Dish TV India's Q2FY19 result (Outperformer) - Down but not out…

Q2FY19 Results Highlights

• DITV cons. revenue fell by 3.7% qoq to Rs15.9bn (3.2% miss) led by 3.3% qoq fall in ARPU. EBITDA at Rs5.4bn (-2.9% qoq) came in 4.3% below est. on rev miss even as it exhibited tight cost control (overall expenses fell by 4.1% qoq led by synergy gains even after accounting for forex loss of Rs210m).
• After reporting a strong 6.5% qoq increase in ARPU in Q1FY19, DITV’s Q2FY19 ARPU fell by 3.3% qoq, to Rs207, led by lack of big ticket sporting events (which help drive ARPU) and weak seasonality. We note that Airtel DTH’s (ADTH) Q2FY19 ARPU grew by 1.3% qoq but that happened on a base of 0.5% qoq increase in Q1FY19.
• Net subscriber base stood at ~23.5mn (~200k addition; below our exp. of 350K). Subs addition was weak because of monsoons (seasonality); we note ADTH added 133K net subs. this quarter.
• Subscription revenue fell 2.4% qoq to ~Rs14.5bn (led by 3.3% fall in ARPU). EBITDA came in at ~Rs5.4bn (-2.9% qoq; 4.3% miss) led by rev. miss. This EBITDA includes Rs210m of forex losses booked in other expenses. EBITDA margin improved by 30bp qoq to 33.9%. DITV maintained its annual guidance of ~8% growth in revenue and 34-35% margin as synergies from the merger are on track.
• Net profit came in at ~Rs255m, in line despite miss in EBITDA due to lower than expected interest expense.
• There has been a significant increase in both ‘other financial assets’ (by Rs13.2bn) and ‘other current liabilities’ (by Rs10.5bn) and the management clarified that the net increase was Rs~3.5bn towards capex advances and this will streamline over the next two quarters.

Key positives: Tight cost control, FCF generation of Rs2.3bn.

Key negatives: Lower than exp. ARPU led EBITDA miss.

Impact on financials: Now build ARPU to be flat in FY20E yoy (vs 2% increase earlier) and cut FY20E EBITDA by 4.6%; FY19E unchanged.

Valuations & view

DITV’s financials are broadly tracking estimates including reduction in net-debt (reduced by Rs4bn in H1FY19). However, the street has significantly derated DITV as it is emulating Jio’s success in the fixed broadband (and TV) space just like the wireless space. We believe that Dish’s 65% rural subscriber base is a natural hedge to the incoming Jio onslught and amongst all DTH operators, it is best placed to defend its subscriber base. Nonetheless, Jio’s acquisition of Hathway & Den will help Jio accelerate its reach and any further investments by Jio in the cable space could be detrimental to even DITV as ‘area’ commaniity increase with Jio. Currently we maintain our OP rating but cut our TP to Rs66 as we cut target multiple to 7x (from 8x) to account for lower LTL EBITDA CAGR over FY18-20E at 12% vs 15% earlier.