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The stock of India’s largest DTH player Dish TV is up 25% over the last month on the back of improving profitability, reducing debt and attractive valuations. A large part of the company’s move to improve its financials was visible in the September quarter results.
Revenues at Rs 593 crore were aided by subscription growth of 13.6% year on year. This growth was boosted both by higher subscriber additions as well as value growth as compared to the year ago quarter. Ebidta margins bounced back from the June quarter number of 21% by 400 bps to 25% on the back of lower content as well as advertising costs. However, on a year on year basis the margins are still lower. The company’s margins in the year ago quarter was at 29.2%.
30 of the 40 analysts covering the stock according to Bloomberg have a buy rating given attractive valuations of 9 times EV/Ebidta (one year forward), pricing discipline, benefits from phase III and phase IV digitisation and a strengthening balance sheet.
One of the key gains for the company has been the higher cost of packages for for new subscribers. This hike in entry prices helped the company improve cash flows, cut churn and keep subscriber acquisition costs low. The company generated free cash flow of Rs 110 crore in the first half of FY14 as against Rs 60 crore for the full year FY13.
A focus on debt reduction is also paying off. The company had gross debt of $285 million (Rs 1,710 crore) at the start of FY14 and has reduced debt to the tune of $33 million (Rs 200 crore) in the first half of the current fiscal and is targetting a reduction of another $90 million (Rs 540 crore) in the second half of FY14. Net of cash on the book net debt at the end of the fiscal should be about Rs 700 crore, according to the management.
What has been disappointing however is the number of subscriber additions on a sequential basis with the company adding 1.6 lakh subscribers in the quarter as against an estimate of 2 lakh. Credit Suisse analysts Jatin Chawla and Akshay Saxena say that subscriber addition remains disappointing, with DTH gaining lower share in first two phases of digitisation than expectations. The company attributes to the lack of implementation of package pricing by MSOs. With competitors dropping prices for a short period Dish lost share within DTH space. While there have been delays in the implementation in the first two phases, the phase III and IV is likely to benefit DTH players more given the difficulty in laying cables in smaller towns and villages.
In addition to the lower subscriber additions average revenue per user at Rs 165 in the September quarter was a tad lower than expectations. The company chief operating officer, Salil Kapoor says that there has been a bit of downtrading on account of a weak economy, but price hikes which translates into higher average revenue per user with a lag, high definition subscribers, and initiatives such as Dish Online which allows subscribers to view programmes on the go (internet) would improve the ARPU number. The company expects exit ARPU (at the end of March quarter, FY14) to move up to Rs 175.
