Focusing on profitable growth

Fall in customer acquisition costs, rising subscription rates and digitisation benefits should result in strong financial gains for Dish TV, say analysts

India’s largest direct-to-home (DTH) television service provider lost about two per cent on news that Apollo Global Management, which holds 11 per cent, is likely to exit the stock. The Dish TV scrip has lost 20 per cent since October last year, underperforming the broader markets due to lacklustre operational performance, with profit growth and margins falling sequentially in the past two quarters.

While increased investments took a toll on the December quarter performance, things should look up in the coming quarters due to the recent price increases in set-top boxes (STBs), higher subscription rates and lower customer churn. Analysts say the fall in the stock price is a good entry point, given the industry discipline and focus on profitability, which will reflect on the market leader, warranting a re-rating of its stock. At the current price of Rs 65.75, the stock is trading at 10 times its estimated FY14 ratio of enterprise value to operating earnings (EV/Ebitda). Morgan Stanley analysts say this is cheaper than for most of its global DTH peers. Most analysts are bullish on the stock and have a target price of Rs 80-100.

Price rises
DTH entities have been making losses thus far. They were looking to outdo each other in acquiring customers, thereby pushing subscriber acquisition costs (through subsidised STBs, free rental packs, etc) to unsustainable levels. However, with the focus turning to cash flows and steering customers to the high-value packs, these moves should help create a sustainable business model. Surendra Goyal and Aditya Mathur of Citi Research say, “Funding challenges and issues around monetisation/churn should result in industry participants starting to behave more rationally. This is already visible across DTH, where most players increased box prices.”

Over the past two quarters, STB prices have been increased by DTH companies. The latest one from Dish TV saw two price rises last month alone, increasing it from Rs 1,690 to about Rs 2,000 apiece. The increases are likely to stay, say Deutsche Bank analysts. “Though the price hike might affect new subscriber addition in the short term, it should be easier to implement because all competitors except Sun Direct have increased prices of their STBs,” they add. Given the higher prices of the boxes, it will also be difficult to switch to competitors, as the cost of doing so is now substantially higher. This would help bring down customer churn.

Customer additions, rentals
Digitisation is having a twin impact on DTH entities, helping them increase their subscriber base and the rentals. Jatin Chawla and Akshay Saxena of Credit Suisse say, “Phase-I implementation has been moderately successful, with DTH gaining about 25 per cent share, and progress on Phase-II will be the next trigger for the (Dish TV) stock.” Further, given the higher investments required by cable TV operators due to digitisation, monthly rentals are likely to increase.

What will push up average revenue per user (ARPUs), according to the analysts, would be digitisation. This would force cable operators to raise prices, allowing room for DTH entities to do so, too. In addition to lowering STB prices, the earlier practice of free subscription packs is also on the decline. Vivekanand Subbaraman and Naveen Kulkarni of PhillipCapital (India) say, “DTH players, including Dish TV, used to offer a free one-month subscription of the platinum (premium) pack with the STB. This has been withdrawn, and customers are forced to pay a minimum of Rs 250 initial recharge as subscription top-up.”

Analysts estimate Dish TV’s monthly ARPUs, Rs 160 at the end of the December quarter, to move to Rs 162 at the end of FY13. Given the improving industry scenario, most analysts have upgraded their FY14 ARPU estimates for Dish TV from sub-Rs 160 to Rs 164-169.

Every rupee increase in ARPU should have a larger impact on profitability. In a report dated March 5, Deutsche Bank analysts note that Dish TV’s Ebitda is highly sensitive to ARPU increases – every five per cent increase in the ARPUs will result in a 12.5 per cent increase in Ebitda.

On the whole, the focus on cash flows should also improve profitability, resulting in higher Ebitda margins for Dish TV. These margins had tanked 450 basis points to 24.7 per cent on a sequential basis in the December quarter as the company raised its selling and distribution expenses to capitalise on the digitisation opportunity. These are expected to stabilise around 30 per cent in FY14.