Asia Pacific India Cable & Satellite (GICS) Media - General (Citi) Company 2 May 2010 32 pages Equity Dish TV (DSTV.BO) Initiation of coverage Initiating with Buy: Satellite Success Buy; Target Price of Rs48 — Digitalization of India's cable & satellite market has Buy/Medium Risk 1M reached an inflexion point, driven by acceleration in DTH market growth. We Price (29 Apr 10) Rs35.60 believe Dish TV is well positioned to benefit from its (a) first-mover advantage, (b) Target price Rs48.00 strong distribution/infrastructure, (c) lower cost base, and (d) attractive fixed price Expected share price return 34.8% content tie-ups. We initiate coverage with Buy (1M) and DCF based TP of Rs48. Expected dividend yield 0.0% DTH subscriber growth on a roll; Dish TV is the leader — We expect the DTH sub Expected total return 34.8% base to double over next 2 yrs to ~32m driven by: (a) investments by 6 corporates Market Cap Rs37,858M resulting in category growth, (b) shift from analog cable, and (c) increase in new US$850M subs from cable dark areas. Dish TV is the market leader with ~7m subs. Strategic focus shifts to profitability — (a) Dish has changed its focus – mix of calibrated growth & profitability v/s pure growth earlier. (b) While the market will Price Performance (RIC: DSTV.BO, BB: DITV IN) follow, we believe Dish’s superior cost controls stand out – the closest local peer's staff costs are 2.5x, despite similar revenues. (c) Scale benefits and fixed programming agreements will drive better payback – we expect contribution/sub to increase ~60% over FY10-FY12E. At our TP, the stock will trade at ~13x FY12E EV/EBITDA, which is reasonable given the high growth – forecast 26% revenue CAGR (global peers avg.: 7%) & improving EBITDA margins to ~25% by FY12E. Balance sheet concerns peaked — While the balance sheet has historically been a concern, we expect recent capital issues (~US$350m) will ensure funding for the next 18 months. Leverage will rise, given the growth, but FCF generation will improve as growth slows/business achieves scale, from FY12 onwards. Consensus likely to lower numbers; but subdued ARPUs in the price — We model near-term pricing pressure (FY11 EBITDA est. is ~17% below consensus), but believe 35% YoY stock underperformance v/s the market prices in the risks. However, volatility around earnings is likely, given risks to consensus estimates. Other risks: Irrational competition & currency (85% of CPE inputs are imported). Figure 1. Dish TV (Consolidated): Statistical Abstract Surendra Goyal, CFA +91-22-6631-9870 Year to Net Profit EPS P/E EBITDA EBITDA EV/EBITDA Net Revenue ROE P/B Growth Revenues Growth [email protected] (Rs Mn) (Rs) (x) (Rs Mn) (%) (x) (Rs Mn) (%) (%) (x) Aditya Mathur FY2008 (4,141) (9.7) (3.7) (2,128) -22.4% nm 4,128 115.4% nm (3.2) +91-22-6631-9841 FY2009 (4,807) (7.0) (5.1) (1,788) 16.0% nm 7,381 78.8% nm (3.8) [email protected] FY2010E (2,845) (2.7) (13.3) 767 nm 58.0 10,724 45.3% nm 10.6 FY2011E (1,902) (1.8) (19.9) 2,061 168.8% 20.4 13,430 25.2% -72.4% 22.6 FY2012E (158) (0.1) nm 4,189 103.2% 10.4 16,962 26.3% -9.9% 24.9 Source: Company Reports and CIRA Estimates See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Citi Investment Research & Analysis is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Citigroup Global Markets Dish TV (DSTV.BO) 2 May 2010 Fiscal year end 31-Mar 2008 2009 2010E 2011E 2012E Valuation Ratios P/E adjusted (x) -3.7 -5.1 -13.3 -19.9 nm EV/EBITDA adjusted (x) -19.4 nm 58.0 20.4 10.4 P/BV (x) -3.2 -3.8 10.6 22.6 24.9 Dividend yield (%) 0.0 0.0 0.0 0.0 0.0 Per Share Data (Rs) EPS adjusted -9.67 -6.99 -2.68 -1.79 -0.15 EPS reported -9.67 -6.99 -2.68 -1.79 -0.15 BVPS -11.00 -9.42 3.37 1.58 1.43 DPS 0.00 0.00 0.00 0.00 0.00 Profit & Loss (RsM) Net sales 4,128 7,381 10,724 13,430 16,962 Operating expenses -7,827 -11,458 -13,133 -15,052 -16,838 EBIT -3,699 -4,077 -2,409 -1,622 124 Net interest expense -469 -737 -516 -375 -510 Non-operating/exceptionals 34 13 80 95 210 Pre-tax profit -4,134 -4,801 -2,845 -1,902 -176 Tax -7 -6 0 0 18 Extraord./Min.Int./Pref.div. 0 0 0 0 0 Reported net income -4,141 -4,807 -2,845 -1,902 -158 Adjusted earnings -4,141 -4,807 -2,845 -1,902 -158 Adjusted EBITDA -2,128 -1,788 767 2,061 4,189 Growth Rates (%) Sales 115.4 78.8 45.3 25.2 26.3 EBIT adjusted -56.6 -10.2 40.9 32.7 107.6 EBITDA adjusted -22.4 16.0 142.9 168.8 103.2 EPS adjusted -72.5 27.7 61.7 33.1 91.7 Cash Flow (RsM) Operating cash flow -247 -2,761 610 2,812 5,896 Depreciation/amortization 1,570 2,289 3,176 3,683 4,065 Net working capital 2,323 -241 279 1,031 1,989 Investing cash flow -2,885 -6,034 -5,373 -6,049 -5,654 Capital expenditure -2,885 -6,034 -5,373 -6,049 -5,654 Acquisitions/disposals 0 0 0 0 0 Financing cash flow 3,515 9,090 11,107 0 -500 Borrowings 3,515 6,047 -1,792 0 -500 Dividends paid 0 0 0 0 0 Change in cash 384 294 6,344 -3,237 -258 Balance Sheet (RsM) Total assets 12,448 21,414 31,514 32,199 35,318 Cash & cash equivalent 511 805 7,149 3,913 3,654 Accounts receivable 403 526 734 920 1,069 Net fixed assets 9,599 13,345 15,541 17,907 19,496 Total liabilities 17,159 27,889 27,936 30,523 33,800 Accounts payable 0 0 0 0 0 For further data queries on Citi's full coverage universe Total Debt 5,445 11,492 9,700 9,700 9,200 please contact CIR Data Services Asia Pacific at [email protected] or +852-2501- Shareholders' funds -4,710 -6,475 3,579 1,676 1,518 2791 Profitability/Solvency Ratios (%) EBITDA margin adjusted -51.6 -24.2 7.2 15.3 24.7 ROE adjusted na na na -72.4 -9.9 ROIC adjusted nm -183.5 -46.5 -23.8 1.9 Net debt to equity na na 71.3 345.2 365.3 Total debt to capital 741.2 229.0 73.1 85.3 85.8 2 Citigroup Global Markets Dish TV (DSTV.BO) 2 May 2010 Contents Initiate with Buy: Target Price of Rs48 4 Valuation 6 Company Overview 8 Industry Overview & Opportunity 9 Competitive Positioning & Strategy 14 Earnings on a Steep Uptrend 17 Risks 23 Annexure 1: Financial Statements 24 Annexure 2: Key Management Personnel 27 Dish TV 28 Company description 28 Investment strategy 28 Valuation 28 Risks 28 Appendix A-1 29 3 Citigroup Global Markets Dish TV (DSTV.BO) 2 May 2010 Initiate with Buy: Target Price of Rs48 Investment Thesis Digitalization of India's cable and satellite Dish TV is the leader in Direct to Home (DTH) satellite broadcast operations in markets has reached an inflexion point on India, benefiting from the high growth in the digitization of the cable & satellite the back of high DTH market growth market. We initiate coverage with a Buy/Medium Risk (1M) rating. Aggressive investments behind the DTH category have accelerated subscriber growth. The market is growing with (a) conversions from analog cable and (b) new subscriber additions in cable dark areas. Dish TV will benefit from its first Dish TV is well positioned to benefit from mover advantage, superior infrastructure and good distribution. We believe its first mover advantage, strong Dish TV is now in a sweet spot with a good scale (gross subscriber base of distribution & infrastructure and lower ~7m), attractive content tie-ups and adequate funding (post GDR/rights). cost base Management focus has shifted from 'growth' to 'profitable growth' – SAC (subscriber acquisition costs) has come down a little from the peak. We believe management focus now seems We expect ~26% revenue CAGR over FY10-12E on the back of strong growth in to be on profitability also, rather than only number of DTH subscribers. Dish TV's revenue growth rates are higher - global subscriber growth peers average around ~7% CAGR over the same period. Figure 2. Dish TV – Gross and Net Subscribers Base (mn) Figure 3. Dish TV – Net Revenues and Revenue Growth Trends (Rs M, %) 12.0 18,000 180% 11.1 16,962 171% 16,077 16,000 160% 10.0 9.1 14,000 13,430 140% 8.3 12,607 8.0 12,000 120% 7.1 10,724 6.9 10,019 10,000 83% 100% 6.0 5.7 5.1 8,000 7,149 7,381 80% 4.3 4.0 6,000 60% 3.0 3,8984,128 2.5 4,000 40% 40% 28% 2.0 1,916 26% 2,000 1,438 20% - - 0% 2008 2009 2010E 2011E 2012E 2007 2008 2009 2010E 2011E 2012E DTH Revenues (Rs Mn, LHS) Overall Revenues (Rs Mn, LHS) Growth in DTH Revenues (%, RHS) Net Subscibers (m) Gross Subscribers (m) Source: Company Reports and Citi Investment Research & Analysis estimates Source: Company Reports and Citi Investment Research & Analysis estimates Competition may put pressure on ARPUs in the near-term.