Dish Infra Services Private Limited February 05, 2019 Summary of rating action Previous Rated Current Rated Instrument* Amount Amount Rating Action (Rs. crore) (Rs. crore) Long-term Loans 400.0 400.0 [ICRA]A+@; placed on rating watch with negative implications Long-term / Short-term, (400.0) (400.0) [ICRA]A+@ / [ICRA]A1@; placed on Fund-based / Non-fund Based Limits^ rating watch with negative implications Total 400.0 400.0 *Instrument details are provided in Annexure-1 ^Sub-limit of long-term loans Material Event The share price of some Essel Group entities, primarily Zee Entertainment Enterprises Limited (ZEEL) and Dish TV India Limited (DTIL) witnessed a sharp correction on January 25, 2019 following a media article alleging its association with an entity being probed by the Serious Frauds Investigation Office (SFIO). The management has, however, categorically denied any association of the promoters or of the operating companies in the Group with the said entity. Rating Action ICRA has placed the long-term rating of [ICRA]A+ (pronounced ICRA A plus) and the short-term rating of [ICRA]A1 (pronounced ICRA A one) outstanding on the Rs. 400.0 crore bank facilities of Dish Infra Services Private Limited (DISPL) on rating watch with negative implications. Rationale While assigning the ratings, ICRA has taken a consolidated view of DISPL along with its parent, DTIL (or Dish TV) and post amalgamation of Videocon d2h Limited (Vd2h) into DTIL. The ratings have been placed on watch with negative implications on account of the reduced financial flexibility of the Essel Group promoters, following the recent decline in the share price of some of the key Group entities and continued high level of pledged shareholding—~60% of the promoters’ shareholding across the listed entities1 of the Essel Group was pledged as on December 31, 20182. This is expected to reduce promoter’s group ability to support the operating entities. Improvement in the financial flexibility of the Group is a key rating sensitivity. 1 Includes, ZEEL, DTIL, SITI Networks Limited (SNL), Zee Media Corporation Limited (ZMCL), Essel Propack Limited and Zee Learn Limited 2 The Essel Group promoters have entered into an agreement with the lenders, wherein the latter agreed to not invoke pledges due to the event of default that occurred owing to the sharp decline in the share price of ZEEL and DTIL. As per the agreement, the lenders have drawn comfort from aresolution through the strategic sale of upto 50% of the promoters’ shareholding in ZEEL, in a time-bound manner. Furthermore, it has been agreed that the equity proceeds of the strategic sale will be first utilised towards the repayment of dues to the lenders. The Group, through Essel Infraprojects Limited (EIL), is also in the process of raising additional funds by way of stake sale in its solar, transmission and certain road projects (with the company having finalised transactions for transmission projects). 1 The ratings continue to derive strength from DTIL’s leadership position in the direct-to-home (DTH) industry in India, which has been further strengthened post the merger of Vd2h with itself, effective from March 22, 20183. The merged entity had a combined net (active) subscriber base of 23.5 million as on September 30, 2018. The average revenue per user (ARPU) of the merged entity stood at Rs. 207 per month in Q2 FY2019 vis-a-vis Rs. 204 per month in Q4 FY2018. Notwithstanding the improvement in the ARPU of the merged entity (vis-a-vis the standalone (pre-merger) ARPU of DTIL of Rs. 144-149 per month), it remains lower relative to other major players, given the higher percentage of subscriber base of DTIL in the non-metro areas, which are typically low ARPU generating regions. The total (net) subscriber additions stood at 0.5 million in H1 FY2019, with the management targeting net subscriber additions of 1.3 million for FY2019. The financial performance of the company in H1 FY2019 was in line with ICRA expectations, with the company having achieved revenues of Rs. 3,249.9 crore. The synergy benefits arising from the merger of Vd2h into DTIL have also started flowing in, as evinced in improved operating profit margin (OPM) of 33.8% in H1 FY2019. With quarterly cash accruals of ~Rs. 380 crore and debt repayment (net of proposed refinancing) of Rs. 771.9 crore for FY2019, the liquidity position of the company is comfortable. The company also had a cash and bank balance of Rs. 400.0 crore as on September 30, 2018. ICRA, however, notes the high potential liability of unpaid license fees of ~Rs. 2,785.2 crore (as on March 31, 2018). This disputed liability is at present sub-judice. In the event of an adverse verdict, cash outflows could be large and result in weakening of the financial profile of the company. ICRA would continue to monitor the developments in this regard. ICRA notes that the direct-to-home (DTH) is a capital and technology intensive industry and DTIL is expected to remain in the investment mode over the near term. The ratings are constrained by the intense competition in the industry from other DTH players, especially DD Freedish, as well as from alternative technology platforms like over-the-top (OTT) media services, digital cable and internet protocol television (IPTV), which can impact DTIL’s subscriber acquisition plans and ARPU improvement. ICRA also notes the proposed new Telecom Regulatory Authority of India’s (TRAI) Tariff Order for the Broadcasting and cable distribution industry, which is being implemented from February 1, 2019. ICRA will continued to monitor the impact of the same on the credit profile of DTIL. Rating Watch with Negative Implications The ratings have been placed on watch due to the reduced financial flexibility of the Group following the recent sharp decline in the share price of DTIL and some other entities of the Group and the high level of pledged shareholding across the listed entities of the Group. This is expected to reduce promoter’s group ability to support the operating entities. Improvement in the financial flexibility of the Group is a key rating sensitivity. This apart, the ratings may be downgraded if DTIL’s credit profile weakens due to higher than estimated debt-funded capital expenditure or lower than estimated accruals. The unpaid and currently disputed license fee also remains a potential negative. 3 The appointed date of the amalgamation is October 1, 2017 2 Key rating drivers Credit strengths Market leadership position – As on September 30, 2018, the combined net (active) subscriber base of DTIL and Vd2h stood at 23.5 million and ranked the highest in the domestic DTH industry. Healthy liquidity supported by free cash and bank balance and liquid investments – At the consolidated level, DTIL had an estimated cash and bank balance of Rs. 400 crore as on September 30, 2018. The synergy benefits arising from the merger of Vd2h into DTIL have also started flowing in, as evinced in improved OPM of 33.8% in H1 FY2019. With quarterly cash accruals of ~Rs. 380 crore and debt repayment (net of proposed refinancing) of Rs. 771.9 crore for FY2019, the liquidity position of the company is comfortable. Digitisation of cable television (TV) systems in India augurs well for revenue growth – The Ministry of Information and Broadcasting (MIB) had laid down several deadlines for complete digitisation of cable TV systems in India, which have witnessed several deferments. The sunset date for digitisation of Phase 3 areas was extended to January 31, 2017, and for the Phase 4 areas to March 31, 2017. However, despite these sunset dates, there has been no switching off of the analog signals in several of these areas. Of the total subscriber base of ~52 million in Phase 3 areas, there continues to remain around 6 million analog subscribers. Similarly, the total analog subscriber base in Phase 4 remains at around 40 million at present. While the digitisation in these areas is progressing slowly, there is a huge opportunity for subscriber addition and thus revenue growth. Nonetheless, the same will depend on the competition and ARPU movement. Credit challenges Reduced financial flexibility of the Group- The ratings factor in the high likelihood of the promoter Group, the Essel Group, extending financial support to DTIL. The financial flexibility of the Essel Group promoters and its entities has, however, reduced following the recent sharp decline in the share price of some entities of the Essel Group and continued high level of pledged shareholding across the listed entities of the Group. Improvement in the financial flexibility of the Group is a key rating sensitivity. Relatively lower ARPU than peers – The ARPU of the merged entity stood at Rs. 207 per month in Q2 FY2019 vis-a-vis Rs. 204 per month in Q4 FY2018. Notwithstanding the improvement in the ARPU of the merged entity (vis-a-vis the standalone (pre-merger) ARPU of DTIL of Rs. 144-149 per month), it remains lower relative to other major players, given the higher percentage of subscriber base of DTIL in the non-metro areas, which are typically low ARPU generating regions. High potential liability on account of unpaid licence fees; adverse ruling for the same could result in weakening of the financial profile – DTIL has a high potential liability of unpaid licence fees of ~Rs. 2,758 crore as on March 31, 2018, for which the matter is at present sub-judice. Any adverse ruling for the same could result in moderation in the financial profile. However, the company has unencumbered cash and bank balance, along with liquid investments of ~Rs.