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UBS Investment Research
Dish TV India
S trong growth momentum to continue
Event: Dish TV reported Q1 standalone results, conference call takeaways
Revenues grew 6% QoQ to Rs4,604m vs. UBS estimate of Rs4,734m. The
EBITDA margin expanded 350bps QoQ to 24.4% vs. UBS estimate of 22.1%. Net
loss declined from Rs370m in Q4 FY11 to Rs183m vs. UBS estimate of Rs249m.
Key takeaways from the conference call are: 1) the increase in ARPU during Q4
FY11 was significant partly due to the World Cup. Dish TV management expects
ARPU to start increasing from Q2; and 2) Dish TV has maintained its earlier FY12
guidance—subscriber addition at 3-3.5m subs, content costs to increase 10-12%.
Impact: raise PT to Rs110; raise FY12-13 earnings estimates 7-10%
We have marginally lowered our FY12 ARPU forecast from Rs162 to Rs160 (vs.
company guidance of Rs160-165 for Q4 FY12). We raise our price target from
Rs100 to Rs110 as we raise our FY12-13 EBITDA margin assumptions by 100-
150 bps to 26.5% and 28.5%, respectively (Dish TV has achieved 24.4% in Q1).
Action: remain +ve on Dish TV—a pure play on growing DTH subs base
Dish TV is a play on India’s fast-growing DTH subscriber base led by rising
income levels, increasing consumer awareness, a sports-heavy calendar, and a low
entry price for new connections. We believe potential catalysts include: 1) strong
financial and operating performance; 2) implementation of mandatory digitisation;
3) likely reduction in license fee; and 4) implementation of goods and service tax
(GST) or rationalisation of tax structure given the DTH industry is heavily taxed.
Valuation: Buy rating with DCF-based PT of Rs110
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
12.6%.
Key takeaways from conference call
Dish TV ARPU grew significantly in Q4 FY11, partly due to the World Cup.
Dish TV management expects ARPU to move up starting Q2 FY12. It has
maintained its ARPU guidance of Rs160-165 for Q4 FY12.
Dish TV management highlighted that some of the fixed-fee contracts have
an annual escalation clause, which led to the increase in programming cost in
Q1 FY12. Only one of Dish TV’s fixed-fee contracts is due for renewal in
FY12 (in September 2011). Dish TV expects content costs to increase 10-
12% in FY12 (was Rs4.55bn in FY11).
Dish TV is likely to spend Rs1.2bn towards advertising and a substantial
proportion of this would be incurred in Q3 during the festive season.
Dish TV expects HD subscriber addition momentum to pick up as it has
strengthened its HD offering—it now offers 40 HD channels.
Dish TV has written off value of set top boxes where the subscribers did not
recharge for more than 500 days. Adjusting for this, lease rental would have
been higher by Rs55m.
Table 2: Q1 FY12 revenue breakdown (Rs m)
Subscription revenue 3,922
Lease rentals 550
Teleport revenue 35
Bandwidth charges and other revenue 97
Total revenue 4,604
Source: Company data
SAC declined 7.5% QoQ to Rs2,058, which comprises:
— Hardware subsidy of Rs1,600 (the set top box costs Rs2,500)
— Distribution fee of Rs250
— Marketing expenses of around Rs200
Dish TV plans to incur capex of Rs5.5-6bn, assuming it will add 3-3.5m
gross subscribers.
Dish TV had gross debt of Rs10.5bn and cash of Rs3.7bn at the end of Q1
FY12. Dish TV expects its interest cost to decline in FY12 as it is converting
its rupee debt into foreign currency loans. Dish TV received Rs900m from its
group companies in Q1 FY12; it further expects to receive Rs500m in Q2.
We expect Dish TV’s net subscriber base to increase from 8.5m in FY11 to
11.2m in FY12 and 13.8m in FY13, led by rising income levels, increasing
consumer awareness, a lower entry-level price for new DTH connections, and a
sports-heavy calendar.
Additionally, the company has launched its HD offering (premium range). This
should help Dish TV acquire more subscribers at the premium end of the
market. We expect Dish TV’s HD subscriber base to grow in FY12 (contribute
5-10% of incremental gross adds) primarily led by addition of HD content by
large broadcasters such as Star Plus and ESPN (for key properties).
We expect ARPU to improve in FY12 mainly led by an increase in package
prices. Dish TV has raised prices of its packages by Rs5-25 in May 2011 (refer
to table below). We believe the full effect of this price increase and new pack is
likely to be felt in FY12. Dish TV has discontinued the Silver pack and the
lowest-priced monthly package that a new subscriber can now choose is the
Silver Saver, priced at Rs165 per month.
Valuation and basis for our price target
We raise our price target from Rs100 to Rs110 (implying 23% upside to the
current stock price). We derive our price target from a DCF-based methodology
and explicitly forecast long-term valuation drivers using UBS’s VCAM tool.
Our price target assumes a WACC of 12.6%.
VCAM is a DCF and an economic profit model
VCAM is a discounted cash flow (DCF) and economic profit analysis (EPA)
valuation methodology, which calculates economic profit along with free cash
flows each year.
It assumes that a company’s DCF Value = Current earnings [NOPAT] valued
in perpetuity + present value of all future incremental economic profit.
The accompanying economic profit forecast indicates whether or not free
cash flow is value-added and it is economic profit growth that justifies an
intrinsic value greater than the company’s current earnings valued in
perpetuity.
A key assumption in the VCAM model is the value creation horizon (VCH),
which refers to the number of future years a company is expected to generate
incremental economic profits. At the end of the VCH, we value the NOPAT
into perpetuity to calculate terminal value.
The major subjective drivers of our VCAM price targets are long-term
margin assumptions and the weighted average cost of capital (WACC).
Our sensitivity and valuation tables come directly from VCAM and clients are
free to modify the data and/or use their own assumptions on our website
(www.ubs.com/investmentresearch).
The site also has a number of tools including sensitivity analysis, long-term
trends, and a goal seeker, and an extensive VCAM user guide.
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.
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
S trong growth momentum to continue
Event: Dish TV reported Q1 standalone results, conference call takeaways
Revenues grew 6% QoQ to Rs4,604m vs. UBS estimate of Rs4,734m. The
EBITDA margin expanded 350bps QoQ to 24.4% vs. UBS estimate of 22.1%. Net
loss declined from Rs370m in Q4 FY11 to Rs183m vs. UBS estimate of Rs249m.
Key takeaways from the conference call are: 1) the increase in ARPU during Q4
FY11 was significant partly due to the World Cup. Dish TV management expects
ARPU to start increasing from Q2; and 2) Dish TV has maintained its earlier FY12
guidance—subscriber addition at 3-3.5m subs, content costs to increase 10-12%.
Impact: raise PT to Rs110; raise FY12-13 earnings estimates 7-10%
We have marginally lowered our FY12 ARPU forecast from Rs162 to Rs160 (vs.
company guidance of Rs160-165 for Q4 FY12). We raise our price target from
Rs100 to Rs110 as we raise our FY12-13 EBITDA margin assumptions by 100-
150 bps to 26.5% and 28.5%, respectively (Dish TV has achieved 24.4% in Q1).
Action: remain +ve on Dish TV—a pure play on growing DTH subs base
Dish TV is a play on India’s fast-growing DTH subscriber base led by rising
income levels, increasing consumer awareness, a sports-heavy calendar, and a low
entry price for new connections. We believe potential catalysts include: 1) strong
financial and operating performance; 2) implementation of mandatory digitisation;
3) likely reduction in license fee; and 4) implementation of goods and service tax
(GST) or rationalisation of tax structure given the DTH industry is heavily taxed.
Valuation: Buy rating with DCF-based PT of Rs110
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a WACC of
12.6%.
Key takeaways from conference call
Dish TV ARPU grew significantly in Q4 FY11, partly due to the World Cup.
Dish TV management expects ARPU to move up starting Q2 FY12. It has
maintained its ARPU guidance of Rs160-165 for Q4 FY12.
Dish TV management highlighted that some of the fixed-fee contracts have
an annual escalation clause, which led to the increase in programming cost in
Q1 FY12. Only one of Dish TV’s fixed-fee contracts is due for renewal in
FY12 (in September 2011). Dish TV expects content costs to increase 10-
12% in FY12 (was Rs4.55bn in FY11).
Dish TV is likely to spend Rs1.2bn towards advertising and a substantial
proportion of this would be incurred in Q3 during the festive season.
Dish TV expects HD subscriber addition momentum to pick up as it has
strengthened its HD offering—it now offers 40 HD channels.
Dish TV has written off value of set top boxes where the subscribers did not
recharge for more than 500 days. Adjusting for this, lease rental would have
been higher by Rs55m.
Table 2: Q1 FY12 revenue breakdown (Rs m)
Subscription revenue 3,922
Lease rentals 550
Teleport revenue 35
Bandwidth charges and other revenue 97
Total revenue 4,604
Source: Company data
SAC declined 7.5% QoQ to Rs2,058, which comprises:
— Hardware subsidy of Rs1,600 (the set top box costs Rs2,500)
— Distribution fee of Rs250
— Marketing expenses of around Rs200
Dish TV plans to incur capex of Rs5.5-6bn, assuming it will add 3-3.5m
gross subscribers.
Dish TV had gross debt of Rs10.5bn and cash of Rs3.7bn at the end of Q1
FY12. Dish TV expects its interest cost to decline in FY12 as it is converting
its rupee debt into foreign currency loans. Dish TV received Rs900m from its
group companies in Q1 FY12; it further expects to receive Rs500m in Q2.
We expect Dish TV’s net subscriber base to increase from 8.5m in FY11 to
11.2m in FY12 and 13.8m in FY13, led by rising income levels, increasing
consumer awareness, a lower entry-level price for new DTH connections, and a
sports-heavy calendar.
Additionally, the company has launched its HD offering (premium range). This
should help Dish TV acquire more subscribers at the premium end of the
market. We expect Dish TV’s HD subscriber base to grow in FY12 (contribute
5-10% of incremental gross adds) primarily led by addition of HD content by
large broadcasters such as Star Plus and ESPN (for key properties).
We expect ARPU to improve in FY12 mainly led by an increase in package
prices. Dish TV has raised prices of its packages by Rs5-25 in May 2011 (refer
to table below). We believe the full effect of this price increase and new pack is
likely to be felt in FY12. Dish TV has discontinued the Silver pack and the
lowest-priced monthly package that a new subscriber can now choose is the
Silver Saver, priced at Rs165 per month.
Valuation and basis for our price target
We raise our price target from Rs100 to Rs110 (implying 23% upside to the
current stock price). We derive our price target from a DCF-based methodology
and explicitly forecast long-term valuation drivers using UBS’s VCAM tool.
Our price target assumes a WACC of 12.6%.
VCAM is a DCF and an economic profit model
VCAM is a discounted cash flow (DCF) and economic profit analysis (EPA)
valuation methodology, which calculates economic profit along with free cash
flows each year.
It assumes that a company’s DCF Value = Current earnings [NOPAT] valued
in perpetuity + present value of all future incremental economic profit.
The accompanying economic profit forecast indicates whether or not free
cash flow is value-added and it is economic profit growth that justifies an
intrinsic value greater than the company’s current earnings valued in
perpetuity.
A key assumption in the VCAM model is the value creation horizon (VCH),
which refers to the number of future years a company is expected to generate
incremental economic profits. At the end of the VCH, we value the NOPAT
into perpetuity to calculate terminal value.
The major subjective drivers of our VCAM price targets are long-term
margin assumptions and the weighted average cost of capital (WACC).
Our sensitivity and valuation tables come directly from VCAM and clients are
free to modify the data and/or use their own assumptions on our website
(www.ubs.com/investmentresearch).
The site also has a number of tools including sensitivity analysis, long-term
trends, and a goal seeker, and an extensive VCAM user guide.
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.
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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