Dish TV India's Q2FY20 results (Neutral) - Weak operating performance…

Q2FY20 Results Highlights

• From Q1 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 ~Rs8.9bn (-4% qoq; 5% miss). On comparable basis (incl. content costs), revenue would have been ~Rs14.7bn (-3% qoq). ~42k net subs addition (net subs base ~23.94m).
• Reported EBITDA margin improved ~40 bps qoq to 58.3% (IDFCe: 58.6%) due to lower operating expenses (-330 bps qoq) which got offset due to higher other expenses (+300 bps qoq). Reported EBITDA fell 3% qoq to ~Rs5.2bn (6% miss led by revenue miss). Comparable EBITDA margin stood at 35.2%; +30 bps qoq).
• Negative operating leverage on the EBITDA front led to PBT falling ~45% qoq to Rs171m (65% miss). Also, ~Rs1.3bn worth of DTA/MAT write-offs (due to shift to lower tax rate) led to DITV reporting a net loss of ~Rs914m (post minority).
• Balance Sheet: Net debt improved to ~Rs17bn as of Sep 2019 (vs  ~Rs19bn/~20.7bn as of June/March 2019. Q2 capex at ~Rs1.75bn.
• H2FY20E expected to be better vs H1: DITV expects business to rebound in Q3 to some extent (vs Q2) supported by festive season related push.
• FY20E Guidance: EBITDA guidance revised to ~Rs21-22bn (vs ~Rs22.5-23bn earlier) given the stress in rural markets. Capex expected to be lower than Rs7bn.

Key positives: Lower net-debt.

Key negatives: Low net subs addition.

Impact on financials: 7.5% cut in FY20E/21E EBITDA.

Valuations & view

DITV’s Q2 performance was far weaker than anticipated, but we believe that business should gradually pickup from Q3 onwards. Ebbing competitive intensity in the South is a relief but the weak economic conditions, especially in DITV’s target markets and the rising popularity of DD FreeDish again (in light of higher pricing of channels post NTO) leads us to cut our ARPU estimates by 6-7% for FY20E/21E. We had already built in lower  net subscriber additions (~900k for FY20E/21E) as we believe that the company would try to save on capex and divert the freed up cash towards its license fee regulatory liabilities. In addition, DITV’s promoter group liquidity concerns and their legal tussle with the erstwhile VD2H promoters would continue to remain a overhang on the performance. As a result, we cut our target multiple to 4x FY20E EV/EBITDA (vs 5x earlier) and maintain our Neutral rating (TP Rs19). Upside risks to valuation include resolution of promoter leverage issues or identification of a strategic buyer for DITV.​