Dish TV India's Q1FY19 results (Outperformer) - Merger rationale beginning to play out…

Q1FY19 Results Highlights (DITV + VD2H)

• DITV fortunes have turned around post the merger of VD2H as ARPU rose by a surprising 6.5% qoq (IDFCe: +1.2%) to Rs214 (vs Rs 201 qoq). Management attributed the increase to higher share of HD, lower discounts and effect of price hikes taken at the beginning of the qtr; they maintained that this ARPU is broadly sustainable.
• Net subscriber base stood at ~23.3 mn (~301k addition; in line). Subs addition was led by this being a Sports heavy quarter even as there was softness on account of Ramadan. 44% of subs additions were on the HD platform. HD is now 17% of total net base of DITV.
• Subscription revenue grew 8.1% qoq to ~Rs14.9bn (5.6% beat led higher than exp. ARPU). Cons. rev. at ~Rs16.6bn grew 8% qoq (5% beat). DITV implemented Ind-AS 115 accounting principles from this qtr (vs Ind-AS 18 previously) which had a 0.9% negative impact on cons. rev.
• EBITDA came in at ~Rs5.6bn (+21% qoq on adj. Q4FY18 EBITDA; 10% beat) led by revenue beat and some merger benefits accruing in employee and SG&A expenses. VD2H license fee accounting was matched to that of DITV’s and this has a ~Rs200m positive bearing on cons. EBITDA which was negated by Rs210m of forex losses (on dollar debt) booked in other expenses. EBITDA margin improved by 360bp qoq (on adj. margin base) to 33.6%. Management maintained its annual guidance of 7-8% growth in revenue and 34-35% margin as content synergies are expected to play out over Q2-Q4FY19E.
• Interest expense came in at ~Rs1.8bn (vs ~Rs1.3 bn qoq), higher than expected. This was led by ~Rs200m one-off expenses towards re-financing and higher provisioning for interest payable on license fee for the combined entity. Net profit came in at ~Rs279m (19% beat).

Key positives: Strong growth in ARPU.

Key negatives: Higher interest expense.

Impact on financials: Unchanged.

Valuations & view

Q1FY19 is a strong start by the merged entity and is a proof of concept of both revenue and cost synergies playing out with scale coming in the business; we expect operating and financial performance to continue improving sequentially and this should be a re-rating event, in our view. We expect VD2H promoters to tender their residual 23% stake, in the open offer. As a result DITV promoters would have additionally bought ~28% stake in the combined entity for a total outlay of ~Rs40bn. Given such a large fresh investment, we firmly believe that the interest of promoters would now be further aligned with minority shareholders and we expect high value creation from hereon. We have an Outperformer rating on DITV with a target price of Rs118 (10x FY20E EV/EBITDA).