Dish TV: Buy

Investors with an appetite for risk can consider an exposure in Dish TV with a three-year horizon. Since its listing in April, the stock has cooled off considerably and is now trading about 35 per cent lower than its May high. The market appears to be factoring in a slower pace of subscriber additions on the back of more entrants into the Direct-to-Home (DTH) market and higher customer acquisition costs due to intense competitive activity. However, at the current market price of about Rs 86, much of these concerns appear to be factored in.
Stock outlook

Dish TV is the leading private DTH operator with 2.1 million subscribers and a first-mover advantage. As the only listed DTH play, the company’s stock is likely to remain on the investment radar of institutional investors. The stock may be the first to benefit from upside triggers such as an extension of CAS (conditional access system) to cover Delhi, Mumbai and Calcutta completely (expected to be implemented by January 2008) and to other cities as well as it would force cable and satellite homes to actively explore digital options. Similarly, any move to allow DTH operators to offer exclusive content would be positive as content will become the differentiator between players; presently low entry costs play that role. Such a move, while it appears some way off for now, will be a trigger for re-rating.

In the absence of these triggers, we expect modest returns over a one-year period, as Dish TV is likely to turn profitable only by 2009-10 and is, therefore, more suitable for the long-term investor. Fiscal 2008-09 might prove to be the crucial year for Dish TV when the full impact of the entry of three more players in the DTH market — Reliance Blue Magic, Sun Direct and Bharti— will be felt. While the competition is formidable, Dish TV’s first-mover advantage and the ability of the large Indian market to accommodate more players inspire confidence. However, a close monitoring of subscriber additions and customer acquisition costs relative to competition is required, as they would reflect the impact of competitive pressures on performance.
Market leader, for now

Although Dish TV continues to be the leading private operator competitor Tata Sky has given it a run for its money since its launch in the second-half of 2006. The latter has garnered a subscriber base of one million in the one year since its launch, a much faster pace than Dish TV did in its initial years. However, at least part of the speedier ramp-up by Tata Sky could be attributed to good timing of its entry into the market. Within a few months of its launch, CAS was implemented in the three metros and with a big event such as World Cup Cricket round the corner customers were far more receptive to Tata Sky’s promotional and advertising blitzkrieg. Dish TV until a year ago also suffered limitations on the content front with the Star bouquet of channels coming under its fold only shortly before the launch of Tata Sky.

Dish TV added 180,000 subscribers in April-June quarter and expects the additions to be significantly stronger in the second and third quarters, as the summer quarter tends to be typically a lean one. According to Dish TV’s estimates, the market saw 300,000 subscribers added during the period. It is likely to finish the year with close to three million subscribers, if it continues to retain its market share of incremental subscribers.
Competition to intensify

However, competition is likely to be intense, as new players with deeper pockets enter the fray. Even at the global level, the market has been won by those prepared to take losses for five-seven years and potential entrants such as Reliance Infocomm and Bharti Airtel (which has just received approval to start its DTH operations) are no strangers to the concept.

As regulations do not allow broadcasters to offer content exclusively to any one operator, content will not be a differentiator between the players; they will be forced to resort to heavy subsidising of set-top boxes and constant promotional activity to acquire customers. Dish TV runs the risk of increasing its customer acquisition costs to get additional subscribers; at Rs 1,800 per subscriber such costs are already at about seven-eight months worth of ARPUs (average revenue per user). Dish TV’s ability to cap acquisition costs at near current levels and sustain its lead over its competitors depends on how much the entry of more players expands the DTH market. The DTH market is projected to grow at a compound annual growth rate of 35 per cent through FY-15.
ARPUs to climb?

While steadily declining tariffs have helped expand the telecom market, the industry does not foresee a similar trend in the DTH market. For one, India’s DTH ARPUs (average revenues per user) are already among the lowest in the world at about $5 a month. This is the amount paid by the average mobile phone subscriber in India and is also equivalent to the current tariffs charged by cable operators. Second, the management at Dish TV reckons that, unlike telecom, the running costs of DTH operators are considerably higher, due to content costs. Broadcasters are unlikely to accept a lower price for their content until DTH manages a significant penetration of cable and satellite households. Operators are more likely to resort to promotional packages, luring customers with starter packs and then getting them to upgrade to higher end packages. As demand for value-added services such as video-on-demand and interactive TV improves over the long-term, the tariffs for the industry as a whole are likely to improve.

In the near-term, promotional strategies such as a free initial period of subscription are likely to rein in growth on the ARPU front. We, however, expect Dish TV to report better ARPUs over the next few years. Dish TV’s early customers paid significantly lower rates as the operator had earlier offered only limited content. As these customers migrate to higher tariffs, Dish TV expects to finish the fiscal with an ARPU of Rs 207. This is set to grow as its penetration in the metros increases and customers opt for higher end packages; only about 60 per cent of its subscribers belong to the top 100 cities.

Also, incremental subscribers as a percentage of the subscriber base are likely to decline over the years, which will reduce the impact of promotional activity (such as free subscription for initial months) on ARPU.

Investors may have to brace themselves for some equity dilution as well. Dish TV is likely to spend Rs 1,000 crore, funded through a mix of debt and equity over the next two to three years towards procurement of equipment and operations. However, with competition set to scale up (with Tata Sky also announcing plans to invest Rs 2,000 crore over three to five years), these investments will be necessary for Dish TV to protect its turf.