INSTITUTIONAL EQUITY RESEARCH Dish TV India Ltd (DITV IN) There is no reason to panic INDIA | MEDIA | Company Update 25 February 2016 Over the last month, Dish TV’s stock price has underperformed broader indices on concerns BUY (Maintain) about stumbling ARPU growth and spike in content cost in FY17. Recent rupee weakness has CMP RS 70 also exacerbated worries. In this note, we have tried to address most of the concerns and TARGET RS 115 (+64%) quantify the financial impact on the company. ARPU growth lagging, but recent price hike should aid near‐term growth: Over the last COMPANY DATA three quarters, the company has hiked prices twice and implemented differential pricing in O/S SHARES (MN) : 1066 MARKET CAP (RSBN) : 77 phase‐1 and phase‐2 markets. Even then, the percolation to ARPU growth has been MARKET CAP (USDBN) : 1.1 disappointing due to – (1) increase in service tax to 14.5% from 12.36%, and (2) ARPU 52 ‐ WK HI/LO (RS) : 122 / 68 dilution from Zing’s subscriber additions (Zing contributes 22‐23% of Dish’s net adds, but its LIQUIDITY 3M (USDMN) : 6.7 base packs are 30‐60% cheaper). However, an approximate 4% price hike in August 2015 PAR VALUE (RS) : 1 across all packs should aid ARPU growth and higher proportion of HD subscriber addition SHARE HOLDING PATTERN, % (HD ARPU is more than twice SD ARPU) should negate ARPU dilution due to Zing’s Sep 15 Jun 15 Mar 15 subscribers. Upcoming sports‐heavy calendar would also aid ARPU growth in the current PROMOTERS : 64.5 64.5 64.5 year. We see ARPU CAGR of 4% in FY16‐18. FII / NRI : 20.2 22.8 13.1 FI / MF : 3.8 3.7 3.4 Increase in content cost in FY17 is not likely to surprise negatively: DishTV’s content cost NON PRO : 1.2 4.8 4.1 per subscriber looks low vs. industry peers because it has ~30% inactive subscribers in its PUBLIC & OTHERS : 10.6 8.2 7.0 reported net subscriber base. However, adjusted for this, its content costs are in line with peers. It has tied up content‐cost agreements with most broadcasters until H1CY16; PRICE PERFORMANCE, % 1MTH 3MTH 1YR contracts will come up for renegotiation only after that. Dish says an increase in content cost ABS ‐16.9 ‐29.6 ‐8.9 in FY17 should track its topline growth and should fall once new agreements are in place. In REL TO BSE ‐13.7 ‐21.4 10.6 the last five years, content cost CAGR was 16% – we expect it to be 17% in FY16‐18. PRICE VS. SENSEX Subscriber growth momentum to continue: DishTV missed net subscriber addition 280 estimates in Q3FY16 due to management changes and delays in promotional launches 240 (including its 99‐rupee Dish99 pack). Additionally, to augment its digitisation drive in phase‐ 200 3, it introduced a 360‐degree multi‐media campaign spanning media platforms. This DAS (Digital Addressable System) promotional campaign will enable it to capitalise on a huge 160 base that would switch to digital from analog. With Zing and the Dish99 pack, we expect it to 120 add 1.4/1.5/1.2mn net subscribers in FY16/17/18 (9MFY16 additions at ~1mn). 80 40 Rs 12bn+ OCF in FY17 to sustain subscriber adds momentum and repay debt: Driven by 0 improving operating margins and cash flow generation from WC changes, DishTV should Apr‐14 Oct‐14 Apr‐15 Oct‐15 generate Rs 12.0/14.6bn OCF in FY17/18. With set‐top box (STB) cost remaining stable, it Dish TV BSE Sensex can easily add ~4.5‐5.0mn subscribers per year, without raising incremental debt. We expect it to add 2.5mn subscribers (gross) in FY17/18, giving it the flexibility to pare its entire debt. Source: Phillip Capital India Research KEY FINANCIALS Stock correction in line with broader indices, movement in consensus estimates stable: Rs mn FY16E FY17E FY18E Recent weakness in stock price can be attributed to a miss in reported KPIs in Q3FY16 result. Net Sales 30,597 35,192 40,722 But, over the last six months, consensus estimates (for both EBITDA and earnings) has EBIDTA 10,190 11,605 14,871 inched higher or remained stable, as the company reported robust operating profit growth Net Profit 2,560 4,410 6,013 driven by prudent cost management. Also, the stock is currently near the lower end of its EPS, Rs 2.4 4.1 5.6 trading range (1 standard deviation below its six‐year average on an EV/EBITDA basis). We PER, x 29.1 16.9 12.4 8.1 6.8 4.7 see room for a re‐rating over the next 2‐3 quarters based on increased momentum in EV/EBIDTA, x P/BV, x NM 19.4 7.6 subscriber addition and uptick in ARPU. ROE, % NM 114.9 61.1 Stock price not factoring in improved fundamentals: Over the past few years, Dish TV’s Debt/Equity (%) NM NM 10.2 margin and cash flow profile has improved significantly due to – (1) increased scale of Source: PhillipCapital India Research Est. operations, (2) decreased competitive intensity, and (3) prudent cost management. This Manoj Behera (+ 9122 6667 9973) growth momentum will continue with robust additions in its subscriber base and less than [email protected] inflationary increase in ARPU. FY16‐18 revenue/EBITDA CAGR should be 15%/21%. At CMP, the stock trades at an FCFE yield of 5%/8% on our FY17/18 estimates. We maintain our BUY rating with a March 2017 target price of Rs 115 (unchanged). Page | 1 | PHILLIPCAPITAL INDIA RESEARCH DISH TV COMPANY UPDATE ARPU growth lagging, but recent price hike to aid near‐term growth ARPU growth has been lagging for the last few quarters: Over the last few quarters, ARPU growth has been sluggish (and missed consensus/our estimates) due to two factors: 1. Increase in service tax to 14.5% (including SBC – Swachh Bharat Cess) from 12.36% implemented from June 1st 2015 2. ARPU dilution from Zing’s subscriber additions (Zing contributes 22‐23% of Dish’s net adds, but its base packs are 30‐60% cheaper) ARPU growth has slowed down over the last couple of quarters 182 ARPU*(in Rs) % change yoy (rhs) 12% 180 10% 178 176 8% Service tax and Zing contributed to a fall in ARPU growth 174 6% 172 170 4% 168 2% 166 164 0% Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 *‐ based on old reporting standard Source: Company, PhillipCapital India Research Pack comparison of Dish TV and Zing digital Base pack price Discount to DishTV (RHS) 300 70% 250 60% 50% 200 Zing’s packs are at a steep discount to 40% Dish TV’s 150 30% 100 20% 50 10% 0 0% Dish TV Zing ‐ Odia Zing‐ Bangla Zing‐ Zing‐ Telugu Zing‐ Tamil Zing‐ Marathi Malayalam Source: Company, PhillipCapital India Research Recently hiked prices to support near‐term ARPU growth: The company has hiked prices by 4‐5% across all the packs in August 2015 to negate the impact of the increase in service tax. It has also implemented a differential pricing strategy across all Digital Addressable System‐2 cities (which constitute 42% of its existing subscriber base) since May 2015, which is yet to reflect in ARPU. Page | 2 | PHILLIPCAPITAL INDIA RESEARCH DISH TV COMPANY UPDATE Price movement of various Dish TV packs 600 Prior Aug‐14 Feb‐15 Aug‐15 Metros 500 400 300 200 100 0 New Super Family Pack Maxi Sports Pack All Sports Pack Platinum Sports Pack Source: Company, PhillipCapital India Research Many major sporting events lined up in CY16 – to aid higher HD subscriber adds: CY16 will see many major sporting events (T20 Cricket WC, Euro 2016, and Olympics) that should lead to an uptick in net HD subscriber addition and an increase in subscription of HD packs/sports pack by existing HD/SD subscribers. Comparison of HD packs vs. SD packs Base pack (Rs per month) 500 400 300 200 100 0 SD HD Source: Company, PhillipCapital India Research HD subscribers now contribute to 20.5% of DishTV’s net adds (during the 2015 cricket We see dishtv’s ARPU growth at 4‐5% world cup, this proportion had risen to 22%). In FY17, we estimate HD subscribers will over the next couple of years. constitute 22‐25% of its total net adds and negate the ARPU dilution impact of Zing/Dish99 subscribers – these two factors will support ARPU growth in the near term. Page | 3 | PHILLIPCAPITAL INDIA RESEARCH DISH TV COMPANY UPDATE ARPU growth expected to pick up from FY17 onwards 195 ARP(in Rs) % change yoy (rhs) 5% 190 4% 185 4% 3% 180 3% 175 2% 170 2% 165 1% 160 1% 155 0% FY16E FY17E FY18E FY19E Source: PhillipCapital India Research Content cost escalation unlikely to surprise negatively DishTV’s content cost has seen a CAGR of 16% over the last five years (FY10‐15) vs. subscription revenue growth of 25%; as a % of total revenue, it has declined to 29% in FY15 from 35% in FY10. DishTV says 50% of its content cost is on a fixed‐fee agreement basis (with an annual escalation clause) and the rest is on a cost‐per‐ subscriber basis (CPS). Content cost linked to active subscriber base Content cost negotiation with broadcasters is based on its active subscriber base and not on its net subscriber base. As per the TRAI, the active subscriber base (of the DTH industry) is only 50% of the registered subscriber base – mainly due to the churn from DTH back to analog cable (mainly because of the cost difference).