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Clear signal
Capital infusion should help DTH market leader Dish TV to consolidate its position in a highly competitive segment.

A $100 million GDR issue and proceeds from a rights offer are likely to help India’s largest direct-to-home (DTH) service provider, Dish TV to expand its subscriber base and fend off competition. The company, which has a market share in the region of 37 per cent, is fighting with five other players with deep pockets---Tata Sky, Big TV, Sun Direct, Airtel and DD Direct Plus---for a larger share of the Rs 3,000 crore market. The improvement in subscriber numbers will provide economies of scale leading to reduced costs, and help the company make net profits in less than two years.

Timely investment
Dish TV issued GDRs to US-based asset management firm Apollo Management at Rs 39.80 per share aggregating to $100 million or about Rs 470 crore. The investment which values the company at around Rs 4,200 crore will lead to an equity dilution by 11 per cent with the promoter’s stake coming down to 66-67 per cent from 74.5 per cent. Analysts say that the gains from an increase in subscription volumes and lower costs due to the scale benefits will be higher than the dip in future earnings per share due to the dilution. Prior to the GDR issue, the company has since the start of the year raised about Rs 700 crore out of the planned Rs 1,100 crore rights offer in tranches. The company is planning to raise the balance (Rs 410 crore) in the third and final tranche shortly. Thereafter, the company would need another Rs 400 crore till the end of 2010-11 to take care of the subscription acquisition expenses.

[Image: 2hd5qtd.png]

Considering that the acquisition cost for each subscriber is Rs 2,500 (set top boxes are subsidised and commission is paid to distributors), the company needs about Rs 1,125 crore over 2009-10 and 2010-11. The management believes that the money will be enough to fund its subscriber acquisition plans till the end of 2010-11 when it expects to report net profits. The focus is thus on adding new subscribers.

Expanding base

While Dish TV had the first-mover advantage when it launched its services in 2003, aggressive competition has meant that the company has had to work harder to retain its market share. While the sector has expanded from a million subscribers in 2006 to about 16 million now, Dish TV has moved from just under a million to over 6 million subscribers and has a market share of 37.5 per cent. The industry is expected to add about 9 million new subscribers this calendar year, of which, the company expects to grab about 2-2.25 million. The company has acquired about 1.3 million subscribers for the year and expects to add another 8 lakh subscriber before the year runs out. The company management believes that the new cash infusion will help it to aggressively expand its services and distribution network and ensure that at least 20 per cent of incremental subscribers choose Dish TV. In addition to expanding its base, the company is also planning to control costs by bringing down the expenditure on content as well as on distribution.

Scale benefits
By moving to a fixed-contract system, Dish TV has been able to save on content costs, which is the single largest component of its expenditure. The 3-4 year fixed contract with broadcasters and content providers has helped the company bring down cost of content services as a percentage of sales from 60 per cent earlier to about 46 per cent now. The company believes that as the subscriber base grows, the fixed nature of cost would translate to incremental revenues per new subscriber added. It is this high cost of content which analysts identify as one of the main reasons that new players are unlikely to come into this segment.

The second area the company could save on is collection cost viz. commission paid to the distributor or retailer on the prepaid cards they sell. The industry is currently paying 6-7 per cent of the amount collected which is likely to come down to 3-4 per cent going forward. The company believes that the combination of these factors should provide benefits to the extent of about 5-7 per cent of revenues.

Further, the company plans to improve its ARPUs, which fell by 15 per cent from its May 2009 peaks to Rs 139 in the September quarter, to Rs 150 in 2009-10 and further to Rs 170 by 2010-11. The company is hoping that customers will upgrade to higher packages and value-added services but expects the shift to happen gradually. Another area where Dish TV could gain is on the licence fee, which may be reduced from 10 per cent of gross revenues to 6 per cent and this will mean savings for DTH companies such as Dish TV.

Moves by Dish TV to bring down costs and enhance its ARPUs have helped it report an operating profit of Rs 23 crore in the September 2009 quarter as compared to a loss of Rs 39 crore in the December 2008 quarter. For 2009-10, on estimated revenues of about Rs 1,100 crore the company should be able to register operating profits of Rs 100 crore as against a loss of Rs 188 crore in 2008-09. The company, which saw losses of Rs 476 crore at the net level for FY09 expects to turn corner by the end of 2010-11 and believes that the cash flow after that should help take care of costs and expansions.

Since the company is currently making losses and there is no listed peer, analysts peg the fair value for the company’s shares using the discounted cash flow method at Rs 50-Rs 60, which gives returns upwards of 25 per cent at the lower end.

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