Dish TV India's Q2FY18 results (Outperformer) - MIB approval exp. soon, merger could create significant value…

Q2FY18 results

• DITV’s Q2 ARPU stood at Rs149 (+0.7% qoq; IDFCe: Rs147) and is a decent performance as it was able to hold on to its Q1 ARPU (which was helped by IPL). GST benefits will be visible over the next two quarters. DITV is hopeful of ARPU build-up over H2FY18E and indicated towards 0-1% increase in ARPU in FY18E over FY17 (Rs153).
• DITV added 188k net subs. (IDFCe: 170k), flat qoq; net sub. base stood at 15.9m (~2.5m HD subs). Churn came down to 0.8% pm from ~1% qoq.
• Subs. rev. grew by 1.9% qoq to Rs7.05bn; cons. rev. grew 1.3% qoq to Rs7.49bn (growth lower than subs. rev. on lower bandwidth rev. qoq).
• Cons. EBITDA grew by 7.4% qoq to Rs2.16bn (1% beat) while margins rose by 170bp qoq to 28.9% (30bp higher than our est.). Content cost was flat sequentially but COGS still grew by 4.3% qoq on higher transponder & call centre charges; margin expansion was driven by 270bp qoq saving in SG&A expenses (on account of lower gross additions, lower churn and low A&P spends).
• Net loss increased to Rs162m from Rs117m qoq because of much higher than expected D&A expenses.
• Receivables at Rs4,938m as of H1FY18 (IndAS) versus Rs870m at FY17 end (IGAAP) was a negative surprise. Management attributed the same to reclassification of some loans receivables to trade receivables and is hopeful of realigning this to earlier levels by the end of FY18E.

Key positives: Margin on an uptrend.

Key negatives: Higher receivables, higher D&A.

Impact on financials: EBITDA maintained but cut FY18E/19E earnings by 51%/35% as we increase D&A expenses.

Valuations & view

DITV’s H2FY18E ARPU is expected to be far higher than H1FY18 led by GST implementation and easing pressure from DD FreeDish (broadcasters beginning to window content). As distribution businesses have tremendous economies of scale, we expect the merger of DITV and Videocon D2H to yield both revenue (higher carriage & ad rev.) and cost (content, SG&A and employee, network) synergies. This should help create significant medium-term value even as pressure on near-term financials has bottomed out. Near-term triggers exist such as lowering of license fee and resolution of past license fee. Maintain Outperformer. Our financials, price target are for DITV and not the combined entity.