Dish TV,Towards blue-sky valuation; REDUCE:: Kotak Sec,

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Towards blue-sky valuation; REDUCE. Dish TV’s near-term operating performance
remains robust—(1) strong volume growth, (2) price increases in Sep 2010 (effective
3QFY11E), (3) operating leverage given large fixed costs and (4) potential regulatory
drivers. However, the stock is nearing its blue-sky valuation scenario and factoring in
(1) simultaneous strong growth in volume and pricing (unlikely, in our view) and
(2) expectations of regulatory upsides (running ahead of reality). Downgrade to REDUCE
with 12-month DCF-based target price of Rs55 (Rs47 previously).


Strong operating performance continues; FY2011E may not be right benchmark, however
Dish TV’s (and DTH’s) strong operating performance continues with (1) strong volume growth
YTD-FY2011E (0.46 mn additions in July-August 2010 to cross 8 mn gross subscriber landmark,
one month ahead of our expectation), (2) price increases of Rs10-15 in September 2010 (effective
3QFY11E; in line with average 3-5% price growth expected in FY2011E) and (3) positive operating
leverage as volume and pricing growth likely outpaces large semi-fixed (content) and fixed
(marketing, distribution) cost base (see Exhibit 1).
However, we highlight that FY2011E may not be the right benchmark given (1) strong sports
calendar in FY2011E (see Exhibit 2), which has been leveraged well by organized DTH operators,
(2) likely continued shift of rural subscribers from FTA DD Direct platform to commercial pay-TV
DTH operators (see Exhibit 3; limited potential given peak claimed subscriber base of ~6-7 mn) as
well as (3) one-off technical issues with Sun Direct, which have been resolved with Reliance Big TV
sharing some of its transponders with Sun Direct.
Trade-off between volume and pricing, rising competitive intensity are the key risks
The competitive intensity in the DTH segment has returned as seen by the aggressive pricing of the
new schemes launched. (1) Tata Sky started off by reducing the price of its basic DTH service to
Rs990 and (2) Dish TV followed by launching a similar offer; (3) Sun Direct and Videocon
countered by reducing the price of their basic DTH service to Rs890 and (4) Dish TV has reacted by
offering Rs990 worth of free content with the basic DTH service. We believe there may be both
structural (equity infusion in Tata Sky and Sun Direct by strategic investors) and cyclical (festival
season in Oct-Nov 2010) elements to the new schemes.
However, we are more concerned about the sub-Rs100 basic package re-introduced by Sun Direct.
We note that price increases by Dish TV recently (Rs10-15 on its Rs125-210 packages) had raised
expectations of pricing power returning to the DTH industry. However, the price-volume trade-off
highlighted in our note “Weak Dish TV 3QFY10 reveals certain ARPU myths” dated January 25,
2010 remains in place. Dish TV may be able to meet its ARPU guidance for FY2011E but its ability
to take further price hikes remains uncertain.