Medium-term signals remain weak for Dish TV

Cost and reach benefits from merger with Videocon d2h only trigger

On a day when the broader markets remained weak, Dish TV, which has been hitting its 52-week low repeatedly, gained 1.3 per cent after brokerage firm CLSA recommended a 'buy' rating, on account of positives from a merger with Videocon d2h and expectations of a revival in average revenue per user (ARPU). According to CLSA, the merger will boost combined operating profit of the merged entity by six per cent. It estimates the new entity will account for 45 per cent of the direct-to-home (DTH) market and 15 per cent of television households.

However, investors need to take note of the fact that while there could be benefits from the merger, the stock did not gain substantially despite the brokerage's target price of Rs 112.

The stock shed 30 per cent from mid-May levels due to a sharp fall in ARPU and subscription revenue in the March quarter. ARPU during the quarter fell 17 per cent over a year ago and 11 per cent sequentially to Rs 134.

While there is near-term relief, with a rebound in ARPU expected in the June quarter on the back of the receding impact of demonetisation and higher recharges during the cricket season, the underlying fundamentals, according to analysts at Emkay Global, are weak. Analysts maintain ARPU could decline three-four per cent in FY18 and FY19 each. They highlight the threat of Free Dish, Doordarshan's free DTH service, down-trading of the existing packs and dilution from lower-priced regional packages such as Zing. According to analysts, the impact will be more because of a large number of rural subscribers.

A higher share of rural subscribers, strong subscriber additions for the lower-priced Zing package and down-trading following the launch of entry-level packs (Rs 99+75 and Rs 99) are impacting subscription revenue.

Good content, even in low-end packages, coupled with a number of free-to-air channels are the factors responsible for rural subscribers preferring entry-level packages.

The merger with Videocon d2h will cement Dish TV's leadership position in the DTH sector. While execution and cost synergies are likely to drive a re-rating, gains are expected to fructify in two to three quarters. During this period, the stock might not see much of a movement.

At the current price, the stock is trading at 7.9 times its FY19 enterprise value to operating profit. Investors should take a cautious stance on the space, given falling ARPU trends and pressure on revenue from newbies, such as Reliance Jio.