Dish TV India's Q4FY18 results (Outperformer) - Merger done; time to deliver…

Q4FY18 Results Highlights (DITV + VD2H)

• DITV reported financials for the combined entity in Q4 (DITV + VD2H). Since the merger was effective Oct 1, 2017, only sequential quarterly numbers are comparable and not annual numbers.
• Rev. at ~Rs15.3bn declined 5.1% qoq (7% miss). The decline was led by 2 less days during Q4 (vs Q3), their focus on completion of the merger and focusing more on better quality subscribers (over quantity).
• Total subscriber base stood at 23m (vs expected ~30m for DITV + VD2H). ~7m subs have been excluded as DITV adopted the 60 day churn method (vs 120 days earlier). Net subs addition in Q4 stood at ~200k. HD subs base stood at 3.5m. Q4 ARPU stood at Rs201.
• Adjusted for Rs600m of merger related one-off expenses (stamp duty and consultancy fees), EBITDA came in at ~Rs4.6bn (-7.5% qoq; 7% miss). Adj. margin came in at 30.1% (-80 bps qoq).
• DITV has taken a tax write-back during Q4, which led to the company declaring net profit of ~Rs1.2bn (vs net loss of ~Rs1.6bn qoq).
• Pro-forma FY18 financials of the combined entity stood at Rs62.4bn in revenue and Rs19.7bn on EBITDA (vs exp. of Rs19.4bn) with a margin of 31.6%. Management guided for 1 7-8% increase in pro-forma revenue in FY19E and EBITDA margin of 34-35%.

Key positives: Merger completion, reiteration of synergy benefits.

Key negatives: Weak sequential performance.

Impact on financials: Cut merged co. EBITDA for FY19E/20E by 2.2%/5.2% as we build lower growth in ARPU of combined entity.

Valuations & view

Changing the churn definition to 60 days (from 120 earlier) is a welcome move and could also be indicative of the positive change in Dish TV’s prospects. As distribution businesses have tremendous economies of scale, we expect the merged entity to yield both revenue (higher carriage & ad rev.) and cost (content, SG&A and employee, network, capex, interest) synergies. There could be minor adjustments in Q1FY19E related to Ind-AS accounting but post that we expect operating and financial performance to improve sequentially and this would be a re-rating event, in our view. We expect VD2H promoters to tender their remaining stake, of 23% in the combined entity, 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).