MOSL: DISH TV INDIA (Buy)-ARPU decline, higher operating cost drag down EBITDA

Dish TV India: ARPU decline, higher operating cost drag down EBITDA; all eyes on merger synergies

(DITV IN, Mkt Cap USD1.2b, CMP INR75, TP INR101, 34% Upside, Buy)

• Double whammy to margins: Subscription revenue fell 1.7% QoQ (flat YoY) to INR6.9b, primarily due to a decline in APRU, partly offset by a rise in net subs adds. Consol. revenue fell 1% QoQ/YoY to INR7.4b (7.5% miss). This, coupled with a significant 23% QoQ rise in SGA expenses, led to a 7.2% QoQ (-15.6% YoY) decline in EBITDA to INR2b (23% miss). EBITDA margin shrunk 180bp QoQ (-470bp YoY) to 27.1% (560bp miss). However, other income and interest cost savings provided support, with net loss down to INR8m from INR162m in 2QFY18.
• ARPU decline – a negative surprise: ARPU dropped again (-3.4% QoQ to INR144), after showing reversal over the last two quarters (INR149 in 2QFY18), due to increased competitive intensity (leading to higher discounts). However, an increase in net subscriber additions by 250k (+33% QoQ, 188k in 2QFY18) to 16.1m reduced the overall impact. Monthly churn remained steady at ~0.8%.
• Key concall highlights: 1) Merger with Videocon D2H is expected to conclude by end of Feb’18; maintain merger synergies of INR5.1b/INR7.6b for FY19/20, of which 50% are expected to be derived from content and the rest from set-top box, backend and interest cost. 2) Net debt of the merged entity at INR21.6b. Additional combined license fee liability, which is under litigation, stands at INR15.3b. 3) ARPU has seen pressure, with absorption of premium HD subscription (~23% of subscribers) offset by downtrading of SD subscribers.