Lower costs key trigger for Dish TV

Content costs rises about 25% year-on-year in first nine months of fiscal and accounted for 32.3% of revenues

Efforts to cut content costs, likely gains from the next phases of the government’s digitisation programme and favourable regulatory action have led to the Dish TV stock gaining seven per cent through the past month. While the digitisation process will increase the company’s subscribers, the key for the Street is the efforts taken to improve profitability.

For the April-December 2013 period, content costs rose about 25 per cent year-on-year, accounting for 32.3 per cent of the revenue. Analysts say in FY15, this is expected to fall about 200 basis points (savings of Rs 40-50 crore) to 30 per cent, helping raise earnings before interest, tax, depreciation and amortisation (Ebitda) margins, currently 22 per cent. A cut in the licence fee from 10 per cent to six per cent of gross revenue could be another positive for the stock.

On the digitisation front, the company is targeting an analogue subscriber base of 40-50 million in phases III and IV by offering packages with a regional flavour. To target customers with regional content, it launched the Zing brand in Odisha. To improve its subscriber base, the company, which has a net subscriber base of 11.2 million, will seek to use regional packs, as well as the competitive advantage of direct-to-home, or DTH (which is cheaper than cable connections), in smaller towns.

While cost savings will help improve cash flows, it is the potential expansion in subscriber base that is the basis for the ‘buy’ call by analysts. Of the 36 analysts tracking the stock, 26 have a ‘buy’ call, while six have ‘hold’ and four have ‘sell’ ratings, with a consensus target price of Rs 64 (upside potential of 31 per cent). At eight times the one-year forward earnings, the valuations are reasonable, says Citi Research. The research firm estimates 13 per cent annual revenue growth during FY13-16, with Ebitda margins rising to 27-30 per cent. The company, which reported an Ebitda margin of 27 per cent in FY13, is expected to end FY14 with a margin of 24 per cent.

Dish TV faces two key risks. The first is a move away from disciplined pricing. CIMB’s Srinivas Seshadri and Anubhav Jain say, “Industry participants appear to be going back to aggressive subscriber acquisition strategies to stimulate demand.

While set-top box prices were cut selectively during the festive season in late 2013, the trend has intensified in 2014, with prices (net of free recharges) falling below 2012 levels in some cases. Initially, Dish TV resisted the cuts, having played the part of a rational price leader for most of the last two years, but its patience appears to have worn thin in the light of the slowdown in its share of gross additions.”

The second risk is subscriber additions. In the September 2013 quarter, these were the lowest since the December 2010 quarter. In the December 2013 quarter, the company added 220,000 net subscribers and the pace of addition, the management said, had fallen due to the economic slowdown, lower TV sales and slower implementation of digitisation. In the first nine months of FY14, the company added 600,000 subscribers. For FY14, the company’s management has reduced the target from 1,000,000 to 850,000-900,000 subscribers.

The long-term prospects on this count, however, appear strong. J P Morgan analysts say given Dish TV’s 20-30 per cent market share, the company could end up with five-seven million subscribers once phases III and IV of the digitisation programme are completed (in two-three years). With subscriber billing activated in phase-I, analysts believe the gap between cable and DTH charges is likely to narrow. This could help Dish TV improve its average revenue per user/month from Rs 166 to Rs 176 by FY16, J P Morgan says.