Dish TV: Strategy on track, gains priced in

The Dish TV stock has gained 50% since the start of September on the back of plans by the DTH operator to improve its margins

The Dish TV stock has gained 50 per cent since the start of September, on the back of plans by the direct-to-home (DTH) operator to improve its margins through lower content costs and higher carriage revenues. Further, on the subscriber addition front, while the first two phases of digitisation have not yielded much for DTH players, they are expected to benefit from the later phases.

With the expected increase in average revenue per user of multi-system operators (MSO) and subsequent price increase of package prices, the gap between MSOs and DTH operators is likely to decrease, helping players such as Dish TV to tap the part of the churn of cable subscribers and gain new users as well. While the prospects given the upsides from digitisation are good and the company is focusing on improving profitability, given the steep run-up in its stock prices, investors should wait for a correction to enter the scrip. At the current price the stock is trading at about eight times its FY15 EV/Ebitda. Given the Bloomberg consensus target price of Rs 65, the stock from these levels offers an upside of nine per cent.

Profitability focus
The company has identified a few levers for margin improvement. The first is reduction in content costs, which had grown by 10 per cent in FY13 but is expected to come down by seven-eight per cent annually. Content costs have risen from Rs 142 crore in the September FY13 quarter to Rs 186 crore in the September FY14 quarter, up 30 per cent on the back of new contracts with broadcasters. The second lever is the higher carriage revenue which will add to the top line. Carriage revenues were at Rs 30 crore for FY13. The company will look at this lever as contracts with content aggregators such as IndiaCast UTV (December 31, 2013), MediaPro (June 2014) and One Alliance (September 2014) come up for renewal. The company says it will stick to its “on request channel” scheme giving consumers the right to unsubscribe those channels they do not want to watch. TDSAT in a recent ruling on a case between Dish TV and IndiaCast says the former can post the expiry of its fixed fee contract with IndiaCast offer the channels in the bouquet on a-la-carte basis.

Ankur Rudra and Utsav Mehta of Ambit however say while the scheme’s purpose was to increase the content bargaining ability and might seem like a good move, this is unlikely to result in upsides to margins or revenues. The company lacks a concentrated presence in TAM-rich markets to impact net content payouts. If the firm manages to reduce costs and improve revenues, analysts estimate margins, 25 per cent at the end of the September quarter, could see a 300 bps increase to about 28 per cent in FY15. While the company says it will be able to bring down content costs and increase carriage revenues, it is also looking at ways of improving its average revenue per user which has been stagnant on a sequential basis at Rs 165 in the September quarter. The company, says its chief executive officer R C Venkateish, hopes to increase its average revenue per user by improving its product mix and through a higher share of high-definition (HD) subscribers.

Currently HD subscribers form 9-10 per cent of overall revenues. Given the higher average revenue per user (ARPUs) in the region of Rs 450 as compared to the average standard definition pack of Rs 220, they contribute more to the revenues, though as a percentage of subscribers they are at three per cent. The company is hoping to touch ARPU of Rs 167-169 at the end of the March quarter of FY14, against the FY13 March quarter number of Rs 157, a growth of six-seven per cent.