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UBS Investment Research
Dish TV India
Leading the digitisation wave
„ Event: improved FY12 outlook; outperforms BSE Sensex by 28% YTD
Dish TV’s stock price has risen 14% and outperformed BSE Sensex by 28% YTD.
The business outlook for FY12 seems to have improved as: 1) subscriber additions
remain strong; 2) Dish TV hiked its subscription price by Rs5-25 in May 2011; 3)
content costs are largely fixed and only one contract is due for renewal in FY12.
„ Impact: raise FY12-14E EPS estimate by 20-24%
We raise our net profit estimates and price target as: 1) we increase our gross
subscriber addition forecasts [from 2.76m to 3.48m subscribers for FY12E]. Dish
TV has guided for 3.0-3.5m gross additions in FY12E; 2) we raise our ARPU
estimates for FY12E from Rs148 to Rs162 (versus 4QFY11 ARPU of Rs150)
driven by price increases in May 2011 and the increase in the HD subscriber base.
„ Action: maintain positive view on Dish TV
We continue to remain positive on Dish TV as it is a play on India’s fast growing
DTH subscriber base, which is led by rising income levels, increasing consumer
awareness, a sports heavy calendar in 2011, and lower entry prices for new
connections. We believe potential share price catalysts include: 1) strong financial
and operating performance; 2) implementation of mandatory digitisation; 3) likely
reduction in license fee; 4) implementation of goods and service tax (GST) or
rationalisation of tax structure given the DTH industry is heavily taxed.
„ Valuation: Buy rating; raise DCF-based price target from Rs77 to Rs100
Our DCF-based price target assumes a WACC of 12.8%. Our price target implies
14x FY13E EV/EBITDA, a marginal discount to its historical trading average.
Investment thesis
Dish TV is the first and largest satellite TV operator in India, with a strong
brand presence, a broad distribution network, and significant scale benefits
owing to its first-mover advantage. We maintain our Buy rating and raise our
DCF-based price target from Rs77 to Rs100 on our higher FY12-14E earnings
estimates. Our Buy rating is premised on the following:
Q Dish TV is the only listed pure play on India’s fast growing DTH subscriber
base, led by rising income levels, increasing awareness of DTH services as a
result of heavy promotions and advertising, a sports-heavy calendar in 2011
and lower prices for new connections. We forecast Dish TV’s subscriber
base to grow at an average annual rate of 23.6% during FY12-FY14.
Q We expect ARPU to improve significantly in FY12 (from Rs150 in 4QFY11
to Rs162 in FY12) led by: 1) increase in monthly subscription package prices
as Dish TV hiked prices by Rs5-25 in May 2011; 2) pick-up in HD
subscriber base led by a strong HD offering; 3) improvement in collection
efficiency; and 4) likely addition of new paid content.
We believe receipt of pending government approval regarding implementation
of mandatory digitisation in India is likely to be a catalyst for Dish TV as it
could accelerate DTH subscriber growth.
DTH is a heavily taxed industry in India, paying: 1) service tax of 10.3%; 2)
license fee of 10% on gross revenue; 3) entertainment tax (varies across states);
4) 5% import duty on set-top boxes; 5) income tax or MAT as and when the
company starts generating positive PBT. We believe rationalisation of the tax
structure or implementation of GST could act as a catalyst.
We believe the key risks for Dish TV are strong competition from other DTH
operators and digital cable TV distributors, regulatory intervention, and a
potential increase in content costs.
Catalysts
Q Strong quarterly financial and operating performance. We believe
quarterly results showing an improving operating performance (in terms of
number of subscribers added, lower subscriber acquisition costs, and higher
ARPU) and financial performance (in terms of strong revenue growth,
EBITDA margin improvement, and net profit breakeven) are likely to act as
a catalyst. We believe FY12 is likely to be a landmark year for Dish TV as
the company is likely to achieve net profit and FCF breakeven.
Q Implementation of mandatory digitisation. In August 2010, TRAI
recommended complete digitisation of analog cable subscribers in four
phases by December 2013. In April 2011, MIB finalised the timelines and
has proposed December 2014 as the sunset date for analog signals for the
entire country, subject to government approval. If implemented, it could lead
to a further pick-up in DTH subscriber additions.
Q Reduction in licence fees. There is a proposal that the license fee be payable
on adjusted gross revenue (versus gross revenue currently). The company
highlighted, that if implemented, this will lead to improvement in EBITDA
margin by around 400bps.
Q Implementation of GST or rationalisation of tax structure. We believe
rationalisation of tax structure or implementation of GST could act as a
catalyst. DTH is a heavily taxed industry in India, paying:
— Service tax of 10.3% on revenue
— License fee of 10% on gross revenue
— Entertainment tax (varies across states)
— 5% import duty on set-top boxes
— Income tax or MAT as and when the company starts generating positive
PBT
In March 2011, the state government of Rajasthan waived entertainment tax.
Previously, an entertainment tax of 10% of revenue was levied on DTH
operators. We would expect FY12 EBITDA margins to improve by c35-
40bps due to this notification, all else remaining equal.
Risks
Q Competition: Dish TV faces significant competition from five other DTH
operators and digital cable TV operators. Some DTH operators, such as
Bharti Airtel (Bharti), have the financial and brand strength to help them
dominate subscriber share on an incremental basis. We think digital cable
could be a threat to DTH if the digital cable market consolidates. However,
we expect DTH and digital cable to co-exist, given a significant proportion
of the market is still on the analogue platform.
Q Regulatory risks. The DTH industry is regulated by TRAI, the Department
of Telecommunications (DoT), and the Ministry of Information and
Broadcasting (MIB). Some of the issues being considered by TRAI are: 1)
technical interoperability of set-top boxes (STB); 2) implementation of
mandatory digitisation; 3) no exclusive content to be broadcast on the DTH
platform; and 4) whether the carriage fee should be regulated.
Q Content costs. A significant portion of content costs are fixed price contracts
for Dish TV. Content costs could increase for Dish TV if broadcasters
negotiate a variable pay structure (based on subscriber numbers).
— As per the Supreme Court (SC) judgement in April 2011, DTH operators
need to pay content cost at 42% of the wholesale rate (rate paid by cable
operators) to broadcasters (versus 50% earlier). The SC order also says
that agreements between DTH operators and broadcasters, which are
already in place, shall prevail. Earlier TRAI had recommended that this
50% rate should be reduced to 35%, which some large broadcasters had
challenged. While, we believe this is likely to have minimal impact on
Dish TV in the near term as Dish TV has largely entered into fixed
contracts for content, this could increase the content costs for DTH
operators in the medium-to-long term.
Q Dish TV India
Dish TV commenced operations in October 2003 and is the first and the largest
DTH operator in India with 5.7m subscribers in FY10. It is part of Essel Group,
a media conglomerate, and was formed after the demerger of Zee
Entertainment's Direct Consumer Services business. Dish TV was listed in April
2007 and recently raised Rs4.16bn in the third and final tranche of a rights issue.
It also received funding of US$100m (Rs4.65bn) from US-based Apollo
Management, through a GDR issue.
Q Statement of Risk
We believe the key risks for Dish TV are: 1) intense competition from other
DTH operators as well as large multi-system operators that offer digital cable
and 2) regulatory risks. We believe content costs could increase for Dish TV if
broadcasters negotiate a variable fee structure based on the number of
subscribers. Dish TV is also exposed to currency risks as it imports set top boxes.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Dish TV India
Leading the digitisation wave
„ Event: improved FY12 outlook; outperforms BSE Sensex by 28% YTD
Dish TV’s stock price has risen 14% and outperformed BSE Sensex by 28% YTD.
The business outlook for FY12 seems to have improved as: 1) subscriber additions
remain strong; 2) Dish TV hiked its subscription price by Rs5-25 in May 2011; 3)
content costs are largely fixed and only one contract is due for renewal in FY12.
„ Impact: raise FY12-14E EPS estimate by 20-24%
We raise our net profit estimates and price target as: 1) we increase our gross
subscriber addition forecasts [from 2.76m to 3.48m subscribers for FY12E]. Dish
TV has guided for 3.0-3.5m gross additions in FY12E; 2) we raise our ARPU
estimates for FY12E from Rs148 to Rs162 (versus 4QFY11 ARPU of Rs150)
driven by price increases in May 2011 and the increase in the HD subscriber base.
„ Action: maintain positive view on Dish TV
We continue to remain positive on Dish TV as it is a play on India’s fast growing
DTH subscriber base, which is led by rising income levels, increasing consumer
awareness, a sports heavy calendar in 2011, and lower entry prices for new
connections. We believe potential share price catalysts include: 1) strong financial
and operating performance; 2) implementation of mandatory digitisation; 3) likely
reduction in license fee; 4) implementation of goods and service tax (GST) or
rationalisation of tax structure given the DTH industry is heavily taxed.
„ Valuation: Buy rating; raise DCF-based price target from Rs77 to Rs100
Our DCF-based price target assumes a WACC of 12.8%. Our price target implies
14x FY13E EV/EBITDA, a marginal discount to its historical trading average.
Investment thesis
Dish TV is the first and largest satellite TV operator in India, with a strong
brand presence, a broad distribution network, and significant scale benefits
owing to its first-mover advantage. We maintain our Buy rating and raise our
DCF-based price target from Rs77 to Rs100 on our higher FY12-14E earnings
estimates. Our Buy rating is premised on the following:
Q Dish TV is the only listed pure play on India’s fast growing DTH subscriber
base, led by rising income levels, increasing awareness of DTH services as a
result of heavy promotions and advertising, a sports-heavy calendar in 2011
and lower prices for new connections. We forecast Dish TV’s subscriber
base to grow at an average annual rate of 23.6% during FY12-FY14.
Q We expect ARPU to improve significantly in FY12 (from Rs150 in 4QFY11
to Rs162 in FY12) led by: 1) increase in monthly subscription package prices
as Dish TV hiked prices by Rs5-25 in May 2011; 2) pick-up in HD
subscriber base led by a strong HD offering; 3) improvement in collection
efficiency; and 4) likely addition of new paid content.
We believe receipt of pending government approval regarding implementation
of mandatory digitisation in India is likely to be a catalyst for Dish TV as it
could accelerate DTH subscriber growth.
DTH is a heavily taxed industry in India, paying: 1) service tax of 10.3%; 2)
license fee of 10% on gross revenue; 3) entertainment tax (varies across states);
4) 5% import duty on set-top boxes; 5) income tax or MAT as and when the
company starts generating positive PBT. We believe rationalisation of the tax
structure or implementation of GST could act as a catalyst.
We believe the key risks for Dish TV are strong competition from other DTH
operators and digital cable TV distributors, regulatory intervention, and a
potential increase in content costs.
Catalysts
Q Strong quarterly financial and operating performance. We believe
quarterly results showing an improving operating performance (in terms of
number of subscribers added, lower subscriber acquisition costs, and higher
ARPU) and financial performance (in terms of strong revenue growth,
EBITDA margin improvement, and net profit breakeven) are likely to act as
a catalyst. We believe FY12 is likely to be a landmark year for Dish TV as
the company is likely to achieve net profit and FCF breakeven.
Q Implementation of mandatory digitisation. In August 2010, TRAI
recommended complete digitisation of analog cable subscribers in four
phases by December 2013. In April 2011, MIB finalised the timelines and
has proposed December 2014 as the sunset date for analog signals for the
entire country, subject to government approval. If implemented, it could lead
to a further pick-up in DTH subscriber additions.
Q Reduction in licence fees. There is a proposal that the license fee be payable
on adjusted gross revenue (versus gross revenue currently). The company
highlighted, that if implemented, this will lead to improvement in EBITDA
margin by around 400bps.
Q Implementation of GST or rationalisation of tax structure. We believe
rationalisation of tax structure or implementation of GST could act as a
catalyst. DTH is a heavily taxed industry in India, paying:
— Service tax of 10.3% on revenue
— License fee of 10% on gross revenue
— Entertainment tax (varies across states)
— 5% import duty on set-top boxes
— Income tax or MAT as and when the company starts generating positive
PBT
In March 2011, the state government of Rajasthan waived entertainment tax.
Previously, an entertainment tax of 10% of revenue was levied on DTH
operators. We would expect FY12 EBITDA margins to improve by c35-
40bps due to this notification, all else remaining equal.
Risks
Q Competition: Dish TV faces significant competition from five other DTH
operators and digital cable TV operators. Some DTH operators, such as
Bharti Airtel (Bharti), have the financial and brand strength to help them
dominate subscriber share on an incremental basis. We think digital cable
could be a threat to DTH if the digital cable market consolidates. However,
we expect DTH and digital cable to co-exist, given a significant proportion
of the market is still on the analogue platform.
Q Regulatory risks. The DTH industry is regulated by TRAI, the Department
of Telecommunications (DoT), and the Ministry of Information and
Broadcasting (MIB). Some of the issues being considered by TRAI are: 1)
technical interoperability of set-top boxes (STB); 2) implementation of
mandatory digitisation; 3) no exclusive content to be broadcast on the DTH
platform; and 4) whether the carriage fee should be regulated.
Q Content costs. A significant portion of content costs are fixed price contracts
for Dish TV. Content costs could increase for Dish TV if broadcasters
negotiate a variable pay structure (based on subscriber numbers).
— As per the Supreme Court (SC) judgement in April 2011, DTH operators
need to pay content cost at 42% of the wholesale rate (rate paid by cable
operators) to broadcasters (versus 50% earlier). The SC order also says
that agreements between DTH operators and broadcasters, which are
already in place, shall prevail. Earlier TRAI had recommended that this
50% rate should be reduced to 35%, which some large broadcasters had
challenged. While, we believe this is likely to have minimal impact on
Dish TV in the near term as Dish TV has largely entered into fixed
contracts for content, this could increase the content costs for DTH
operators in the medium-to-long term.
Q Dish TV India
Dish TV commenced operations in October 2003 and is the first and the largest
DTH operator in India with 5.7m subscribers in FY10. It is part of Essel Group,
a media conglomerate, and was formed after the demerger of Zee
Entertainment's Direct Consumer Services business. Dish TV was listed in April
2007 and recently raised Rs4.16bn in the third and final tranche of a rights issue.
It also received funding of US$100m (Rs4.65bn) from US-based Apollo
Management, through a GDR issue.
Q Statement of Risk
We believe the key risks for Dish TV are: 1) intense competition from other
DTH operators as well as large multi-system operators that offer digital cable
and 2) regulatory risks. We believe content costs could increase for Dish TV if
broadcasters negotiate a variable fee structure based on the number of
subscribers. Dish TV is also exposed to currency risks as it imports set top boxes.
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