Dish TV India's Q3FY18 results (Outperformer) - ARPU weakness resumes; merger with VD2H round the corner…

Q3FY18 Results Highlights

• DITV’s Q3 ARPU slipped to Rs144 (-3.4% qoq; IDFCe: Rs150), after two consecutive quarters of improvement. As per the management ARPU decline was due to (1) stress in rural markets (~75% of base is from non-urban towns) (2) discounting of packs led by competitive activity and (3) higher down-trading to lower value packs which is more than negating the improvement on account of HD subs. The fall is surprising given that DITV had indicated in its Q2 result call that ARPU would revive from Q3 led by savings from GST and their HD initiatives.
• DITV added 250k net subs. which was marginally ahead (IDFCe: 225k); net sub. base stood at 16.1m. Churn flat qoq at 0.8%
• Subs. rev. declined 2.1% qoq to Rs6.9bn (miss of 3%); cons. rev. fell 1% qoq to Rs7.4bn (purely led by decline in ARPU).
• Cons. EBITDA fell by 7.2% qoq to Rs2bn (13% miss) while margins shrunk 180bp qoq to 27.1% (IDFCe: 30.3%) due to lower ARPU and higher selling/distribution expenses. COGS declined 3.9% qoq led by lower transponder costs qoq. Management indicated that EBITDA had one-off expense of Rs330m towards content and STB write-off.
• Net loss post minority interest decreased to Rs8m from Rs162m qoq, largely due to a ~Rs150mn tax reversal taken during the quarter.
• DITV said that merger with Videocon D2H is on track and effective date would be towards Feb’18 end; all approvals have been received.

Key positives: Merger on track.

Key negatives: ARPU weakness continues.

Impact on financials: Cut merged co. EBITDA for FY19E/20E by 5.8%/5.4% as we build lower ARPU for DITV.

Valuations & view

Financials of DITV continue to disappoint but announcement of firm intent to merge with Videocon d2h is a big positive as it removes a big overhang (of merger cancellation). The combined entity will have a market-share of ~19% in overall pay-TV households with a comfortable FY18E net-debt/EBITDA multiple of 1.2x. As distribution businesses have tremendous economies of scale, we expect the merger of DITV and VD2H to yield both revenue (higher carriage & ad rev.) and cost (content, SG&A and employee, network, capex, interest) synergies. This should help improve the growth profile of DITV; and, EBITDA scale should be a re-rating event as synergies play out over time. Near-term triggers exist such as lowering of license fee and resolution of past license fee. Maintain OP with revised PT of Rs125 for the combined entity.