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DishTV (DITV)
Media
Something better than nothing. The honorable Supreme Court, in a case involving
DTH operators, C&S broadcasters and sector regulator TRAI, has set a cap on wholesale
tariff rates paid by DTH operators to C&S broadcasters at 42% of ‘analog’ cable versus
50% previously. This is moderately positive for Dish TV as ~20% of its content deals will
be reprised downwards; however, remaining ~80% of fixed fee content deals are
already favorable and remain unchanged. Reiterate ADD with revised TP of Rs70 (Rs65
previously); however, expansive valuations led by street’s high expectations leave little
room for upside (or disappointment, as seen from yesterday’s reaction).
The chronology of DTH tariff orders: From 50% of analog cable rates to 35% to 42%
Historically, wholesale tariff rates paid by DTH operators to C&S broadcasters have been capped
at 50% of analog cable rates. In July 2010, TRAI notified a new wholesale tariff structure for
digital, addressable systems (digital cable/DTH), reducing the cap on the wholesale tariff rates to
35% of analog cable rates, effective CY2011.
However, the broadcasters challenged the said new wholesale tariff order in TDSAT, terming
TRAI’s decision as arbitrary and unreasonable without considering the suggestions of all
stakeholders. The TDSAT set the TRAI order aside.
Moderately positive impact on Dish TV’s content costs: Something is better than nothing
Exhibit 1 presents an illustration of the potential moderately positive impact on Dish TV
financials as a result of the Supreme Court order. We highlight that the exact nature and
quantum of fixed fee content deals (competitive information by default) is not publically
available and thus, we are forced to make do with reasonable assumptions. We estimate ~4%
savings in content cost for Dish TV from the above Supreme Court ruling due to downward
reprising of variable content deals (per sub at 50% of analog cable rates); we note that fixed
fee content deals are already favorable and remain unchanged.
However, there is strategic element to the Supreme Court ruling as well, in so far as it concerns
the bargaining position of Dish TV/DTH operators vis-à-vis C&S broadcasters. The cap on
wholesale tariff rate is the base of negotiations between DTH operators and C&S broadcasters.
Thus, the Supreme Court ruling is further positive in that it strengthens the negotiating position
of Dish TV; however, it can also be construed negatively (as suggested by the market reaction)
since a 35% cap would have given further cushion to Dish TV. We are not unduly worried on
this account given Dish TV’s leadership position in the DTH segment.
The chronology of DTH tariff orders (contd)
TRAI challenged TDSAT’s order in the Supreme Court. The honorable Supreme Court
stayed the TDSAT order and additionally, set the cap on wholesale rates for DTH at 42%
of analog cable rates, versus 50% previously and 35% recommended by TRAI. Also, the
Supreme Court noted that agreements between DTH operators and C&S broadcasters,
which are already in place, shall prevail.
We await the detailed Supreme Court ruling to understand rationale behind the 42% cap
on DTH wholesale tariffs. TRAI had suggested a 35% cap on DTH wholesale tariffs to
promote a level-playing field versus analog cable, where declaration levels are 15-20%.
Conversely, C&S broadcasters had argued for increasing the declaration levels on analog
cable rather than reducing the cap for DTH.
Though the potential impact on DTH operators in general and Dish TV in particular is
moderately positive, the exact ruling and logic used by the Supreme Court to arrive at the
42% cap will determine the future direction of DTH wholesale tariffs.
Retain ADD but valuations are expensive now
We retain our ADD rating on the Dish TV stock with a revised TP of Rs70 (Rs65 previously);
our increased TP reflects (1) moderate savings on content costs (as discussed above), (2)
higher subscriber additions, (3) moderately higher ARPUs in the long run given robust
uptake of HD-DTH services and (4) DCF roll-forward. However, we highlight that the stock is
trading expensive at 10.5X FY2013E EV/EBITDA and 8X FY2014E EV/EBITDA; this compares
with global cable and DTH operators trading at 6-8X FY2012E EV/EBITDA, though with likely
superior growth profile for Dish TV over the next 3-5 years.
However, as seen from the reaction to the stock price from yesterday’s announcement, the
street may be building in aggressive assumptions with respect to (1) subscriber additions,
(2) simultaneously strong growth in ARPUs and (3) low content costs. We remain
conservative; we model ~18% CAGR in content costs between FY2011E and FY2014E
versus ~10% guided by the company to factor in (1) potential addition of new pay-TV
channels to the Dish TV platform led by (2) high-cost HD channels (higher ARPU).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DishTV (DITV)
Media
Something better than nothing. The honorable Supreme Court, in a case involving
DTH operators, C&S broadcasters and sector regulator TRAI, has set a cap on wholesale
tariff rates paid by DTH operators to C&S broadcasters at 42% of ‘analog’ cable versus
50% previously. This is moderately positive for Dish TV as ~20% of its content deals will
be reprised downwards; however, remaining ~80% of fixed fee content deals are
previously); however, expansive valuations led by street’s high expectations leave little
room for upside (or disappointment, as seen from yesterday’s reaction).
The chronology of DTH tariff orders: From 50% of analog cable rates to 35% to 42%
Historically, wholesale tariff rates paid by DTH operators to C&S broadcasters have been capped
at 50% of analog cable rates. In July 2010, TRAI notified a new wholesale tariff structure for
digital, addressable systems (digital cable/DTH), reducing the cap on the wholesale tariff rates to
35% of analog cable rates, effective CY2011.
However, the broadcasters challenged the said new wholesale tariff order in TDSAT, terming
TRAI’s decision as arbitrary and unreasonable without considering the suggestions of all
stakeholders. The TDSAT set the TRAI order aside.
Moderately positive impact on Dish TV’s content costs: Something is better than nothing
Exhibit 1 presents an illustration of the potential moderately positive impact on Dish TV
financials as a result of the Supreme Court order. We highlight that the exact nature and
quantum of fixed fee content deals (competitive information by default) is not publically
available and thus, we are forced to make do with reasonable assumptions. We estimate ~4%
savings in content cost for Dish TV from the above Supreme Court ruling due to downward
reprising of variable content deals (per sub at 50% of analog cable rates); we note that fixed
fee content deals are already favorable and remain unchanged.
However, there is strategic element to the Supreme Court ruling as well, in so far as it concerns
the bargaining position of Dish TV/DTH operators vis-à-vis C&S broadcasters. The cap on
wholesale tariff rate is the base of negotiations between DTH operators and C&S broadcasters.
Thus, the Supreme Court ruling is further positive in that it strengthens the negotiating position
of Dish TV; however, it can also be construed negatively (as suggested by the market reaction)
since a 35% cap would have given further cushion to Dish TV. We are not unduly worried on
this account given Dish TV’s leadership position in the DTH segment.
The chronology of DTH tariff orders (contd)
TRAI challenged TDSAT’s order in the Supreme Court. The honorable Supreme Court
stayed the TDSAT order and additionally, set the cap on wholesale rates for DTH at 42%
of analog cable rates, versus 50% previously and 35% recommended by TRAI. Also, the
Supreme Court noted that agreements between DTH operators and C&S broadcasters,
which are already in place, shall prevail.
We await the detailed Supreme Court ruling to understand rationale behind the 42% cap
on DTH wholesale tariffs. TRAI had suggested a 35% cap on DTH wholesale tariffs to
promote a level-playing field versus analog cable, where declaration levels are 15-20%.
Conversely, C&S broadcasters had argued for increasing the declaration levels on analog
cable rather than reducing the cap for DTH.
Though the potential impact on DTH operators in general and Dish TV in particular is
moderately positive, the exact ruling and logic used by the Supreme Court to arrive at the
42% cap will determine the future direction of DTH wholesale tariffs.
Retain ADD but valuations are expensive now
We retain our ADD rating on the Dish TV stock with a revised TP of Rs70 (Rs65 previously);
our increased TP reflects (1) moderate savings on content costs (as discussed above), (2)
higher subscriber additions, (3) moderately higher ARPUs in the long run given robust
uptake of HD-DTH services and (4) DCF roll-forward. However, we highlight that the stock is
trading expensive at 10.5X FY2013E EV/EBITDA and 8X FY2014E EV/EBITDA; this compares
with global cable and DTH operators trading at 6-8X FY2012E EV/EBITDA, though with likely
superior growth profile for Dish TV over the next 3-5 years.
However, as seen from the reaction to the stock price from yesterday’s announcement, the
street may be building in aggressive assumptions with respect to (1) subscriber additions,
(2) simultaneously strong growth in ARPUs and (3) low content costs. We remain
conservative; we model ~18% CAGR in content costs between FY2011E and FY2014E
versus ~10% guided by the company to factor in (1) potential addition of new pay-TV
channels to the Dish TV platform led by (2) high-cost HD channels (higher ARPU).
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