Dish TV reported some recovery in operating performance on a sequential basis. The management has revised downwards net sub adds and margin guidance for FY2018E. It has guided to Rs 5.1 billion synergies from the merger in FY2019, ahead of our expectations of Rs 3-3.5 billion in FY2020E. Gains from GST and synergies offer comfort and should support the stock price. A sustainable recovery in valuations hinges on revenue growth acceleration and recovery of market share. We cut FY2018-19E EBITDA estimates of Dish TV by 7-12% and TP by 8% to Rs 88. Dish TV’s net subscriber addition was muted at 186K (KIE 310K). ARPU increased 10.3% q-o-q to Rs 148 , KIE Rs 145, after cumulative decline of 17% post demonetisation, Q2-Q4FY17). Even as ARPU was down 10% on y-o-y basis, q-o-q progress lends comfort. Monthly churn at 1% was a notch higher than 0.8%. Direct costs increased 4% q-o-q led by 8-9% increase in content costs and was partly offset by 22% decline in transponder costs, one-off in Q4 last year. EBITDA of Rs 2.01 billion, -23% y-o-y was 4% below our estimate due to higher costs. Depreciation increased 5%/11% qoq/yoy due to Rs 1.8 billion. FY2018 guidance revised downwards—1 million net sub adds, 1.2-1.3 million earlier, 7-8% revenue growth 7-9% earlier and 29-31% EBITDA margin (about 35% earlier).
The merger of Dish TV and Videocon d2h would enable scale-led revenue, cost and capex synergies. Key areas are efficient content sourcing, infra sharing, SG&A leverage, revenue synergies, advertising, carriage and VAS), and capex synergies, STB procurement. Dish TV management has guided synergy gains of Rs 5.1 billion in FY2019 implying 20%+ EBITDA upside, significantly ahead of our expectation of P&L synergies of Rs 3-3.5 billion in FY2020E. It has refrained from sharing further break-up but indicated that renegotiation of content contracts (esp. VDTH’s inefficient content deals) would contribute significantly to synergies. The management has indicated that it has not factored in TRAI tariff order, understandably so, given too many variables. Separately, it is also not clear whether guidance includes capex savings. We trim Dish TV’s FY2018-19E EBITDA estimate by 7-12% as we incorporate the weak outlook. We cut TP to Rs 88, from Rs 95. The CMP of Dish TV values the merged entity at 6X FY2019E EV/EBITDA including synergy benefits.
Our positive view is largely on account of strong EBITDA growth over the next two to three years aided by upside from merger synergies, GST benefits, potential reduction in license fees and phase IV digitization. In addition, we expect improvement in cash generation. We value Dish TV at 8X FY2019 EV/EBITDA (including synergy gains) and partly capture the risk pertaining to prior period license fee liability. RJio’s foray into Pay-TV in the medium term could increase competitive intensity, a key risk.