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3.5m gross subscriber adds, 10.4m total subs
The 3.5m subscriber additions in FY11 (up 50% from FY10) are the manifestation
of a strong market share shift in favour of DTH (vs. cable). Dish TV has maintained
a 25% incremental share in a growing market and is on course to double EBITDA
in both FY11 and FY12. We are revising up our target price 8.5% to INR77 due to
higher-than-expected subscriber numbers, which are a driver of higher cash flows.
We maintain Buy
Fixed content costs drive gross margins and EBITDA turnaround
The key driver of Dish TV’s EBITDA breakeven is its content cost. The major
broadcasters have agreed to a fixed fee instead of a per subscriber-based fee from
Dish TV. This is why content cost as a percentage of revenues has been less than
50% of revenue (the benchmark for international satellite distributors).
Upgrading customers would help increase ARPU
The company has discontinued its Silver pack, the base pack at INR125 per month,
for new customers and has introduced a Silver Saver pack with nine additional
channels for INR150 per month as the base pack. The company said it would offer
a discount to existing Silver pack customers as an incentive to switch. Blended
ARPU as of Q3FY11 was INR142, up from INR139 the previous quarter. We have
factored in an ARPU of INR144 for FY12.
Maintaining Buy with a DCF-based target price of INR77
Our DCF valuation relies on a cost of capital of 14.6% and a terminal growth rate
of 4%. While FCF for Dish TV is unlikely to be positive over the next 24 months,
market valuations will likely factor in the scale buildup and growth in EBITDA. Key
risks to our earnings include a decline in ARPUs and an increase in content costs.
See pp.5-6 for details on valuation and risks
Valuation
DCF implies valuation of INR77
The key assumptions of our three-stage FCFF (free cash flow to firm) methodology are:
„ Risk-free rate of 6.7%, market risk premium of 8.1% (we apply a standard estimated riskfree rate and market risk premium to all the Indian companies we cover), and beta of
1.12 (Bloomberg Finance LP data), implying a cost of equity of 15.8%
„ 9% cost of debt, implying an after-tax cost of debt of 5.85%
„ Using the above cost of debt and cost of equity, we derive a WACC of 14.7%
„ Growth in the stable phase of 4% (which is the long-term growth rate in the number of
households in India)
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
3.5m gross subscriber adds, 10.4m total subs
The 3.5m subscriber additions in FY11 (up 50% from FY10) are the manifestation
of a strong market share shift in favour of DTH (vs. cable). Dish TV has maintained
a 25% incremental share in a growing market and is on course to double EBITDA
in both FY11 and FY12. We are revising up our target price 8.5% to INR77 due to
higher-than-expected subscriber numbers, which are a driver of higher cash flows.
We maintain Buy
Fixed content costs drive gross margins and EBITDA turnaround
The key driver of Dish TV’s EBITDA breakeven is its content cost. The major
broadcasters have agreed to a fixed fee instead of a per subscriber-based fee from
Dish TV. This is why content cost as a percentage of revenues has been less than
50% of revenue (the benchmark for international satellite distributors).
Upgrading customers would help increase ARPU
The company has discontinued its Silver pack, the base pack at INR125 per month,
for new customers and has introduced a Silver Saver pack with nine additional
channels for INR150 per month as the base pack. The company said it would offer
a discount to existing Silver pack customers as an incentive to switch. Blended
ARPU as of Q3FY11 was INR142, up from INR139 the previous quarter. We have
factored in an ARPU of INR144 for FY12.
Maintaining Buy with a DCF-based target price of INR77
Our DCF valuation relies on a cost of capital of 14.6% and a terminal growth rate
of 4%. While FCF for Dish TV is unlikely to be positive over the next 24 months,
market valuations will likely factor in the scale buildup and growth in EBITDA. Key
risks to our earnings include a decline in ARPUs and an increase in content costs.
See pp.5-6 for details on valuation and risks
Valuation
DCF implies valuation of INR77
The key assumptions of our three-stage FCFF (free cash flow to firm) methodology are:
„ Risk-free rate of 6.7%, market risk premium of 8.1% (we apply a standard estimated riskfree rate and market risk premium to all the Indian companies we cover), and beta of
1.12 (Bloomberg Finance LP data), implying a cost of equity of 15.8%
„ 9% cost of debt, implying an after-tax cost of debt of 5.85%
„ Using the above cost of debt and cost of equity, we derive a WACC of 14.7%
„ Growth in the stable phase of 4% (which is the long-term growth rate in the number of
households in India)
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