MOSL: DISH TV INDIA (Buy)-MIB approves merger of VD2H-Expect significant synergies-stock attractively priced

​Dish TV India: MIB approves merger of VD2H; Expect significant synergies; stock attractively priced

(DITV IN, Mkt Cap USD1.3b, CMP INR80, TP INR106, 32% Upside, Buy)

• The Ministry of Information and Broadcasting (MIB) has approved the merger of Dish TV (DITV) and Videocon D2H (VD2H), paving the way for their combined operations.
• We expect the combined entity to derive synergies of INR2.4b in FY19 and INR4b in FY20. Also refer our note dated September 25, 2017 for details on merger synergies.
  
• DITV’s ARPU has remained sluggish in the last few quarters partly due to high competitive intensity. We expect gradual improvement in ARPU, with the effects of demonetization waning, HD contribution rising, LCOs becoming increasingly tax compliant and competitive intensity reducing.
• The stock is trading at an EV of 6x FY19E and 4.6x FY20E EBITDA if we factor merger synergies of INR2.4b in FY19 and INR4b in FY20 (~50% below management’s estimates). We remain positive on DITV, with a TP of INR106 (8x FY19E EBITDA of INR26.5b including merger synergies of INR2.4b).

Merger to drive synergies of INR2.4b in FY19 and INR4b in FY20

• The merger should drive synergies of INR2.4b (360bp synergy gains) in FY19 and INR4b (480bp synergy gains) in FY20, implying combined EBITDA of INR26.5b in FY19 and INR31.8b in FY20. VD2H’s high content cost of 40% of total revenue (INR82/subscriber/month against DITV’s 30% or INR51/subscriber/month) should get rationalized. Additionally, GST of 18% as against 15% service tax and 6-7% entertainment tax should help save an additional 400-500bp.