Dish TV- Record subs addition and margin; OutPerform :: Macquarie Research

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Dish TV India
Record subs addition and margin; Reiterate OP

Event
 Dish TV reported good 3Q results that were ahead of our expectations. The
company delivered record 1.14m subscriber additions in the quarter and
improved margins to all time high of 18%. We reiterate our OP rating and see
23% potential upside to our increased TP of Rs75.

Impact
 Price hike gets reflected in ARPU. Following a price hike of ~10% on two of
its packages in late September, Dish reported ARPU improvement of 2.2%
QoQ to Rs142 (vs Rs139 in 2Q). We learnt from management that the full
impact of the price hike has not been seen in 3Q and we should continue to
see the uptick as subscriber base comes up for renewal.
 Subscriber addition momentum continues. Our positive view on the Indian
DTH industry is based on digital shift in the Cable & Satellite homes. After two
successive years of adding 8m DTH subscribers, we expect the industry to
add 12m customers in FY11. Dish TV has been executing well and we
forecast the company to have net add market share of 27%. Post 3Q, we are
raising our subscriber forecast for Dish to 3.2m in FY11.
 Tight control on advertising cost sees Dish report record margins. The
company has been able to garner record subscribers without going overboard
on ad spend. To remain conservative, we have maintained FY12E and FY13E
margins at the same level in our model and see upside risks to our estimates.
 3Q details: Dish reported revenues of Rs3,732m (up 35% YoY, up 14%
QoQ), EBITDA of Rs667m (up 475% YoY, up 34% QoQ) and a net loss of
Rs443m (vs loss of Rs452m in 2QFY11). Subscriber Acquisition Cost came in
at Rs2,142 (down 14% YoY and up 3% QoQ, vs Rs2,083 in 2Q).

Earnings and target price revision
 We factor in increased net adds market share for Dish TV leading to better
profitability and cashflow in FY12E and FY13E. (Please see Fig 1 for details.)
Our DCF derived TP moves up to Rs75 from Rs72 earlier.
Price catalyst
 12-month price target: Rs75.00 based on a DCF methodology.
 Catalyst: Uptick in subscription ARPU going forward.
Action and recommendation
 Reaffirm OP. We believe Dish TV India is an attractive way to play the
growing Indian DTH industry. In our view, the company has done a
commendable job of capturing back net adds market share without slipping on
profitability. We expect this to continue and to drive stock outperformance.


FY12E – Our subscriber addition and margin estimates are conservative
 Factoring in higher net adds market share of 27% to reflect growth. Based on the quarter’s
performance, we now expect Dish to capture 27% of the net add market share in FY12 (vs 25%
estimated earlier). We expect the total industry additions to be 12m and 11m in FY3/11 and
FY3/12, respectively. This results in an addition of 3.2m and 2.8m subscribers for Dish TV in the
next two years.
 Increase in subscription ARPU. Dish reported 3Q subscription ARPU of Rs142 after flat ARPUs
in the last five quarters. Even now, our 4Q ARPU of Rs144 is still below management guidance of
Rs150–155.  
 Factoring in higher Selling and Distribution expense. We have raised our margin forecast for
FY11 to 15.5% following the beat in 3Q. Even so, for FY12E and FY13E, we have maintained
margins as reduced advertisement expense for these years is offset by assuming increased
Selling & Distribution expense.


Valuation: DCF-derived target price of Rs75
 We believe DCF is the best way to value Dish due to the back-end loaded nature of FCF. Our
target price is based on a two-stage DCF model that factors in 4% terminal growth and 13%
WACC.
 Based on our current estimates, we expect the company to turn both FCF positive and PAT break
even in FY13.