Dish TV - Results belie expectations; on weaker margins, Hold - Anand Rathi

Steady revenue growth. Dish TV's 3Q revenue was up 10% yoy (similar to growth in 1H) and in line with our estimate. Net subscriber additions recovered from 0.16m in 2Q to 0.22m (our estimate was 0.24m). ARPU, at Rs. 166, was up a speck from 2Q's Rs. 165 (vs our estimated Rs. 167).

Margins under pressure. EBITDA came in 17% lower than our estimate. The EBITDA margin dipped 284bps qoq (yoy comparison distorted by uneven cost distribution across quarters in FY13), which can be attributed to: (1) a 6.7% qoq increase in content costs even as revenue was flat, which management attributed to a bump because of more India cricket content; (2) the impact of exchange-rate volatility of ~Rs. 120m; without this, the margin dip and EBITDA miss would have been 80bps and 9%; (3) a rise in subscriber-acquisition costs during the festival period, higher gross additions.

Growth outlook subdued, focus on margins. Management expects subscriber additions to be constrained by the deeper penetration levels and longer time gap till digitisation resumes in Phase-3 and -4 cities in December. It hopes to reduce content costs (as percent of revenue) by 400-500bps in two years following its persuasion/measures to convince channel partners. It is satisfied with results of removing IndiaCast channels from base packs.

Reducing estimates. We have cut our EBITDA/earnings estimates due to pressures on margins evident in recent quarters. Accordingly, our price target is down from Rs. 55 (9x FY15e EBITDA) to Rs. 50 (9x).

Our take. The free cash flow turnaround and valuation cushion (one-year-forward EV/EBITDA at 9x (vs the 12x average for the past one year) are positive. For a more constructive outlook, however, we look for revenue buoyancy (especially on healthier subscriber growth). Risks: Upside More subscriber additions/ARPU, reduced license fees. Downside Delays in cable-TV digitisation.

Source : Equity Bulls

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