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DISH TV: Not palatable as yet… - Views on News from Equitymaster

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DISH TV: Not palatable as yet…

Oct 23, 2007

Performance summary
  • Operating revenues decline by 15% compared to 1QFY08 due to the decline of 15% in revenues from the DTH segment and change in the accounting policy of taking carriage fees as a part of revenues.

  • 54% growth in DTH subscriber additions in 2QFY08 compared to 1QFY08

  • ARPU’s decline by 25% over 1QFY08 leading to a decline in revenues.

  • Results not comparable to the previous fiscal due to limited operating history.

(Rs m) 1QFY08 2QFY08 Change
Net Sales 893 755 -15.4%
Expenditure 1,381 1,227 -11.1%
Operating profit (488) (472)  
Operating profit margin (%) -54.6% -62.6%  
Other income 1 20  
Depreciation 328 357 8.6%
Interest 81 110 35.4%
Profit before tax (897) (918)  
Tax 1 1 16.3%
Profit after tax (898) (919) 2.4%
No of shares (m)   428  
Diluted earnings per share (Rs)*   (2.1)  

What is the company’s business?
Dish TV is India’s largest direct-to-home (DTH) player with a subscriber base of 2.4 m. Its market share of the pay DTH industry is 68%. It is present in 4,300 towns across India, with more than 500 distributors and around a 35,000-strong dealer network. In addition to rapid subscriber addition, Dish is looking to increase its ARPU by offering value-added services like movies-on-demand and gaming.

What has driven performance in 2QFY08?
Volumes add flair: The company added 278,000 new subscribers during the second quarter compared to 180,000 in 1QFY08, an increase of 54%. Gross subscriber base stood at 2.4 mat the end of September 2007. The subscription revenues increased by 19% over 1Q2008. As the regional channels are very popular in India, the company has further strengthened its channel offering to 180 channels, by far the biggest in the category. The company has added the entire Sun Network bouquet and other popular regional channels like Zee Talkies etc. Dish TV currently has 17 Tamil, 12 Telugu, 12 Malayalam and 10 Kannada channels. In order to further strengthen Dish TV ’s distribution across the length and breadth of this country, and in addition to a base of 35,000 dealers, Dish TV has entered into association with many large organized retails chains having a pan-India presence like Essar Telecom Retail, Spencer’s, Music World, and NEXT Retail India. This strategy has resulted in a, capturing a dominant pay DTH Industry market share of 68%.

Segmental performance: Dish TV operates in the different segments of DTH, teleport services and trading. DTH is the dominant segment contributing close to 95% of the revenues. There was a 54% growth in DTH subscriber additions in 2QFY08 compared to 1QFY08. However, the ARPUs (average revenue per user, Rs 126 at the end of September 2007 against Rs 132 in June 2007) declined by 5% leading to a decline in revenues.

Segmental breakup
(Rs m) 1QFY08 2QFY08 Change
DTH 841 715 -14.9%
% of total revenue 94.2% 94.8%  
Teleport Services 27 27 3.1%
% of total revenue 3.2% 3.8%  
Trading 25 12 -51.5%
% of total revenue 3.0% 1.7%  

High acquisition cost: The company’s cost of acquiring a subscriber is very high which explains the high subscriber related expenses. Subscriber related expenses declined by 18.2% compared to 1QFY08 but the subscriber related expenses continue to be more than the revenues. Investors must also note that the limited operating history of the company offers very little scope for a comparative analysis of the company’s operating numbers.

Cost Break up
(Rs m) 1QFY08 2QFY08 Change
Subscriber related expenses 987 807 -18.2%
% of Sales 110.5% 106.9%  
Employee Cost 70 72 3.2%
% of Sales 7.8% 9.5%  
Administrative and Other Cost 51 86 67.8%
% of Sales 5.7% 11.4%  
Financial charges 79 110 39.1%
% of Sales 8.8% 14.5%  
Depreciation and Amortization 328 357 8.6%
% of Sales 36.8% 47.2%  
Others 276 263 -4.5%
% of Sales 30.9% 34.9%  

What to expect?
Competition for Dish TV is on the rise with Tata Sky offering marketing and consumer subsidies. Entry of new players such as Sun TV, Reliance and Bharti would significantly increase the competitive intensity. DISH TV would have the capacity to beam 225 channels, which could be a significant competitive advantage in the next 18 to 24 months. We believe that the ARPUs would decline in the near term due to the impact of high acquisition costs and increase significantly in the longer term as the cable television ARPUs in India are very low compared to even developing countries and miniscule compared to the developed nations (90% lower than the developed countries). However, the company expects to increase its ARPUs to move up to Rs 154 and Rs 163 respectively in the next two quarters. The incremental subscriber ARPU is Rs 210. The market for DTH services is expected to escalate to 25 to 30 m subscribers from about 5 m currently. The DTH business requires long gestation periods and the same holds for DTH operators to break even on their investments. The company plans to make an investment of Rs 8 bn in the next 3 years. DTH would be raising debt and equity for funding the same. The company expects to breakeven by FY09, though it may take longer than this if the new entrants resort to unhealthy competition.


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