J.P. Morgan - Dish TV

Dish TV (DITV IN) Earnings disappoint on content cost inflation. Positive FCF is the main improvement in financials		Overweight Price Target: Rs60.00 PT End Date: 31 Mar 2015

DITV’s earnings (loss of Rs 1.4/Share) disappointed vs. expectations. Earnings had few accounting adjustments (Net Impact reported EBITDA higher by Rs 0.7B). Key positive read through was that through F14 DITV has generated positive FCF of Rs 3.1B (Rs 2.9/Share) thus putting the stock at a 5% FCFE yield. Net addition has improved for the company in Q4 and as digitization moves into tier 3/rural areas DTH will likely perform better. At current market price we believe that risk reward is positive given limited benefit being attributed either to a) The company’s initiatives on margin improvement in F15 or b) Longer term optionality on ARPU improvement in a post digitization scenario.

· Key negatives – 1. DITVs Q4 earnings had a number of accounting adjustments (Net result reported EBITDA higher by Rs 0.7B). New accounting norm of upfront activation revenue may be concerning but seems to be in line with industry practice. 2. EBITDA margin at 25% for F14 (restated basis) has been under pressure due to heavy content cost increase (+19%) through the year vs. ARPU improvement of 7.6%. 3. Capex will likely increase as rollout of phase 4/5 markets start.

· Key positives – 1. Company has turned FCF positive (5% yield on F14 basis) with net debt correspondingly reduced 2. Initiatives on content cost management being put in place. Co expects 150bps reduction on content cost to revenue over F15 thus regaining some part of lost margins. 3. Co has regained lost market share in Q4 in net adds (0.22MM) and 4. Tariff hikes of 10% being taken in June (except entry packs).

· Outlook for F15- Given a low base formed in F14, we think comps will be easier for the company to beat going into F15. Operating initiatives taken in terms of content cost management, tariff hikes, churn containment and volume growth in phase 4/5 provide multiple levers for showing improved growth ahead. Risk remains in terms of high competitive intensity in the industry, which could keep tariff hikes under check.

Table 1: DITV - Q4F14 earnings table

Rs M, year end March	Dec-13	Mar-14	% Q/Q
Net Revenues	6,207	6,348.5	2%
Other Operating Income	30.9	20.6	-33%
Total Income	6,238.1	6,369.1	2%
Expenditure
Purchases of stock in trade	15.3	3.6	-76%
Change in stock	2.4	10.8	350%
License Fees	645.8	669.8	4%
Other operating costs	742.4	823.8	11%
Commission	503.7	506.5	1%
Other expenses	323.4	512.7	59%
Employees cost	215.2	210.2	-2%
Total	4,783.8	5,079.7	6%
EBITDA	1,454.3	1,289.4	-11%
EBITDA Margin (%)	23.3	20.2	(3.1)
Depreciation	1,534.0	1,490.8	-3%
EBIT	(79.7)	(201.4)	153%
Other Income	97.1	200.9	107%
Interest	301.0	326.3	8%
Profit before exceptional	(283.6)	(326.8)	NM
Exceptional	0.0	1,163.7
Profit before tax	(283.6)	(1,490.5)	NM
Profit after tax before minorities	(283.6)	(1,490.5)	NM
Net profit	(283.6)	(1,490.5)	NM

Source: Company reports

 

Investment Thesis

We think shares of Dish TV are attractively valued from a risk-reward perspective at the current market price. Capex rationalization, initiatives on content cost / churn management and increasing share of value added service offerings should result in positive FCF sustaining hereon. Longer term, we believe ARPU increase potential is mostly undiscounted in the price. At FY15E EV/EBITDA of 8.8x (average range 14x over CY10-13), we think the stock discounts most of the risks.

Valuation

Our Mar-15 price target of Rs60 implies a 9.2x forward EV/EBITDA as against last 3 year average range of 14x and at a 10-15% discount to regional peers. While the stock is currently trading at a discount to the peers, we believe valuations should catch up as progress on debt reduction comes though given improving cash flow position.

Risks to Rating and Price Target

Key near term risks will be industry discipline, longer than anticipated (2 year) delay in digitization implementation, higher than expected capex resulting in negative FCF and risk on pledged shares.

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