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DishTV (DITV)
Media
HD-Ready. We upgrade Dish TV to BUY (ADD previously) with FY2013E FV of Rs90
(Rs95 previously) led by (1) structural growth (~3 mn gross adds), (2) fair valuations (9X
FY2013E EBITDA) and (3) stable market dynamics. More important, we view FY2013E
as a potential inflection point for HD in India and discuss (1) value-add (HD versus SD
subs), (2) demand (HDTV stock and annual sales trends), (3) content supply (explosive
growth in HD content), (4) capacity (transponder availability) and (5) risks (price of HD
content, Dish TV brand). We also discuss the potential for gains/implications from
DAS/digitization and concerns over proposed capital raising.
Dish TV is HD-Ready: Industry demand, content supply, platform capacity
Exhibit 1 presents the reasoning behind our excitement from the potential first inflection point for
HD in India (likely FY2013E). The base ARPUs in HD-DTH service is ~Rs400, >2X the average ARPUs
of Rs150-200 (across various players) from SD-DTH services. More important, higher ARPUs may
translate into higher margins assuming ‘reasonable’ content costs and fixed costs similar as SDDTH
(transponders, advertising, distribution). The capex/sub at Rs4K/sub is <2X Rs2.5K/sub for SDDTH,
resulting in significantly higher returns and value-add. The potential for value creation is clear,
not discounting the startup expenditure (transponder, advertising, technology).
HDTV demand. HD-DTH penetration in India will likely reach ~1% in FY2012E (~110 mn C&S
HHs) and ~3% share of DTH HHs (~2% share in Dish TV net base). This compares with ~3%
HDTV penetration in India: (1) Exhibit 2 presents estimates of FPTV (flat panel) and HDTV sales
in India. (2) A large number of HDTVs are bought into India by individuals from markets such as
South-East Asia given the large price differential (Rs10-20K/HDTV). However, the FPTV/HDTV
sales inflection point is visible in FY2012E itself. Demand for HD-DTH will likely follow (Hathway
is the only cable player to offer HD services in select metros). Exhibit 3 presents the experience
of US urban markets, which largely shifted to HDTV within three years; Exhibit 4 presents C&S
HHs in top cities in India; HDTV concentration around these urban areas implies >10%
penetration by end-FY2012E (~3 mn out of ~26 mn C&S HHs).
Content supply. However, demand for HDTV-services in India faced a chicken-and-egg
situation with consumers not also likely not buying HDTVs given a lack of HD content in India.
Exhibit 5 presents the dramatic turnaround in the situation with large numbers of channels
launched or to be launched in FY2012E. HD-feeds of all the flagship channels of all large
broadcasters (excepting few regional ones) will be made available. We believe that the negative
feedback loop (lack of HD content resulting in low HDTV sales resulting in limited investment in
HD content) will turn into a positive feedback loop in FY2013E, also based on our discussions
with niche broadcasters (plans to launch HD-only feeds). Event-based content will also get
another fillip in FY2013E given strong sports calendar
HD-Ready (contd.)
Transponder capacity. However, demand and supply of HD content is not enough since
the DTH platform also needs to have the capacity to carry HD content/channels, which
require 3-4X space on the transponders versus SD channels. Dish TV added transponders
on its DTH platform in FY2011, which allows it to carry >30 HD channels. Dish TV is in an
advantageous position here (though for a limited time period) given the general paucity
of transponder capacity in India; the cost of additional capacity (~US$1 mn/transponder)
is already factored in financials/valuations. Exhibit 7 shows that Dish TV leads in terms of
number of HD channels offered.
Pricing of HD content. Exhibit 7 also highlights underutilization in Dish TruHD platform,
carrying only 12 out of the 19 HD available channels despite >30 channel capacity. Unlike
SD channels where TRAI controls the pricing and ensures availability (must-provide clause),
broadcasters are free to negotiate the pricing of HD channels; thus the unavailability of
Star bouquet of channels on Dish TV. Dish TV will close the gap between offered and
available HD content given deals for upcoming HD channels with respective broadcasters
(sister company Zee TV, Sony TV and Nimbus; Exhibit 5). We hope broadcasters take a
long-term view in offering HD content at a reasonable premium.
Dish TV brand and HD marketing. Dish TV’s branding efforts have been more focused
towards semi-urban and rural markets historically; Dish TV is the largest DTH operator in
India but Tata Sky and Airtel Digital TV lead in brand perception, resulting in higher HD
net base. Dish TV needs to balance its HD ambitions (urban centers) with the bread-andbutter
business (semi-urban and rural price-sensitive HHs); Dish TV proposes to manage
this by focusing its HD marketing efforts on niche media and SD efforts on low-cost
targeted regional/BTL media.
Upgrade to BUY
We upgrade Dish TV to BUY (ADD previously) with FY2013E fair value of Rs90 (Rs95
previously); the reduction in our fair value is on account of assumed higher license fee (10%
versus 8% of gross revenues previously; we have assigned a 50% probability to the
government reducing the license fees to 5-6% of revenues but that does not seem to be the
case anymore given the fiscal situation currently). DTH industry in India heavily taxed with
Service Tax (Central Government), License Fees (Central Government), Entertainment Tax
(State Government) and Income Tax (Central Government; Dish TV is unlikely to pay any
income tax for some time given large accumulated losses) accounting for 20-25% of ARPU.
Thus, lower taxation (reduced License Fees, reduced Entertainment Tax) is a rational demand
but likely not feasible; in fact, our discussions with the industry leads us to believe higher tax
realizations is one of the key reasons behind DAS/digitization.
Accordingly, we have fine-tuned our FY2012E-14E EBITDA to Rs5.5 bn (Rs5.6 bn previously),
Rs7.4 bn (Rs7.8 bn) and Rs9.8 bn (Rs10.1 bn). Dish TV valuation at 9X FY2013E EBITDA is
reasonable given structural growth (~3 mn gross adds) in rural areas even discounting
potential gains from (1) DAS/digitization and (2) HD-DTH. We believe Dish TV would be
valued at a premium to developed market comparables (6-8X CY2012E EBITDA) given
potential for both (1) long-term volume growth (large rural BPL population that may become
APL over time; Dish TV is ideally positioned to tap into the same) and (2) long-term price
increases (current US$3-4/sub-month ARPUs are in line with HHs’ capacity to pay but
average HH income is growing in double-digits). Exhibit 8 presents our per-sub steady-state
valuation for Dish TV and compares it with current valuation; the current valuation does not
give any benefit to (1) hyper-growth phase over the next 4-5 years, (2) potential from gains
from digitization/DAS and (3) premium subs/services (HD-DTH).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
DishTV (DITV)
Media
HD-Ready. We upgrade Dish TV to BUY (ADD previously) with FY2013E FV of Rs90
(Rs95 previously) led by (1) structural growth (~3 mn gross adds), (2) fair valuations (9X
FY2013E EBITDA) and (3) stable market dynamics. More important, we view FY2013E
as a potential inflection point for HD in India and discuss (1) value-add (HD versus SD
subs), (2) demand (HDTV stock and annual sales trends), (3) content supply (explosive
growth in HD content), (4) capacity (transponder availability) and (5) risks (price of HD
content, Dish TV brand). We also discuss the potential for gains/implications from
DAS/digitization and concerns over proposed capital raising.
Dish TV is HD-Ready: Industry demand, content supply, platform capacity
Exhibit 1 presents the reasoning behind our excitement from the potential first inflection point for
HD in India (likely FY2013E). The base ARPUs in HD-DTH service is ~Rs400, >2X the average ARPUs
of Rs150-200 (across various players) from SD-DTH services. More important, higher ARPUs may
translate into higher margins assuming ‘reasonable’ content costs and fixed costs similar as SDDTH
(transponders, advertising, distribution). The capex/sub at Rs4K/sub is <2X Rs2.5K/sub for SDDTH,
resulting in significantly higher returns and value-add. The potential for value creation is clear,
not discounting the startup expenditure (transponder, advertising, technology).
HDTV demand. HD-DTH penetration in India will likely reach ~1% in FY2012E (~110 mn C&S
HHs) and ~3% share of DTH HHs (~2% share in Dish TV net base). This compares with ~3%
HDTV penetration in India: (1) Exhibit 2 presents estimates of FPTV (flat panel) and HDTV sales
in India. (2) A large number of HDTVs are bought into India by individuals from markets such as
South-East Asia given the large price differential (Rs10-20K/HDTV). However, the FPTV/HDTV
sales inflection point is visible in FY2012E itself. Demand for HD-DTH will likely follow (Hathway
is the only cable player to offer HD services in select metros). Exhibit 3 presents the experience
of US urban markets, which largely shifted to HDTV within three years; Exhibit 4 presents C&S
HHs in top cities in India; HDTV concentration around these urban areas implies >10%
penetration by end-FY2012E (~3 mn out of ~26 mn C&S HHs).
Content supply. However, demand for HDTV-services in India faced a chicken-and-egg
situation with consumers not also likely not buying HDTVs given a lack of HD content in India.
Exhibit 5 presents the dramatic turnaround in the situation with large numbers of channels
launched or to be launched in FY2012E. HD-feeds of all the flagship channels of all large
broadcasters (excepting few regional ones) will be made available. We believe that the negative
feedback loop (lack of HD content resulting in low HDTV sales resulting in limited investment in
HD content) will turn into a positive feedback loop in FY2013E, also based on our discussions
with niche broadcasters (plans to launch HD-only feeds). Event-based content will also get
another fillip in FY2013E given strong sports calendar
HD-Ready (contd.)
Transponder capacity. However, demand and supply of HD content is not enough since
the DTH platform also needs to have the capacity to carry HD content/channels, which
require 3-4X space on the transponders versus SD channels. Dish TV added transponders
on its DTH platform in FY2011, which allows it to carry >30 HD channels. Dish TV is in an
advantageous position here (though for a limited time period) given the general paucity
of transponder capacity in India; the cost of additional capacity (~US$1 mn/transponder)
is already factored in financials/valuations. Exhibit 7 shows that Dish TV leads in terms of
number of HD channels offered.
Pricing of HD content. Exhibit 7 also highlights underutilization in Dish TruHD platform,
carrying only 12 out of the 19 HD available channels despite >30 channel capacity. Unlike
SD channels where TRAI controls the pricing and ensures availability (must-provide clause),
broadcasters are free to negotiate the pricing of HD channels; thus the unavailability of
Star bouquet of channels on Dish TV. Dish TV will close the gap between offered and
available HD content given deals for upcoming HD channels with respective broadcasters
(sister company Zee TV, Sony TV and Nimbus; Exhibit 5). We hope broadcasters take a
long-term view in offering HD content at a reasonable premium.
Dish TV brand and HD marketing. Dish TV’s branding efforts have been more focused
towards semi-urban and rural markets historically; Dish TV is the largest DTH operator in
India but Tata Sky and Airtel Digital TV lead in brand perception, resulting in higher HD
net base. Dish TV needs to balance its HD ambitions (urban centers) with the bread-andbutter
business (semi-urban and rural price-sensitive HHs); Dish TV proposes to manage
this by focusing its HD marketing efforts on niche media and SD efforts on low-cost
targeted regional/BTL media.
Upgrade to BUY
We upgrade Dish TV to BUY (ADD previously) with FY2013E fair value of Rs90 (Rs95
previously); the reduction in our fair value is on account of assumed higher license fee (10%
versus 8% of gross revenues previously; we have assigned a 50% probability to the
government reducing the license fees to 5-6% of revenues but that does not seem to be the
case anymore given the fiscal situation currently). DTH industry in India heavily taxed with
Service Tax (Central Government), License Fees (Central Government), Entertainment Tax
(State Government) and Income Tax (Central Government; Dish TV is unlikely to pay any
income tax for some time given large accumulated losses) accounting for 20-25% of ARPU.
Thus, lower taxation (reduced License Fees, reduced Entertainment Tax) is a rational demand
but likely not feasible; in fact, our discussions with the industry leads us to believe higher tax
realizations is one of the key reasons behind DAS/digitization.
Accordingly, we have fine-tuned our FY2012E-14E EBITDA to Rs5.5 bn (Rs5.6 bn previously),
Rs7.4 bn (Rs7.8 bn) and Rs9.8 bn (Rs10.1 bn). Dish TV valuation at 9X FY2013E EBITDA is
reasonable given structural growth (~3 mn gross adds) in rural areas even discounting
potential gains from (1) DAS/digitization and (2) HD-DTH. We believe Dish TV would be
valued at a premium to developed market comparables (6-8X CY2012E EBITDA) given
potential for both (1) long-term volume growth (large rural BPL population that may become
APL over time; Dish TV is ideally positioned to tap into the same) and (2) long-term price
increases (current US$3-4/sub-month ARPUs are in line with HHs’ capacity to pay but
average HH income is growing in double-digits). Exhibit 8 presents our per-sub steady-state
valuation for Dish TV and compares it with current valuation; the current valuation does not
give any benefit to (1) hyper-growth phase over the next 4-5 years, (2) potential from gains
from digitization/DAS and (3) premium subs/services (HD-DTH).
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