Event update: Dish TV India (Outperformer) - VD2H Results - In-Line EBITDA despite ARPU miss; strong FCF generation…

Videocon D2H (VD2H) Q3FY18 Result Highlights

• VD2H’s ARPU at Rs208 fell 1.9% qoq (off a very high base; Q2 ARPU grew 7% qoq), below our Rs214 est. We note that Airtel DTH (ADTH) ARPU was flat qoq while DITV’s ARPU fell 3.4% qoq (on a low base).
• VD2H added 0.16m net subscribers (IDFCe: 0.27m), taking its total subscriber base to 13.4m (net) as of Q3 end. Churn increased to 1% per month (vs 0.62% qoq), which explains the weak net adds despite decent gross additions (0.56m in Q3 vs 0.45m qoq).
• Revenue was flat qoq (2% miss; ARPU driven). In comparison, ADTH rev grew 2.9% qoq while DITV’s fell 1% qoq.
• Content cost increased just 1% qoq (+9% yoy) at 40.1% of rev (vs 39.7% qoq). Tight cost control led to 32%/20% qoq declines in admin/S&D expenses respectively. Overall costs declined 2.1% qoq leading to in-line EBITDA of Rs2.9bn (+4% qoq). ADTH EBITDA grew 5.4% qoq; DITV’s declined 7% qoq. VD2H’s EBITDA margin improved 140bp qoq to 35% (highest ever).
• PAT came in at Rs309mn (vs Rs168mn qoq).
• Strong FCF at Rs1.3bn due to lower capex (at Rs1bn vs quarterly run-rate of Rs1.5bn). Net debt stood at Rs14.6bn (vs Rs15bn qoq).

Key positives: In-line EBITDA despite ARPU decline.

Key negatives: 1.9% qoq ARPU decline.

Impact on financials: Unchanged.

Valuations & view

While there was a miss on VD2H’s ARPU, its EBITDA was in line; as a result we do not see any change in our estimates of the financials of the combined entity (Dish TV + VD2H). 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, in our view, as synergies play out over time. Maintain OP with FY20E based PT of Rs125 for the combined entity.