Dish TV now is clearly focusing on profitability and cash flow over immediate market share, says Nomura Equity Research in its Quick Note
Dish TV’s standalone results were ahead of expectations but missed consensus expectations at the operating level, said Nomura Equity Research in its Quick Note on the company’s performance in 4QFY13. While ARPU (average revenue per user) came in lower than expectations, trends were significantly positive on all other metrics as SAC and churn trended down, content cost surprised on the upside and this turned out to be the first free cash flow positive year for the market.
Dish now is clearly focusing on profitability and cash flow over immediate market share. The brokerage expects that high-single-digit percentage increase in ARPU will be visible in FY14 on the back of recent price increases and competition becoming more rational. “We would use any weakness in the stock price on the back of these results to accumulate the stock,” added Nomura.
Analysing the company’s results, Nomura Equity Research said that Q4FY13 consolidated sales came in at Rs5.54 billion (5.8% y-o-y growth) in line with its expectation of Rs5.65 billion but around 5% below consensus expectations of Rs5.82 billion owing largely to a subdued ARPU.
EBITDA came in at Rs1.2 billion, which was around 15% ahead of Nomura’s Rs1.04 billion estimate but nearly 9% below consensus expectation. The brokerage sees a 12% y-o-y increase in content cost as guided by the company, especially as part of the incremental cost from media pro negotiation was expected this quarter; however, the actual increase was around 5.1%, which was a positive surprise, said Nomura.
Profit after tax (PAT) came in at Rs436 million of loss compared to Nomura’s expectations of Rs875 million of loss. The lower loss versus Nomura’s expectation was on account of higher other income (Rs157 million against Nomura’s expectation of Rs90 million) and lower depreciation (Rs1.45 billion versus its expectation of Rs1.71 billion) due to a higher write-off of set-top box (STB) for subscribers who were inactive for more than 500 days. Adjusted for these, PAT would have been Rs760 million of loss compared to Nomura’s expectations of Rs875 million loss and consensus expectations of Rs530 million of loss.
Subscriber acquisition cost (SAC) decreased from Rs2,201 in Q3 to Rs1,996 in Q4 due to STB price increase in February 2013 for which the complete impact will be visible in Q1 of FY14, said Nomura.
The company has guided for an increase in content cost by 8%-10% y-o-y in FY14F against Nomura’s current expectations of 15%. The brokerage expects content and other cost growth of around 15% y-o-y in FY13 based on the management’s guidance of 12%-15% that was later reduced to 12%. But actual growth in content and other cost was around 7.5%, leading to lower base versus Nomura’s expectations. Thus, these two combined would lead to an around Rs 94 million reduction in content cost expectations for FY14F, said Nomura.
Company churn declined to around 0.8% in Q4 from 1% in Q3. While it’s too early to extrapolate 0.8% churn rate to subsequent quarters, decline in churn rate can be attributed to following reasons:
• Set up box price increase by DTH players as well as some cable operators such as Den Networks in February 2013, which has increased subscriber switching cost. This can also been seen from the fact that Airtel DTH churn rate came down from 1.3% in Q3 to 1.1% in Q4.
• Dish TV’s offer of 70 basic free channels (most Free to Air) for subscribers as a part of existing base package. This was a churn management strategy that became evident in Q4, said Nomura.
The company generated around Rs650 million of FCF (free cash flow) in FY13 and has guided for Rs2 billion of FCF in FY14. Nomura believes that this improvement in free cash flow trajectory is possible as:
• Increase in STB price—the company intends to bring down subsidy from the current Rs1,450 to zero in the next 12–18 months, which would mean the company would reduce subsidy in FY14. Also, the full impact of STB price increase taken in February 2013 was not completely captured in Q4 but will be visible in FY14.
• Improvement in operation performance led by subscriber addition, increase in package price that would lead to better EBITDA and cash flow from negative working capital days.
The company added around 0.4 million subscribers in Q4 (against Nomura’s expectation of 0.35 million). This expectedly, trended down as Dish TV, in particular (and the entire DTH industry in general), focused on “value focused customers”. MSOs have seeded 4.45 million STBs compared to 0.38 million STBs seeded by DTH between 1 March 2013 and 12 April 2013 post STB price increase taken by DTH players. This can also be understood by the fact that Airtel also added around 0.21 million in Q4 (versus 0.44 million in Q3). Also, a few inactive subscribers, particularly in phase 2, became active in Q4.
Dish TV reported ARPU of Rs157 against Nomura’s expectations of Rs161.8 and Rs160 in Q3. As per company, this was on account of the lower number of days in Q4, down trading (% of subscribers on base pack has increased from run rate of 54% to 58% in Q4), increase time gap between package subscription getting over and recharge, lower churn rate that effectively means higher base, inactivity by some subscribers due to children exams, and Q3 having better ARPU due to festival season. Even Airtel DTH ARPU decreased from Rs186 in Q3 to Rs184 in Q4.
The company seems confident of high-single-digit increase (Rs12-Rs14) in ARPU in FY14F post 10% price hike taken in April 2013 and will be looking at further price increases in the next fiscal.
While digitization is mostly done in phase I & II and MSOs have seeded set up boxes, they have not started billing as per the digital package which is significantly higher than current prices they are charging subscribers. Once the billing as per the digital package starts, DTH players including Dish TV would have more headroom to increase ARPUs, says Nomura.
Additionally, given that one of the MSO’s revenue streams of carriage fees is trending down with the onset of digitization, they will have a bigger incentive to behave rationally on the ARPU front.
Dish TV’s gross and net debt increased by around Rs 1.5 billion in FY13, which Nomura expects to come down in FY14F on account of increased FCF generation as mentioned above. Also, short-term loans and advances increased from Rs1.98 billion to Rs3.06 billion on account of increases in advanced payment towards purchase of STBs.
On the back of Q4 numbers and the company’s guidance, Nomura’s FY14F estimates and price target are under review. The brokerage will be looking at a lower subscriber addition (as the DTH industry focuses on profitability rather than market share), lower content cost guidance, and lower subscriber addition cost.