Niraj Dalal

Whether it is saas-bahu serials, toon series, news or sports channels — cable TV has become an integral part of all our lives, including mine. Living in a joint family poses its own challenges, chief among them being the fight for the remote control and deciding who watches what. To overcome this obstacle and pointless conflict I took an additional cable connection from Dish TV about six months ago.

This was our third cable connection and, strangely, I chose Dish based on a random advertisement I saw somewhere with the tagline Dish Karo, Wish Karo. We had a Tata Sky and a local cable connection in the house already. At the time of taking the additional cable connection and paying the subscription charges, the idea of taking another look at the Dish TV stock struck my mind. Dish TV has always been on my radar but for some reason the stock has not performed well and the numbers have never excited me enough to do a deep-dive.

But the fact that I was buying a premium Dish TV connection, which I was going to pay through my nose for, meant that I had to re-consider the company and its business model all over again. Dish TV is something that I have liked for the past three to four years but negotiating the purchase of my own connection made me dig deeper into the media industry’s dynamics in general and Dish TV in particular. The findings make for a very, very compelling case and I would be surprised if Dish TV’s performance and stock price does not influence people positively in the new year and in future as well. 

The big picture

The Indian paid-television industry is going through a transformative phase, with mandatory digitisation of existing analog cable subscribers. The government has set December 2016 as the sunset date for analog cable in the country. The first and second phases of digitisation have concluded, and phases three and four (mostly rural and semi-urban markets) are likely to conclude over the next couple of years.

The digital TV penetration in India is among the lowest, presenting a huge opportunity for incumbents, with their available infrastructure and know-how of the business. Direct-to-home (DTH) accounts for 28% of the distribution industry and this share is likely to go up as and when the final phase of digitisation gathers momentum. The DTH industry and Dish TV, specifically, given its significant rural presence, will be the biggest beneficiary of the last two phases because of limited coverage by multi-system operators and high recognition of DTH in and around rural and semi-urban regions. 

Dish TV, which commenced operations in October 2003, is the first and the largest DTH operator in India, with around 12 million subscribers. It is a part of media conglomerate Essel Group and was formed after the demerger of Zee Entertainment’s direct consumer services business.

The business got listed in April 2007 and today has the highest transponder capacity, the maximum content tie-ups (Zee TV being part of the same group company helps), the maximum number of HD channels and a well-spread dealer and distributor network in place.

Dish has now reached significant scale and accounts for an around 27% share of the DTH market. It has been consistently adding more than 100,000 subscribers a month for the past two quarters and has been pushing for strong additions in the future (1.2–1.5 million per annum).

Programming costs as a percentage of subscription revenue have seen a steady decline from 75% in FY08 to around 32% in FY14. Similarly, the average revenue per user (ARPU) has also gone up from ₹131 to ₹170. To focus on regional markets, Dish TV introduced several new packages, Zing being the most popular and successful one. Steady customer ramp-up with a focus on cost control will augur well for the company, going forward.  

Tune in

Dish TV’s business has a unique advantage, in the sense that no one usually changes their cable operator. Once the equipment is fixed, you are more or less stuck with the same company. So, once Dish TV acquires a subscriber, he or she becomes a customer for life. Typically, Dish spends nearly ₹3,000 on each customer as part of subscriber acquisition cost (SAC); this includes the up-front discount, and incentives that Dish TV offers its customers. Then, for the rest of the subscription period, the customer pays around ₹200-300 per month.

Against this, Dish incurs a programming cost of around 29% (₹60-90). The rest is all fixed costs and provides a significant operating leverage as new subscribers join in. Hence, while conventional measures are good enough while valuing other companies, I prefer to look at Dish TV from a different perspective: I view Dish TV as a perpetuity model. While the next five years are likely to generate significant cash flows and gains from huge operational efficiencies and leverage, the real value of the business, according to me, is best understood in perpetuity.

Assuming an acquisition run rate of 1.5 million customer additions every year, Dish TV will boast of a customer base of around 20 million by 2019. Assuming that the ARPU increases from the current ₹172 to ₹210 and operating margins go up to 30% (a 100 basis points increase every year), the company will bring in sales of ₹5,500 crore and an operating profit of ₹1,650 crore. If we deduct depreciation and interest costs of ₹700 crore (which could be lower), the cash flow comes to around ₹1,300 crore (adding back depreciation), profit before tax works out to ₹1,000 crore and PAT works out to ₹700 crore. That translates to an EPS of ₹7 in 2019. 

However, the key is to not look at Dish TV from a five-year time-frame but in terms of perpetuity. The differentiation is unique, given that while other FMCG and product companies have to keep advertising to retain and attract new customers, Dish TV has no such expense apart from the initial acquisition cost. The longer the customer continues to stay on the better it is for Dish TV, as the fixed costs are incurred up-front and amortised over the subscription life of a single customer.

Based on this logic, Dish TV will be able to generate substantial free cash flows, going forward, and become a market leader with a dominant position in the DTH space in India. In my view, the potential strong cash generation and superior earnings growth make this stock a potential multi-bagger; I think Dish TV is an idea whose time has come. Once the DTH player starts making profits, which I definitely think is around the corner, a lot of people will sit up and take notice. In other words, it will be a stock to watch out for, not just in 2015 but in the years to come. I have put my money on Dish, have you? 

The author holds the stock in his personal capacity and has recommended the same to his clients.