DISH TV

Company Valuation & Equity Research Analysis

Syndicate 3
11020541003 Abhijeet Kunturkar 11020541016 Bindiya Bansal 11020541030 Kishor Kamble 11020541033 Maheep Singh 11020541040 Neelima Agrawal 11020541041 Nikhil Kumar Goyal 11020541055 T. M. Sairam Prassad

INDEX 1.0 2.0 About Dish TV Introduction to DTH Industry in India

1.0 Dish TV Dish TV India Private Limited (formerly ASC Enterprises) is a part of Essel group headed by Mr. Subhash Chandra. It was formed as the result of a demerger of Zee Telefilms limited and contains its DTH business. The company has been the leader in the DTH industry with approximately 12.9 million subscribers in over 6000 towns across the country. About 60% of the viewers are concentrated in the top 100 cities, with top 15 cities comprising 20% of it. The company has still been a loss making entity, incurring losses to the tune of Rs 1588 million in FY 2011 2012 but on growth point it is growing by 48 % from last 5 year on year. 2.0 Introduction to DTH Industry in India Direct To Home (DTH) broadcasting service refers to distribution of multi channel programs in Ku Band through a satellite system, by providing TV signals direct to subscribers premises without passing through an intermediary such as cable operator. Currently there are seven players in the DTH industry in India Dish TV, Tata Sky, Sun Direct, Big TV, Airtel Digital TV, DD Direct and Videocon D2H joining the competition recently. Under DTH a subscriber needs to buy a Dish Antenna and a STB (Set Top Box) and theoretically they have the choice of selecting the channels they want to see and pay accordingly. But due to practical problems usually the service provider provides a bundled option to the subscribers and they chose the package which suits most to their taste. Off lately to increase the revenues the service providers are focusing on Value Added Services (VAS) like movie on demand, etc. The DTH industry in India has a tremendous growth potential. FICCI KPMG predicts that the number of subscribers will grow to 99 million by FY 2015. DTH industry has already achieved 46.9 million user by June 2012 and report predicts by end of 2012 57 million subscribers. Metros digitization is also helping the industry to acquire new subscribers.

Looking at the huge subscriber growth potential many new entrants have entered in the industry. Dish TV was the first private player to enter the industry and launched its services in the year 2005. In August 2006 Tata Sky launched its services, followed by launch of service by Sun Direct in early 2008. Reliance launched its DTH services under the brand Big TV and Airtel launched Digital TV by 2008 end. Latest entrant in the field is Videocon D2H in 2009. The current structure of the industry and important parameters can be seen in Annexure 1. 3.0 Valuation of Dish TV We have done the current valuation of Dish TV standalone business. The valuation of the firm is done under 2 methods 1. Discounted cash flow method. 2. Corporate Evaluation - Enterprise Value /EBITDA, EV / Sales 3. Stock debt Approach 4. Economic Value Added 3.1 Discounted Cash flow (DCF) method Some of the basic assumptions which we have made while carrying out valuations of Dish TV by DCF method are

Expect 23% revenue CAGR in the next four years (F2012-16E).

We expect the company to report a profit turnaround by FY 2011. This is on the assumptions of gains from subscribers added in the last 3-4 quarters, plus enhanced scale, which would help in this turnaround.

We expect the cash outflow in investment to reduce in the years to come as the company has made investment in the infrastructure and now only need to maintain it. We expect that Dish TVs capital spending needs, especially as a proportion of its balance sheet size and EBITDA, will fall fast from here. This should help sustain its growth in the medium term.

The income statement projections have been done taking various growth rates given by CRISIL research report.

Weighted average cost of capital (WACC): We assume a beta of 1.2, cost of equity 15.4%, Cost of debt 9%, risk-free rate of 8.7%, thus deriving a weighted average cost of capital 12.1%. The beta of 1.2 is an average of historical beta (from Bloomberg) for Dish TV and its peer group (The Indian Media coverage universe).

We have calculated the valuation of the company in two stages. Stage 1 is the explicit phase and covers the period from 2011 to 2016. Stage 2 is beyond 2016 and represents the terminal period. In the terminal period growth rate of 5% is taken which is less than our India Economics teams long-term growth forecast of 7.5%. 3.1.1 Income Statement Projection
F2011 Sales and other income Total Expenditure EBIDTA Depreciation & Amortization EBIT Interest Expenses Other Income PBT Provision for Taxes PAT 14367 11792 2575 3996 (1421 ) 602 294 (1728 ) (3) (1725 F2012 E 19418 14410 5008 4728 280 1823 331 (1212) 0 (1212) F2013 E 23884 17127 6757 5421 1336 1292 358 402 0 402 F2014 E 29457 20656 8801 5745 3056 1399 463 2120 0 2120 F2015 E 36451 24847 11604 5962 5642 872 262 5032 503 4529 F2016 E 42189 27776 14413 6002 8411 259 400 8552 2822 5730 5

*All figures in Rs Million

3.1.2 Free Cash flow statement Phase 1 *All figures in Rs Million

F2012 E 280 4728 968 5976 (5682) 294 258 F2013 E F2014 E 1336 3056 5421 5745 718 1457 7475 10258 (6582) (6709) 893 3549 785 3167 F2015 E 5138 5962 98 11199 (6344) 4855 3866 F2016 E 5589 6002 519 12110 (5838) 6272 4458

NOPLAT Add: Depreciation & Amortization Less: Working Capital Cash flow from operations Less: Capital Expenditure Free cash flow to form Discounted FCF

Total present value of FCF = 258+785+3167+3866+4458 = Rs 12534 million Phase 2 Assuming the company to grow at 5% from the year 2017-18 the FCFF from that year onwards =6272* 1.05 / (0.121-0.05) = Rs 92754.93 million Present Value = 92754.93 / (1.12) ^5 =Rs 52631.64 million Hence total present value = 12534 + 52631.64
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= Rs 65165.64 million Hence the valuation of the company comes out to be Rs 65165.64 million. Number of outstanding shares = 1064 million Hence Price value of each share = 65165.64 / 1064 =Rs 61.24 3.2 Corporate Evaluation - Enterprise Value /EBITDA, EV / Sales

It is calculated for FY 2011

Enterprise Value = Market Value of Equity + Market Value / book Value of debt Cash and Cash Equivalent * All Figures in Rs. Million
Market Value of Equity Book Value of Debt Cash and Cash equivalent Enterprise Value EBITDA EV / EBITDA 58000 10763 3385 65378 2575 25.38951

EV / EBITDA = 25.389 EV / Sales = 65378 / 14367 = 4.55 3.3 Stock & Debt Approach Value = Market value of outstanding Shares + Market value of debt Market value of outstanding Shares = Rs. 58000 million
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Market value of debt = Rs. 10763 million So Value = 58000 / 10763 = 5.389 3.4 Economic Value Added (EVA) EVA = PAT COST OF CAPITAL CHARGE Cost of Capital Charge = Cost of Capital * Capital Employed = 0.121 * 11390 = Rs 1378.19 million PAT EVA = 1378.19 (-1725) = Rs 3103.19 million 4.0 Equity Research Analysis Dish TV is Indias largest direct-to-home company and part of the biggest media conglomerate Zee Group. Below are the reasons for its no. 1 position

= Rs -1725 million

Distribution Network A customer looks at the proximity of dealer before he buys a product like this. Dish TV has the largest network of dealers and distributors present among its entire competitor. Dish TV is present in over 6,600 cities and has more than 55,000 dealers via 1400 distributors.

Number of Subscribers DTH business is a scale business. The more number of subscribers one player has, the better is his chances of earning profits earlier. According to CRISIL a player in DTH segment needs to have at least 7 million subscribers to start earning profits. Currently Dish TV has approximately 12.9 million and is the market leader in the DTH segment.

Ku Band Transponders Number of transponders available are limited and they can be only accessed via Astrix. Transponder gives a DTH player the
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capacity to provide additional channels. Thus more number of transponder means the player can offer more channels. Dish TV has currently largest transponder capacity available. Only Tata Sky has comparable transponder capacity as that of Dish TV, while other operators have lower capacities.

Industry Leap The DTH industry can be divided in three stages, Seeding & Brand Building, Building Scale and Value Realization. While in the first stage, Seeding & Brand building the player has a high subscribers growth, slow revenue ramp up, high cash burn and low negotiating power. Airtel Digital TV and Big TV are currently in this phase.

*Source-CRISL Report Phase two is Building scale, where revenue starts building up but subsidies remain high. Players like Sun Direct and Tata Sky are in this phase. Phase three is Value Realization wherein scales of economies kicks in, bargaining power among suppliers increase and breakeven are achieved. Dish TV is currently at the interface of Phase two and Phase three and is way ahead of its competitor. Sensex Related Data analysis

Market Share of the DTH Industry

Profitable Subscriber Growth Momentum

Dishtv crosses the 12.9 million subscriber mark. Becomes Asias first DTH company to break the 1-crore barrier
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Achieving innumerable firsts for the industry, Dish TV has been the revolutionary market leader since its launch and has consistent maintained its leadership position in the fiercely competitive Indian DTH industry from 2003.

The company achieved nearly 75% growth in subscriber additions this year and is expected to close FY11 with over 3.5 million additions to its family.

29% Market Share ARPU of Rs150 (Rs139 in Q2FY11) driven by price increases in lower end packages. This helped offset the rise in content cost and subscriber acquisition cost (SAC), resulting in EBITDA margin improving to 18% (15% in Q2FY11).

Content costs remained at 39% despite the fixed content deals, as Dish TV added new channels Neo Sports, UTV and regional channels to their packages. SAC increased to Rs2, 142 (Rs2, 083 in Q2FY11) driven by:o o

Increased distribution costs and Higher promotional subsidies on the settop boxes.

Index Performance

Company Performance Financials

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Financials
Particulars Revenue EBITDA Net Profit EPS 2010 10850 1117 (2621) -2.50 2011 14367 2575 (1725) -1.60 2012 E 19418 5008 14410 -1.10 2013 E 23884 6757 17127 0.40

Key Ratios
Particulars ROE (%) ROCE (%) PE (x) EV / EBITDA 2010 NA NA NA 64.4 2011 NA -9.3 -35.1 25.6 2012 E NA -0.3 -65.3 14 2013 E NA 8.8 150.6 10.3

4.1 Investment Concerns

Threat of Retaliation from the Cable TV Platform: DTHs progress may slow from here if the cable industry is able to consolidate quickly and then start investing to retain control of the last mile into subscribers homes. This may not be relevant, however, for the 37 mn TV households that are not connected by cable, are served only by the government-owned company Doordarshan via the terrestrial platform, and are thus effectively an unhindered target area for DTH. On the same platform government is also pushing DTH industry to mandate digitization in metros and later in tier-1 cities also.

Intense Competition on DTH Turf Could Cap ARPU: The DTH industry in India has six players, all with strong brands and financial backing. While players like Dish TV and Tata-Sky have reached a relatively comfortable subscriber base for sustenance, new players like Airtel, Reliance and Videocon are still in the accelerated subscriber addition mode. Against this background, if competitive behaviour is more aggressive than we project, ARPU and SAC could remain unfavourable for all players including Dish TV.

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Dish TVs Losses May Continue over Next 4-5 Quarters: As the company continues to acquire new subscribers over the next 4-6 quarters, it may suffer losses in the next 4-5 quarters.

Sustained Need for Funding in Next 4-6 Quarters: The Company may need sustained funding as the breakeven is expected to happen in the year 2013. Hence another concern would be raising capital to maintain its growth.

RECOMMENDATION TO BUY DISH TV INDIA LTD is currently trading at a P/E multiple of (35.1) x EPS of Rs (1.60) and is expected to trade in P/E multiple of (65.3) x and EPS of Rs. (1.10) in FY12E so we recommend you to

BUY for target of Rs. 72.

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Other Players in the Market

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Balance Sheet

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