Though ARPU expectations remain moderate and DD Free Dish remains a near-term risk, we believe the current stock price does not factor in the high synergies expected from the merger of Videocon D2H.
Ditv’s stock price has declined 27% in the last six months on weak revenue/Ebitda performance. Though ARPU expectations remain moderate and DD Free Dish remains a near-term risk, we believe the current stock price does not factor in the high synergies expected from the merger of Videocon D2H. We reiterate Buy. Merger to provide stimulus to margins —Videocon D2H’s merger should drive synergies of Rs 2.4 bn, 340bp synergy gains in FY19 and Rs 4 bn, 510bp synergy gains, in FY20, implying combined Ebitda of Rs 26.8 bn in FY19 and Rs 31.9 bn in FY20. Videocon’s high content cost of 40% of total revenues, Rs 82/subscriber/month against DITV’s 30% or Rs 51/subscriber/month should get rationalised. Additionally, GST of 18% as against 15% service tax and 6-7% entertainment tax should help save an additional 400-500bp.
DD Free Dish a near-term risk, but long-term economics unfavourable—DD Free Dish has drawn high interest from broadcasters in the recent auctions, posing a risk to current Pay TV subscribers and 40m-45m phase-IV analog subscribers yet to get digitised. We believe chasing advertisement revenue from the FTA market at the cost of subscription revenue is unfavorable for broadcasters. Their loss of subscription revenue share from DD Free Dish subscribers is Rs 3.8 bn higher than the corresponding FTA ad market opportunity. This would increase to Rs 13.3 bn, assuming 30m Phase-IV analog subscribers shift to DD Free Dish.
ARPU under pressure in the near term, but should recover gradually— DITV’s ARPU, which has been under pressure for 3-4 quarters, should gradually recover, as (i) the effects of demonetisation wane, (ii) HD contribution rises, (iii) GST leads to better tax compliance by LCOs, and (iv) competitive intensity diminishes with consolidation. We expect flat ARPU in FY18 and build a moderate 2% ARPU CAGR over FY17-20. OTT could take time share, but complete shift of users unlikely— OTT did not impact usage of Pay TV even during RJio’s free data period. RJio’s wireline launch could be a threat to DTH players. However, given that it will be urban region specific, with slow scalability and high ARPU offerings, we believe DTH operators should be insulated.
Attractively priced; below 6x on EV/Ebitda (including merger gains) — For the combined entity, we expect 9% revenue CAGR and 17% Ebitda CAGR over FY17-20. This is on the back of 8%/1% CAGR in net subscribers/ARPUs and including Ebitda synergies of Rs 2.4 bn/Rs 4 bn in FY19/20e. We believe merger synergies are not fully captured in valuations. DITV is valued at an EV of 6.4x