Event update: Dish TV India (Downgrade to Neutral) - Not fundamentals but resolution of promoter level issues key monitorables…

Dish TV India Ltd. (DITV) hosted a conference call to address investor concerns post the adverse market reaction to Essel Group companies after a negative news article. Following are the key takeaways:

• 59.1% Promoter holding currently: Shareholding down 173 bps to 59.1% post Friday’s sale of ~32m pledged shares by lenders.
• VD2H purchase synergetic for DITV: DITV reiterates the strategic fit of VD2H acquisition and believes that unlocking synergies would be eventually positive for shareholders. Promoter-level stress increased post-merger due to the mandatory open-offer (which led to more debt being piled up at promoter level).
• Agreement reached with most lenders: ~96-97% lenders (by value) are on board with DITV and would not consider the price fall as a default and would not sell pledged shares in the market. No liquidity issue at the company level (interest/principal payments on schedule).
• Zee stake sale proceeds to de-pledge Zee/DITV: First priority of Essel Group would be to de-pledge Zee’s shares post the stake sale as the stake would have to be transferred to the buyer. Some proceeds would also be used to de-pledge DITV promoter shares.

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We do not expect any material impact on day to day operations of DITV as the business continues to generate enough OCF to meet its liquidity requirement comfortably. We also continue to believe that the consolidation of VD2H with DITV would help overall earnings growth as synergies continue to play out. However, DITV’s promoter group liquidity concerns and their legal tussle with the erstwhile promoters of VD2H will continue to weigh on the stock. While the Essel Group has put a plan in action to de-pledge both Zee Entertainment Enterprises (Z) and DITV, we believe the sale proceeds (of promoter stake in Z) would first be used to de-pledge Z and only then DITV will be de-pledged or through sale of other promoter group assets (such as transmission, roads and solar). Given complete lack of clarity on this account, we downgrade DITV a notch to Neutral till further clarity emerges on resolution of the pledged shares. While we continue to maintain our estimates and also continue to believe that DITV is broadly insulated from cord-cutting, we now value it at 4x FY20E EV/EBITDA (vs 7x earlier given promoter leverage concerns) with a revised price target of Rs27. We believe if the promoter leverage is resolved or if there is a strategic buyer for DITV as well, then the stock can very quickly start reflecting fundamentals.

Other highlights:

• Only Zee stake sale under consideration: No other group company (incl. DITV) on radar for stake sales. Promoters open to consider interesting strategic partner deals in the future, however.
• No impact on DITV due to Videocon promoter issues: DITV maintained that there would be no issue on the combined entity over a legal battle between DITV and Videocon promoters regarding buyout of remaining stake from the latter.

·      Subscriber additions to become aggressive: Although no questions were taken pertaining to operations, DITV highlighted that subs addition from hereon would get more aggressive.