Dish TV India's Q1FY20 results (Neutral) - Mixed results; Full year EBITDA growth to be driven by accounting changes…

Q1FY20 Results Highlights

• From this qtr onwards Dish TV is reporting rev. net of content costs as under the new tariff order (NTO) it is a pass-through. Reported revenue stood at ~Rs9.3bn. On comparable basis (incl. content costs), revenue would have been ~Rs15.4bn (+9.8% qoq; in-line). ~209k subs addition (net; subs base ~23.9m) and ~8% qoq improvement in LTL ARPU (~Rs199, in line) on account of issues related to NTO getting stabilised and aided by Sports/Election coverage in the quarter.
• Stringent cost controls on personnel (rightsizing done last quarter), and lower logistics/G&A/collection costs led to 29.2% qoq growth in EBITDA to Rs5.36; however, LTL EBITDA growth was 14.5% and the rest of the growth was driven by lower license fee as rev. is now booked net of content cost vs earlier gross rev. being booked. Reported EBITDA margin stood at 57.9% while comparable margin would have been 34.9% (+520 bps qoq; IDFCe: 32.9%).
• Better EBITDA drove a strong beat on the PBT level (~Rs310m vs est. ~Rs18m; qoq loss). However, higher tax outgo meant that DITV reported a net loss (post minority) of ~Rs320m (vs est. Rs62m profit).
• Net debt improved to ~Rs19bn as of June 2019 (vs ~Rs20.7bn as of March 2019). Q1 capex at ~Rs2.05bn.

Key positives: ARPU normalisation post NTO stress in Q4FY19.

Key negatives: Bulk of EBITDA improvement driven by accounting changes.

Impact on financials: Unchanged.

Valuations & view

The implementation of the tariff order (NTO) weighed heavily on the performance of DITV causing the huge miss in H2FY19 financials.  Things have normalised from Q1FY20 onwards but this qtr’s LTL ARPU was also helped by key sporting events and hence going forward ARPU print could be weaker. We note that we are building in 12% growth in FY20 EBITDA but 800bp of the growth is led by change in accounting and LTL growth is just 4% as Dish slows down subs addition. We believe DITV is purposely being less aggressive in adding gross susbcribers (FY19 capex at Rs8.6bn while FY20E guidance is just Rs6.5-7bn) to improve its liquidity situation so that it is preparing to pay the license fee regulatory liability in case it is called for. DITV’s 65% rural subscriber base is a natural hedge to the potential onslaught from Jio’s triple-play foray. However, DITV’s promoter group liquidity concerns and their legal tussle with the erstwhile VD2H promoters would continue to weigh on stock performance. We maintain our Neutral stance on DITV with a target price of Rs 35 (5x FY20E EV/EBITDA). We maintain that if the promoter leverage issue is resolved or if there is a strategic buyer for DITV as well, the stock can very quickly start reflecting fundamentals.