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Well-placed to benefit from ongoing digitization
Concerns - competition, tapering content cost leverage, high expectations
We re-initiate coverage, with a Neutral rating and target price of INR65.
DITV has a strong leadership position in the pay TV market and will benefit from
ongoing digitization.
However, we are cautious due to increasing competitive activity, lower room to squeeze
content cost and already high consensus expectations.
Re-initiating coverage with Neutral rating and TP of INR65: We re-initiate
coverage on Dish TV (DITV), with a Neutral rating and target price of INR65. DITV
is well positioned to benefit from the ongoing digitalization further boosted by
government regulations to phase-out analogue broadcasting which should drive
22% revenue CAGR and 30% EBITDA CAGR over FY12-14E. However we are
cautious due to 1) likely increase in competitive activity as six DTH operators
and several MSOs might see digitalization as an opportunity to grab subscribers,
2) lower room to squeeze content cost percentage further down, and 3) already
high consensus expectations. Our FY13/14 EBITDA estimates are 9/6% lower than
consensus. Valuation at 9.3x FY14 EV/EBITDA (11.6x adjusting for lease rentals)
and ~USD110/subscriber is not inexpensive.
Strong leadership position in DTH; high churn and potential increase in
competitive intensity remain concerns: DTH technology is leading the
digitization wave, with industry subscriber base of ~40m or one-third of the
total cable and satellite base of ~120m. The DTH industry has been riding a
tailwind of (1) weak competition from the fragmented cable industry, (2)
preferred treatment from broadcasters (in the form of fixed-fee payment
structures), who have been combating under-declaration by cable operators,
(3) better execution capabilities, (4) strong balance sheet support, resulting in
ability to withstand significant cash burn, and (5) the government's fresh deadline
for sunset of analog broadcasting by December 2014. DITV enjoys a leadership
position, with ~30% subscriber share in the fast-growing 6-player Indian DTH
market. However, we expect subscriber churn to peak in FY12 and remain at
elevated levels going forward (14-15% p.a. of net subs) as compared to FY09-11
levels (9-10%) due to increase in competition from DTH as well as cable operators.
Expect 19% subscriber CAGR, 6% ARPU CAGR over FY12-14: Subscriber additions
have weakened since 3QFY11 due to (1) one-off demand in the earlier period
related to cricket World Cup and IPL, (2) general economic slowdown, and (3)
increase in connection costs and tariffs by the DTH industry. We model gross
subscriber addition of 2.7m in FY12 (v/s 3.5m in FY11), 3.5m in FY13 and 4m in
FY14, which will drive ~19% CAGR in average net subscribers over FY12-14. We
model 6% CAGR in DITV's ARPU over FY12-14, which will be driven by increase in
renewal ARPU as well as lower proportion of subscribers on activation plans.
Operating leverage benefit from content cost to reduce going forward: DITV has
fixed-fee contracts (with annual escalation of 7-9%) with all broadcasters except
Sun TV, providing significant operating leverage and driving reduction in
programming and content costs from 61% of revenue in FY08 to 32% in FY12. DITV's
contract with the largest content provider (Media Pro) is coming up for renewal in
1QFY13, which could be negotiated at ~20% higher rate. We build ~23% CAGR in
content costs for DITV over FY12-14 v/s revenue CAGR of ~22%. We believe pressure
from broadcasters for a higher share of end-user revenue will increase as the DTH
industry matures.
Accounting treatment results in ~8ppt overstatement of EBITDA margin: DITV
capitalizes the set-top box provided to subscribers and amortizes it over five years.
The STB is subsidized and the partial payment made by the subscriber is recognized
as "lease rental", which has no associated operating costs above the EBITDA line.
Lease rental contributes ~10% to DITV revenue, excluding which DITV's FY12E EBITDA
margin would be ~17% (v/s reported EBITDA margin of ~25%).
Capex intensity to remain 30%+: DITV is expected to incur a capex of ~INR6b in FY12,
down 19% YoY, led by lower subscriber additions. However, we believe that strong
subscriber addition momentum will keep capex/sales above 30% up to FY14.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Well-placed to benefit from ongoing digitization
Concerns - competition, tapering content cost leverage, high expectations
We re-initiate coverage, with a Neutral rating and target price of INR65.
DITV has a strong leadership position in the pay TV market and will benefit from
ongoing digitization.
However, we are cautious due to increasing competitive activity, lower room to squeeze
content cost and already high consensus expectations.
Re-initiating coverage with Neutral rating and TP of INR65: We re-initiate
coverage on Dish TV (DITV), with a Neutral rating and target price of INR65. DITV
is well positioned to benefit from the ongoing digitalization further boosted by
government regulations to phase-out analogue broadcasting which should drive
22% revenue CAGR and 30% EBITDA CAGR over FY12-14E. However we are
cautious due to 1) likely increase in competitive activity as six DTH operators
and several MSOs might see digitalization as an opportunity to grab subscribers,
2) lower room to squeeze content cost percentage further down, and 3) already
high consensus expectations. Our FY13/14 EBITDA estimates are 9/6% lower than
consensus. Valuation at 9.3x FY14 EV/EBITDA (11.6x adjusting for lease rentals)
and ~USD110/subscriber is not inexpensive.
Strong leadership position in DTH; high churn and potential increase in
competitive intensity remain concerns: DTH technology is leading the
digitization wave, with industry subscriber base of ~40m or one-third of the
total cable and satellite base of ~120m. The DTH industry has been riding a
tailwind of (1) weak competition from the fragmented cable industry, (2)
preferred treatment from broadcasters (in the form of fixed-fee payment
structures), who have been combating under-declaration by cable operators,
(3) better execution capabilities, (4) strong balance sheet support, resulting in
ability to withstand significant cash burn, and (5) the government's fresh deadline
for sunset of analog broadcasting by December 2014. DITV enjoys a leadership
position, with ~30% subscriber share in the fast-growing 6-player Indian DTH
market. However, we expect subscriber churn to peak in FY12 and remain at
elevated levels going forward (14-15% p.a. of net subs) as compared to FY09-11
levels (9-10%) due to increase in competition from DTH as well as cable operators.
Expect 19% subscriber CAGR, 6% ARPU CAGR over FY12-14: Subscriber additions
have weakened since 3QFY11 due to (1) one-off demand in the earlier period
related to cricket World Cup and IPL, (2) general economic slowdown, and (3)
increase in connection costs and tariffs by the DTH industry. We model gross
subscriber addition of 2.7m in FY12 (v/s 3.5m in FY11), 3.5m in FY13 and 4m in
FY14, which will drive ~19% CAGR in average net subscribers over FY12-14. We
model 6% CAGR in DITV's ARPU over FY12-14, which will be driven by increase in
renewal ARPU as well as lower proportion of subscribers on activation plans.
Operating leverage benefit from content cost to reduce going forward: DITV has
fixed-fee contracts (with annual escalation of 7-9%) with all broadcasters except
Sun TV, providing significant operating leverage and driving reduction in
programming and content costs from 61% of revenue in FY08 to 32% in FY12. DITV's
contract with the largest content provider (Media Pro) is coming up for renewal in
1QFY13, which could be negotiated at ~20% higher rate. We build ~23% CAGR in
content costs for DITV over FY12-14 v/s revenue CAGR of ~22%. We believe pressure
from broadcasters for a higher share of end-user revenue will increase as the DTH
industry matures.
Accounting treatment results in ~8ppt overstatement of EBITDA margin: DITV
capitalizes the set-top box provided to subscribers and amortizes it over five years.
The STB is subsidized and the partial payment made by the subscriber is recognized
as "lease rental", which has no associated operating costs above the EBITDA line.
Lease rental contributes ~10% to DITV revenue, excluding which DITV's FY12E EBITDA
margin would be ~17% (v/s reported EBITDA margin of ~25%).
Capex intensity to remain 30%+: DITV is expected to incur a capex of ~INR6b in FY12,
down 19% YoY, led by lower subscriber additions. However, we believe that strong
subscriber addition momentum will keep capex/sales above 30% up to FY14.
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