Dish TV: Signals getting stronger

Margins are expected to improve from here as revenue growth will be stronger than increase in costs

With content costs under control and the trend in subscriber additions robust, operating performance of Dish TV, India’s largest direct to home (DTH) player, is expected to be strong in the coming quarters. The company added 0.39 million subscribers in the June quarter, 20.5 per cent more than those in the year-ago period and better than the estimated 0.34 million.

On an annual basis, the company management indicated net addition of 1.5-1.7 million subscribers, with subscribers switching to digital medium and the impact of phase III digitisation, especially in the last quarter of FY16. After being postponed from mid-2014 to end-2014, the deadline for phase-III is now December 2015.

However, the chances of this deadline being postponed further is lower this time around given that DTH players like Dish have turned aggressive. More clarity will emerge by September-October. The total subscriber base of Dish TV though stood at 13.3 million at the end of the June quarter.

It was the strong subscriber additions, which helped the company boost overall revenues by 19 per cent year-on-year to Rs 737 crore. This is what offset the disappointment in average revenue per user at Rs 180 (up 6.4 per cent year-on-year, 0.6 per cent sequentially), which was lower than analyst estimates. The management indicated that ARPU (average revenue per user) will grow at six-seven per cent driven by upgradation of customers from standard definition (SD) to high definition (HD), price increases and uptick from new launches. Currently, while 20 per cent of the incremental subscriber additions is HD, the company expects the number to move up to about 25 per cent going ahead. More HD customers translates to higher profitability given ARPU for HD are more than twice that of SD. The increase customer preference for HD as well as the sharp fall in HD television prices (making them affordable) are key reasons leading to higher demand for HD services.

At the net level, profits came at Rs 54.2 crore versus a loss of Rs 15 crore in the year-ago period and a profit of Rs 34.9 crore in the March’15 quarter.

Given the content, deals Dish TV has signed with broadcasters and distributors, the company expects content costs to grow at about five-six per cent till the second quarter of FY17 when the first of its content deals come up for renewal. At 73 per cent, these form the single largest component of operating costs for the company. The company indicated higher subscribers and ARPU will help improve its topline and margins given leverage benefits. While its volume gains are strong and it has a good product mix (HD, Zing and SD), rival DTH players have a higher proportion of new HD customers.

On the flip side, while Dish TV performance has been impressive, there is little upside for the stock which has gained 50 per cent since the start of May. Higher competition and the Reliance Jio launch could be worries as it could take the industry back to price wars.

At the current price of Rs 109, the stock is trading at 10 times its FY17 Enterprise Value/Ebitda (earnings before interest, depreciation and amortisation) estimates as compared to Hathway’s seven times. Investors should await meaningful correction in the stock before taking exposure.