Dish TV ; rich valuations limit upside.:: Kotak Sec

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DishTV (DITV)
Media
Robust 2QFY11 operationally as well as financially; rich valuations limit upside.
Dish TV reported robust 2QFY11 EBITDA of Rs498 mn (+95% yoy; +55% qoq) versus
our Rs450 mn expectation with solid operational metrics (barring ARPUs) from (1) gross
addition of 0.76 mn subs (0.66 mn expectation) (2) annualized churn rate of 8.6%
(9.0%) and (3) content cost at 39% of DTH revenues (40%). Retain REDUCE with a
revised TP of Rs57 (Rs55 previously) after a 3.6X increase in EBITDA in FY2011E-14E
(35% EBITDA margin in FY2014E). The stock is valued at 8X FY2014E EV/EBITDA in line
with global peers (growth over the next 3-4 years captured in valuation).


Robust 2QFY11 results with all operational and financial parameters in line (except ARPU)
􀁠 Dish TV reported robust 2QFY11 EBITDA of Rs498 mn (+95% yoy; +55% qoq) versus our
Rs450 mn expectation; the positive variance was largely on account of robust cost control
though ARPUs continued to remain subdued at Rs139/sub-month.
􀁠 Dish TV reported robust subscriber volumes of 0.76 mn versus our 0.66 mn expectation and
churn at 0.14 mn was in line with expectation (annualized churn rate at 8.6% was lower versus
our 9.0% expectation). We do not reckon FY2011E to be the right subs addition benchmark
given (1) a strong sports calendar, (2) shift of rural subs from FTA DD Direct to pay-TV DTH and
(3) one-off technical issues with Sun Direct, which have been resolved.
􀁠 However, the ability of Dish TV to control cost was the key driving force behind the continued
positive operating leverage. (1) Content cost increased only 9% yoy, 9% below our expectation.
(2) Advertising cost at Rs177 mn also came in below our expectation. However, the company
noted higher advertising spends ahead in 3QFY11 (festival season).
With due respect to the past, the future looks ‘good’ for pricing but not ‘rosy’
We have previously discussed our investment rationale for Dish TV in our report “Towards a bluesky
valuation scenario” dated October 18, 2010. We maintain that though volume growth has the
potential to surprise positively, the trade-off will be on account of pricing at scheme as well as
package level. (1) We highlight that Dish TV revised its initial festival scheme recently (see Exhibit 2;
with a 100% cash back offer in the form of content) on account of new schemes from
competition; the revised scheme will likely help Dish TV meet its volume targets but with higher
cost of doing business. (2) We also highlight that Sun Direct and Tata Sky have launched new basic
packages at Rs99 (Rs110 previously) and Rs150 (Rs160 previously). Dish TV has the option of
raising its basic package price in future (Rs135 from Rs125 recently) but the strategy risks market
share loss to mass (Sun Direct) and premium (Tata Sky) players.