Seeing Better Than Buying - Dish TV

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Dish TV, which came into being by the de-merger of the direct consumer businesses of Zee Entertainment and the merger of Siti Cable and New Era Entertainment in 2006 is India’s first and the largest DTH operator in India with 5.7 mil-lion subscribers and a market share of approximately 33 per cent at the end of FY10.

This huge subscriber base has been achieved in the last four years. And going forward, Rajeev Dalmia, CFO, Dish TV, continues to be “bullish on the entire industry and expects it to maintain the run rate for at least the next two and half years with Dish TV maintaining its leadership position”.

The reason for such bullishness is not unfounded. The DTH market acquired around 1.6 crore subscribers by the end of 2009, which constitutes only 12.4 per cent of the total of 12.9 crore TV households in India. This represents a huge untapped market for the DTH service providers. Even if we consider 9.5 crore cables and satellite homes that represent the most potent market for DTH service providers, we find a huge market waiting to be tapped.  Dish TV, which has the ‘first mover’ advantage, has covered 33 per cent of the total DTH ground and is a market leader. But the path ahead is not so easy as many big brands have plunged into the market and the competition is tough ahead. Apart from other DTH players, the company also has to compete with digital cable providers to acquire customers. Experience in other parts of the world shows that consumers prefer more of digital cable compared to DTH,  due to its usage as cable TV, cable broadband and cable telephony.

This fact is substantiated by one of the reports by FICCI-KPMG that estimates India’s digital cable subscriber numbers will record a CAGR of 58 per cent for the period 2009-14, compared with a CAGR of 22 per cent for the DTH in the same period.  However, when we analysed the figures from India, the results were contrary to this report. The digital cable subscriber base has doubled to around 4 million over the past 3-4 years; whereas the number of DTH subscribers has accelerated more than five times to 1.6 Cr households (as of Dec 2009) over the same period. The reason for this may be the huge investments carried out by the DTH players to educate and spread DTH services. The other factor that might limit the expansion of digital cable is its absence in rural areas and places where it is difficult to install cables. Nevertheless, let us check how Dish TV is playing its card in this competitive environment.[PAGE BREAK]

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One thing that is clearly in favour of Dish TV is its ‘first mover’ advantage and focus in areas beyond the top 100 cities, where the threat from cable TV is the least. The same strategy has helped the company to garner a huge market share. However, with the coming of new players in the market, the company is losing its market share though it is increasing the subscriber base in absolute numbers. At the end of March 2009, Dish TV had a market share of approximately 42 per cent and a gross subscriber base of 5.1 million.

The figures at the end of March 2010 are 33 per cent and 6.9 million respectively. Going ahead, we feel the trend will continue as the entire market is expanding and the competition is intensifying.

However, what will help Dish TV to stay ahead of the competition is its size. A business like this requires a critical scale to be profitable. The critical scale helps the company to reduce its content cost and other operational costs on a per subscriber basis.

This is clearly visible in the results of the company wherein content cost, which includes primarily programming costs, has come down from 83 per cent of its revenue in 2007 to 40 per cent last year. This is further going to reduce because “the content cost is increasing by 7 per cent but revenue is growing by 42 per cent,” explains Rajeev Dalmia, adding, “We have entered into a fixed contract with broadcasters for the next 3-5 years and for next two years content cost will remain almost fixed.” One of the unseen benefits of increasing competition is that awareness is being generated about the DTH service and with a strong distribution network of more than 800 distributors and 48,000 dealers, Dish TV is well-poised to take benefit of such awareness. Nevertheless, since the business is capital intensive it requires huge investments to exploit such an opportunity. The major cost goes into subscriber acquisition, which is as high as Rs 2,500 per subscriber.

This mainly involves subsidy given on set-top boxes and marketing cost. The company has adequate cash in its books, which was recently raised through a rights issue and GDR to fund its future growth. The effect of all these factors will bode well for the financials of the company, which is still into red after almost six years of operation. The trend though is clearly visible, as for FY10 the company, for the first time, earned profit at its EBITDA level and “is expected to be in black by FY12,” according to Dalmia. Apart from the economies of scale, an improvement in the average revenue per user (ARPU) per month will help the company to achieve this. [PAGE BREAK]

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For the fiscal year ending March 2010, its ARPU was Rs 145 per month, which has come down from Rs 155 per month in FY08. Factors that will help the company to raise its ARPU are the launch of new packages like ‘silver saver’ and ‘gold saver’ to upgrade the current users of ‘silver’ and ‘gold’ packages users respectively and the launch of high definition (HD) services.

The response to these packages is quite high and has “surpassed the expectation of the management,” as Dalmia puts it. The company will get a further boost in its bottomline from the expected implementation of the GST from the next fiscal and will be benefited by 5-6 per cent. This will directly add to its P&L account. “This will occur mainly due to the merging of the entertainment tax with SGST and the rationalisation of the taxes,” Dalmia explained. So far so good, but how is it valued and have these factors been already discounted in the price? Since the company is still in the red, we cannot value it based on earning multiples.

Therefore, we will take the EV/subscriber to value the company. Taking its FY10 subscriber base, it works out to around Rs 7,000 per subscriber or USD 165. If we compare it with the emerging market peers engaged in the same line of business who are trading at an EV/subscriber of USD 1,000, their ARPU is almost 5-10 times of Dish TV’s ARPU, which makes it fairly valued. Even in terms of market cap to sales (FY10), it is trading at 4.3 times which again reflects that there is no room for capital appreciation. This is because in the first quarter of CY10, an aborted PE deal for the second-largest DTH operator valued it at around two times its annual sales. Therefore, we suggest that investors should enter the counter only if they have an investment horizon of more than one year since it is only then that the company will see substantial improvement in its bottomline due to the implementation of GST and improvement in ARPU. As of now, we advise you to go for a Dish TV connection rather than Dish TV’s stock.