Low subscriber addition, high cost impact margins
We upgrade Dish TV to Buy from Hold as we believe the company is taking right
steps towards maintaining a balance between growth and lean balance sheet. It is
well set to capitalize on its distribution reach to benefit from digitization and free
cash to fund future growth. Triggers of increasing ARPU post MSO billing in PhaseI/II cities, reduction in content cost following sustained efforts and reduction in
license fees could help in margin expansion. 22% correction in stock price after
our downgrade to Hold offers further comfort despite disappointment in Q3FY14
results on subscriber additions and margins.
Q3FY14 results below expectations: Dish TV posted 10% YoY growth in revenues
on the back of 11.8% YoY (2.9% QoQ) growth in subscription revenues led by 3.75%
YoY improvement in ARPU (Rs166, in line with expectations) and 7.4% YoY growth
in net subscribers (220K addition). Operating profit declined by 1.6% YoY (down
8.4% QoQ) due to 22% YoY increase in programming & other costs and higher
transponder cost on the back of rupee depreciation. Hence, operating margin was
at 22.1%, 415bps below expectations. Losses increased to Rs383mn against
Rs226mn expected.
Subscriber addition remains low: Management believes net subscriber addition
was the lowest in the industry in the past 3 years during the recent festive season
with Dish TV maintaining 20% incremental market share. We have reduced FY14
net subscriber addition to 0.8mn (guidance of 0.85-0.9mn). Management estimates
the demand to pick up on the back of Phase-III/IV digitisation with relevant market
of 40-45mn subscribers with DTH companies expected to have 60% market share.
Despite churn remaining under control at 0.6%, ARPU was flat QoQ on the back of
free viewing offered to the customers due to high competition.
Focus on healthy balance sheet: Company has repaid debt of Rs3.3bn during the
quarter and also expects to re-pay $42mn in Q4FY14 which would lead to ~Rs6bn
in net-debt by FY14. On-request offering of Indiacast channels could help the
company reduce its content cost over medium term while it would have an
opportunity to increase ARPU once MSO billing starts in Phase-I/II cities leading to
margin expansion. Further reduction in license fees to 6-8% against current 10%
could act as a trigger.
Valuations & Risks: We have cut our subscriber estimates for FY14/FY15 along
with lower operating margins on the back of fixed cost model. We upgrade the
stock to BUY with a target price of Rs62 and value it at 8x Dec 2015 EV/EBIDTA as
the stock has fallen by 22% post our downgrade to Hold on 1st January 2014. We
believe the company is taking right steps towards maintaining a balance between
growth and lean balance sheet. It is well set to capitalize on its distribution reach to
benefit from digitization and free cash to fund future growth internationally. Key
risk could be further delay in digitization and inability to increase ARPU.
��
We upgrade Dish TV to Buy from Hold as we believe the company is taking right
steps towards maintaining a balance between growth and lean balance sheet. It is
well set to capitalize on its distribution reach to benefit from digitization and free
cash to fund future growth. Triggers of increasing ARPU post MSO billing in PhaseI/II cities, reduction in content cost following sustained efforts and reduction in
license fees could help in margin expansion. 22% correction in stock price after
our downgrade to Hold offers further comfort despite disappointment in Q3FY14
results on subscriber additions and margins.
Q3FY14 results below expectations: Dish TV posted 10% YoY growth in revenues
on the back of 11.8% YoY (2.9% QoQ) growth in subscription revenues led by 3.75%
YoY improvement in ARPU (Rs166, in line with expectations) and 7.4% YoY growth
in net subscribers (220K addition). Operating profit declined by 1.6% YoY (down
8.4% QoQ) due to 22% YoY increase in programming & other costs and higher
transponder cost on the back of rupee depreciation. Hence, operating margin was
at 22.1%, 415bps below expectations. Losses increased to Rs383mn against
Rs226mn expected.
Subscriber addition remains low: Management believes net subscriber addition
was the lowest in the industry in the past 3 years during the recent festive season
with Dish TV maintaining 20% incremental market share. We have reduced FY14
net subscriber addition to 0.8mn (guidance of 0.85-0.9mn). Management estimates
the demand to pick up on the back of Phase-III/IV digitisation with relevant market
of 40-45mn subscribers with DTH companies expected to have 60% market share.
Despite churn remaining under control at 0.6%, ARPU was flat QoQ on the back of
free viewing offered to the customers due to high competition.
Focus on healthy balance sheet: Company has repaid debt of Rs3.3bn during the
quarter and also expects to re-pay $42mn in Q4FY14 which would lead to ~Rs6bn
in net-debt by FY14. On-request offering of Indiacast channels could help the
company reduce its content cost over medium term while it would have an
opportunity to increase ARPU once MSO billing starts in Phase-I/II cities leading to
margin expansion. Further reduction in license fees to 6-8% against current 10%
could act as a trigger.
Valuations & Risks: We have cut our subscriber estimates for FY14/FY15 along
with lower operating margins on the back of fixed cost model. We upgrade the
stock to BUY with a target price of Rs62 and value it at 8x Dec 2015 EV/EBIDTA as
the stock has fallen by 22% post our downgrade to Hold on 1st January 2014. We
believe the company is taking right steps towards maintaining a balance between
growth and lean balance sheet. It is well set to capitalize on its distribution reach to
benefit from digitization and free cash to fund future growth internationally. Key
risk could be further delay in digitization and inability to increase ARPU.
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