. We have highlighted the trade-off between volumes and pricing as well as the
impact of rising competitive intensity on pricing previously. The competition among
various DTH operators (in rural and urban markets) as well as cable (largely in urban
markets) will result in (1) strong DTH industry growth (as discussed) but (2) keep the lid on
pricing as bargaining power rests with the consumer. However, we would also like to
highlight the ‘ARPU myth’ that India is an underpriced market. We believe that given
entertainment is a discretionary service, it needs to be viewed from the lens of the ability
of households in a market to pay for entertainment.
Content and operating costs. We note that content costs at 39% of revenues are the
single-largest cost-item for DTH operators. DTH operators like Dish TV have benefitted
from fixed and semi-fixed content contracts with broadcasters given positive operating
leverage from strong subscriber growth. However, the gap between Dish TV’s content
costs and Zee’s DTH subscription revenues has increased considerably (Zee benefits from
industry volume growth given variable and semi-fixed contracts with other operators).
Additionally, we note margin pressure on broadcasters from rising cost of content (sports,
movie), which may result in demand for more compensation for their channels. Dish TV’s
legacy contracts are up for renewal in FY2012E-13E.
Transponder costs. Dish TV has contracted additional transponders on Asiasat,
which increases its channel capacity by 50% (~300 SD channels versus ~250
currently; ~35 HD channels versus ~5 currently). Though this increases cost in the
near term (with associate impact on valuations), we believe it provides competitive
differentiation (~200-250 SD channel capacity available with other DTH platforms in
India) and allows Dish TV to strengthen its HD offering, thus providing it with a firstmover
advantage in this high-value segment.
Regulations. Another feature of an emerging industry is an emerging regulatory scenario.
One does not have to look any further that the cable industry in India to realize the
importance of regulations (or the lack of them). The telecom regulator, TRAI, has been
assigned the task of regulating the broadcasting and distribution market in India but
continues to struggle with regulatory issues. Additionally, barring a couple of modest
successes, the will of the government of India has been found wanting. We discuss two
key issues hanging fire for quite some time.
Content costs. The legacy of analog cable system in India continues to be a shadow
on the DTH segment in India as well. The cable market is fragmented (~100K local
cable operators) and being analog, also un-addressable. Currently, local cable
operators declare a tiny fraction (~15%) of their real subscriber base, keeping their
content costs low. DTH being digital is also completely addressable (100% subscriber
declaration); current regulations place a cap on channel rates for DTH at 50%, which
does not provide a level playing field. TRAI had mandated a lower 35% cap instead
but it is hanging fire in the legal system.
License fees. DTH operators in India pay 10% of their revenues as license fee to the
government of India. Again, analog cable in India being a largely legacy, unregulated
system is not required to pay any license fee. More surprisingly, both TRAI and the
government of India seem to have agreed a while back that that 10% quantum of
license fee was heavy burden indeed and publically discussed reduction to 6% of
DTH revenues. We are yet to hear from them again. We assume 6% license fee in
our DCF valuation in the terminal years.
Taxation. However, license fee is just one form of taxation that the DTH industry has to
bear; the taxation burden on the industry includes service tax (by the government of India)
as well as entertainment tax (by the respective state governments), besides the usual tax
on income. The DTH industry has been crying afoul as regards the two level of taxation
(service as well as entertainment tax) at the revenue level. However, the entertainment tax
burden has only increased (~5.0% in FY2012E from 2.5% in FY2010). The only hope is
the implementation of a uniform Goods and Services Tax (GST) in India, provided
Entertainment Tax is not left out of its preview.
Blue-sky valuation and valuation sensitivity
Exhibit 11 presents our blue-sky valuation for Dish TV. We discuss the key assumptions and
differential versus the base case.
We assume steady-state (FY2015E) ARPU at Rs200/month, versus average of
Rs142/month in FY2011E and Rs186/month in our base case.
We model FY2012E-15E (initial explosive growth phase) gross subscriber addition at 3.0-
3.3 mn subs versus our assumed 2.8-3.0 mn in the base case. We assume a churn rate of
9% throughout versus 10% in our base case.
We assume a steady-state EBITDA margin of 40% versus ~17% in FY2011E and 36% in
our base case; we note that higher ARPU and subscriber base will also result in improved
bargaining power versus broadcasters resulting in higher margins.
Most important, we assume an 8X EV/EBITDA valuation in FY2015E, at the high-end of
global comparables; this implies a 20X FY2015E EV/FCF. We assume hardware (STB +
antenna) costs dropping to ~Rs2,000 from ~Rs2,500 currently. We note that the DTH
industry is highly capital intensive, and DTH operators may also be forced to subsidize
possible subscriber migration to HD.
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