Dish TV: Cost pressures to remain in near term

Could see downgrades on poor June quarter performance

The Dish TV stock has lost 11 per cent in two trading sessions on the back of a disappointing June quarter and worries that cost pressures on the business could continue in the near term. India’s largest direct to home (DTH) company saw a surprise spike in costs, both due to higher content costs as well as a weaker rupee. These combined to pull down Ebitda margins by a whopping 888 basis points to 21 per cent. A hundred basis points is one percentage point.

Analysts, thus, have cut their Ebitda estimates for FY14 by an average of about 10 per cent. Say Vivekanand Subbaraman and Naveen Kulkarni of PhilipCapital India, “While we remain optimistic on the DTH industry’s improving structure, we note that operating cost inflation isn’t likely to show any respite. Thus, our Ebitda and PAT estimates see a sharp cut despite no material change in revenue estimates.” The two analysts cut their FY14 Ebitda estimates by 18 per cent. However, despite the cut in earnings estimates, given the recent correction and focus on profitability, most analysts still have a buy on the stock, with price targets of Rs 60-70.

Costs pull down performance
The biggest cost constituent for Dish TV is programming/content accounting for 33 per cent of sales. These spiked 27 per cent year-on-year to Rs 192 crore for the June quarter, on the back of costly sports content which included a one-off deal with Sony to show the Indian Premium League in high definition, as well as an agreement with ESPN on telecast of the Champions trophy. In addition to content costs, the company also spent a significant amount in advertising, pushing up sales and distribution expenses by 38 per cent over the year-ago quarter. What aggravated the situation was that some of the operating costs such as satellite, encryption and middleware are dollar-denominated, pushing up these expenses.

The Dish TV management has indicated that content costs for FY14 would be higher to the tune of 8-10 per cent. Thus, most analysts have scaled down their Ebitda estimates from Rs 730-750 crore to Rs 600-625 crore.

Eyeing cash flows
The company is focusing on profitability and has affected price hikes both on set-top boxes (to cut subsidies) and subscription fees. The company hiked prices of set top box in the first week of July by Rs 250, which helped lower its subscriber acquisition costs from Rs 2,250 in the December quarter to Rs 1,828 in the June quarter. The company intends to increase prices further to eliminate the subsidy on these over the next two years.

The company also raised subscription rates in April by eight per cent. All this has helped it improve  average revenue per user by six per cent year-on-year (five per cent sequentially) to Rs 165 and free cash-flows have improved to Rs 48 crore as against Rs 22 crore in the March quarter. It had generated about Rs 65 crore cash flows in FY13.

Dish, which has gross debt (largely dollar-denominated) of about Rs 1,600 crore, also highlighted plans to reduce debt by Rs 750 crore by the end of FY14 through internal accruals. All these should help improve its profitability and financial health. However, if peers (both DTH and cable players) follow a contrasting strategy, Dish could have to rethink or the growth in subscriber addition might fall sharply.