We initiate Dish TV at Buy with a price target of R97. With a net subscriber base of 9 million and 32% market share, Dish TV is the industry leader in a six player market. Our rating is driven by potential doubling of subscriber base over next five years, likely strong 54% CAGR in Ebitda over FY11-14E led by subscriber growth and content cost leverage.
Our price target is on DCF and implies EV/EBITDA of 16x our FY13E at a premium to global peers; fair given Ebitda CAGR of 54% vs. 8% for peers.
We expect DTH penetration in India to double to 70% over the next five years, driven by increasing disposable incomes and rising spends on entertainment, consumer preference to adopt digital TV given limited availability of channels in the analogue network due to bandwidth constraints and potential regulatory push (digitalisation bill), which mandates the transition of analogue to digital networks across the country in four phases starting March 2012.
With an estimated net subscriber base of 10 million by FY12E and potential increase in ARPUs, we expect net income to turn positive in FY13E, leading to turn around in FCF. Consequently it would now be able to fund growth through internal accruals, a key positive, given our view that peers likely to reel under losses for at least 2-3 more years & may face funding challenges.
We forecast Ebitda to jump 4x and FCF turnaround by FY13.
We see upside risks from potential reduction in licence cost?from 10% to 6% of revenues?based on court judgment. We see downside risk from increasing churn. Given operators currently offer subsidies on set top boxes, increasing churn remains a key concern and could impact valuations adversely.
While Dish TV has an average churn of 9% -10% annually, it is much less than that in developed economies. Any increase in churn will impact profitability adversely.
Furthermore, management currently writes off investment in set-top box only if the consumer has not been active for over 500 days. Any change in this policy could lead to higher.
BofAML