Dish TV: Strong signals

The company is on course to improving profitability but any move to expand smaller recharge options to subsidise set-top box charges by competition would be a major negative

The Dish TV scrip has lost eight per cent since last Wednesday on concerns that aggressive promotions by direct to home (DTH) rivals would lead to a fresh pricing war impacting its average revenue per user (ARPU).

Recently, Tata Sky had launched a recharge of Rs 8 a day for single-day access. Given the fixed costs, the move, which might result in subscribers opting for the service only for a part of the month, will impact Dish TV’s leverage and margins. Given the offer, seems to be targeted at the semi-urban and rural markets, this could impact Dish TV, as it has large subscriber base in these markets. Phase III and Phase IV compulsory digitisation is in the semi-urban markets and are scheduled to be implemented by December 2015 and December 2016.

The Dish TV management has, however, said the move by its rival won’t affect it. R C Venkateish, chief executive officer, says from a new customer acquisition perspective, there is zero impact as a customer who will pay Rs 8 once in a while is not going to pay Rs 2,000 upfront. “As far as new customers are concerned, those on Dish platform won’t be impacted. Tata Sky is downgrading its own customers, which is why this is a self-goal.”

Tata Sky is looking at tapping the rural base further with this low denomination recharge, which will enable the DTH subscriber the flexibility to pay for days of use rather than a monthly subscription where the service may not be availed on a daily basis.

Dish TV, on the other hand, has been customising its content for regional audiences with its brand Zing. The Tata Sky move, according to analysts, could also be a move to counter the success of Zing. “However, the move is unlikely to have a major impact on Dish TV’s business or financials,” said an analyst with a domestic brokerage.

While the Tata Sky move could impact other players, analysts say the key worry would be if the recharge war is to escalate to one on the set top box. This is the largest upfront cost (Rs 1,700-2,000) that customers make when they subscribe to one of the DTH services.

In the near term, the Street will also look to the operational performance in the March quarter, where Dish TV is expected to post strong net subscriber additions at 4-5 lakh. Average revenue per user is expected to decline 1.2 per cent sequentially or stay flat given fewer days in the quarter. Despite the lower ARPU, operating profit is expected to be maintained given flattish content costs. ARPUs have been on an uptrend over the last year moving up from Rs 166 at the end of FY14 to an estimated Rs 177 in FY15, a growth of 6.6 per cent. Ebitda (earnings before interest, tax, depreciation and amortisation) margins are expected to move up from 22.7 per cent in FY14 to about 24.9 in FY15.

Importantly, cash flows from operations are improving, which should provide funding for future growth and customer acquisition. Going ahead, while the company is expected to report a lower loss in FY15, the current financial year will be its first full year of net profit.

In this backdrop, 85 per cent of analysts covering the stock have a ‘buy’, with a target price of Rs 100, which offers 20 per cent returns from the current  Rs 78.55.