Shobhit Khare (Shobhit.Khare@MotilalOswal.com); +91 22 3982 5428

23 July 2014

Update | Sector: Media

Dish TV India CMP: INR60 TP: INR75 Buy

TRAI licence recos EBITDA positive but cash negative Upgrading EBITDA by ~11%; Retrospective liability remains sub-judice

New licence fee recommendations by TRAI would prospectively reduce licence fee provision from ~10.4% of revenue to ~7.5% of revenue.

Reported EBITDA margin to increase by ~290bp driving ~11% upgrade in our EBITDA estimates. However cash flow impact is negative as currently cash licence fee payout is only ~6% of revenue, in line with the current legal understanding. FY15 cash flow impact estimated at ~0.4b.

Maintain Buy with revised target price of INR75/sh vs INR78 earlier.

DTH licence fee revised from 10% of GR to 8% of AGR TRAI has recommended DTH licence fee at 8% of adjusted gross revenue (AGR) for new/renewed DTH licences as compared to 10% of gross revenue earlier. AGR would be calculated by excluding service tax, entertainment tax and other taxes. These recommendations, if accepted by the government, would be applicable with effect from October 2013 for Dish TV as its earlier licence period ended in September 2013. There has been a dispute regarding methodology for licence fee calculation and the matter is currently sub-judice. As a result, DITV is currently making licence fee provision at ~10% of gross revenue but making payment at ~6% of gross revenue, in line with current legal understanding. New licence fee regime EBITDA accretive but cash flow negative Currently DITV’s licence fee provision made in P&L amounts to ~10.4% of reported revenue (10% of gross revenue) while actual cash payment is estimated at ~6.2% of reported revenue. Under the new regime, post deduction of entertainment tax (which constitutes ~6% of reported revenue), effective licence fee under the new regime would be ~7.5% of reported revenue. Hence, while licence fee provision in P&L will decline by ~290bp, the actual cash outgo pertaining to licence fee would increase by ~130bp. For example, as compared to FY15 licence fee provision of ~INR2.8b and cash outgo of ~INR1.7b, the revised licence fee would be ~INR2.05b (please refer table on page 2). Retrospective licence fee liability of ~INR8.4b remains sub-judice DITV has an accumulated retrospective licence fee liability of ~INR8.4b due to lower cash payment vs government demand. While this liability pertains to earlier licensing regime and remains sub-judice, there would be a significant decline in the liability if TRAI’s new licence fee regime were to be applied retrospectively. We have not factored any cash outgo pertaining to the retrospective liability. Upgrading EBITDA by ~11%; downgrade TP from INR78 to INR75 We are upgrading our EBITDA estimates by ~11% but downgrading DCF based target price from INR78 to INR75. Our revised target price incorporates higher cash outlay towards licence fee but factors lower WACC (12.5% vs 13% earlier) to reflect lower perceived risk in the licence fee regime.

BSE Sensex S&P CNX 26,147 7,796

Stock Info Bloomberg DITV IN

Equity Shares (m) 1,064.9

52-Week Range (INR) 65/40

1, 6, 12 Rel. Per (%) 3/-2/-23

M.Cap. (INR b) 63.7

M.Cap. (USD b) 1.1

Financial Snapshot (INR Billion) Y/E March 2015E 2016E 2017E Net Sales 27.4 31.6 36.3

EBITDA 7.4 9.5 12.8

Adj. NP 0.3 2.3 5.8

Adj. EPS (INR) 0.3 2.2 5.4

BV/Sh (INR) -2.6 -0.4 5.0

RoCE (%) 11.3 26.7 51.4

Valuations

P/E (x) NA 26.9 10.8

EV/EBITDA (x) 9.8 7.4 5.0

EV/Sub (INR) 5,619 4,980 4,248

Shareholding pattern (%)

As on Jun-14 Mar-14 Jun-13

Promoter 64.5 64.5 63.6

DII 2.3 4.9 4.4

FII 19.1 19.5 21.0

Others 14.1 11.0 11.1

Note: FII Includes depository receipts

Stock Performance (1-year)

40

49

58

67

76

Jul-

13

Oct

-13

Jan-

14

Apr

-14

Jul-

14

Dish TVSensex - Rebased

Investors are advised to refer through disclosures made at the end of the Research Report.

Dish TV India

23 July 2014 2

Change in licence fee regime: EBITDA and cash flow impact calculation (INR b) FY15E FY16E

Revenue 27.4 31.6

Earlier licence fee provision (~10.4% of revenue) 2.8 3.3

New licence fee (~7.5% of revenue) 2.1 2.4

Saving in licence fee 0.8 0.9

Earlier EBITDA 6.6 8.6

Revised EBITDA 7.4 9.5

EBITDA upgrade (%) 11.6 10.5

Earlier licence fee paid (~6.2% of revenue) 1.7 2.0

New licence fee (7.5% of revenue) 2.1 2.4

Increase in cash outflow 0.4 0.4

Source: Company, MOSL

DITV: Summary of estimate change FY15E FY16E FY15E FY16E

Gross subscribers (m) Revenue (INR b)

Old 19.1 21.6 Old 27.4 31.6

New 19.1 21.6 New 27.4 31.6

Change (%) 0.0 0.0 Change (%) 0.0 0.0

Net subscribers (m) Operating costs

Old 12.8 14.1 Old 20.8 23.1

New 12.8 14.1 New 20.0 22.2

Change (%) 0.0 0.0 Change (%) -3.7 -3.9

Gross adds (m) EBITDA (INR b)

Old 2.5 2.5 Old 6.6 8.6

New 2.5 2.5 New 7.4 9.5

Change (%) 0.0 0.0 Change (%) 11.6 10.5

Net adds (m) Net Profit (INR b)

Old 1.4 1.3 Old -0.4 1.5

New 1.4 1.3 New 0.3 2.3

Change (%) 0.0 0.0 Change (%) NA 56.5

ARPU (INR/month) Depreciation (INR b)

Old 176 185 Old 6.1 6.2

New 176 185 New 6.1 6.2

Change (%) 0.0 0.0 Change (%) 0.0 0.0

Annual churn (% of net subs) Net Finance Cost (INR b)

Old 9 9 Old 1.5 1.4

New 9 9 New 1.6 1.5

Change (bp) 0 0 Change (%) 1.1 3.9

CPE capex/gross add (INR) EBITDA Margin (%)

Old 2,709 2,655 Old 24.2 27.0

New 2,709 2,655 New 27.0 29.9

Change (%) 0.0 0.0 Change (bp) 281 284

Source: Company, MOSL

Dish TV India

23 July 2014 3

DISHTV: A Snapshot Key Assumptions FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY17E Gross subscribers (m) 7 10 13 15 17 19 22 24 YoY (%) 36 51 24 18 9 15 13 12 Gross adds (m) 1.8 3.5 2.5 2.3 1.4 2.5 2.5 2.5 YoY (%) -12 93 -30 -6 -38 75 0 0 Net subscribers (m) 5.7 8.5 9.6 10.7 11.4 12.8 14.1 15.2 YoY (%) 32 50 13 11 6 13 10 8 Net adds (m) 1.4 2.8 1.1 1.1 0.7 1.4 1.3 1.1 YoY (%) -22 106 -60 -2 -40 114 -11 -12 Monthly churn (%) 7.4 7.9 11.4 8.5 4.8 6.0 6.0 6.0 ARPU (INR) 140 140 153 157 165 176 185 197 YoY (%) -3 0 10 3 5 7 5 6 Prog & content costs (INR b) 4.6 5.2 6.1 6.5 7.8 8.4 9.3 10.2 % of revenue 42 36 31 30 32 31 29 28 EBITDA margin (%) 9 17 25 27 23 27 30 35 CPE capex/gross add (USD) 47 46 46 46 46 45 44 43 CPE capex/subscription revenue (%) 49 62 34 32 18 26 22 18 Revenue Mix

Revenue (INR b) 10.8 14.4 19.6 21.7 24.3 27.4 31.6 36.3 YoY % 47 32 36 11 12 13 16 15 Subscription revenue (%) 77 83 85 89 90 94 95 96 Lease rentals (%) 14 14 11 7 4 2 1 0 Others (%) 9 3 4 4 6 4 5 4

Source: Company, MOSL

Dish TV India

23 July 2014 4

Financials and valuations

Income Statement (INR Million)Y/E March 2013 2014 2015E 2016E 2017ENet Sales 21,668 24,258 27,389 31,650 36,287YoY (%) 10.7 12.0 12.9 15.6 14.7

Operating expenses 15,873 18,745 19,997 22,193 23,444Cost of goods and services 11,010 13,098 13,498 15,025 15,530Employee Cost 822 891 980 1,078 1,186Sel l ing & dis tribution exps 3,036 3,321 4,199 4,677 5,214Adminis trative exps 1,005 1,436 1,319 1,413 1,514EBITDA 5,795 5,513 7,392 9,457 12,843EBITDA margin (%) 26.7 22.7 27.0 29.9 35.4

Depreciation 6,276 5,973 6,091 6,216 6,504Interest 1,284 1,327 1,564 1,491 1,122Other Income 512 660 582 582 582PBT -1,252 -1,127 319 2,332 5,799Adjusted PAT -1,252 -1,127 319 2,332 5,799 Change (%) -21.2 -10.0 -128.3 630.4 148.6Exceptional i tems 594 -415 0 0 0Reported PAT -658 -1,542 319 2,332 5,799

Balance Sheet (INR Million)Y/E March 2013 2014 2015E 2016E 2017EShare Capita l 1,065 1,065 1,065 1,065 1,065Share Premium 15,378 15,378 15,378 15,378 15,378Reserves -17,996 -19,531 -19,212 -16,880 -11,081Net Worth -1,553 -3,089 -2,770 -437 5,361Loans 16,330 14,460 14,823 12,990 7,456Deffered Tax Liabi l i ty 0 0 0 0 0Capital Employed 14,777 11,371 12,054 12,553 12,817

Gross Fixed Assets 35,788 42,314 49,727 57,132 64,342Less : Depreciation 21,449 27,422 33,513 39,729 46,233Net Fixed Assets 14,339 14,891 16,214 17,404 18,109Capita l WIP 6,535 2,808 2,808 2,808 2,808Investments 0 1,180 1,180 1,180 1,180

Curr. Assets 10,676 8,831 9,041 9,282 9,538Inventory 86 75 84 98 112Debtors 304 415 468 541 621Cash & Bank Ba lance 6,403 5,399 5,399 5,399 5,399Loans & Advances 3,883 2,943 3,090 3,244 3,406

Current Liab. & Prov. 16,773 16,339 17,189 18,121 18,817Creditors 10,099 7,837 8,754 9,981 11,068Provis ions & other l iab. 6,674 8,503 8,436 8,140 7,749

Net Current Assets -6,097 -7,508 -8,148 -8,839 -9,280Miscel lanous exp 0 0 0 0 0Application of Funds 14,777 11,371 12,054 12,553 12,817E: MOSL Estimates

Dish TV India

23 July 2014 5

Financials and valuations

RatiosY/E March 2013 2014 2015E 2016E 2017EBasic (INR)Adjusted EPS -1.2 -1.1 0.3 2.2 5.4Growth (%) -21.3 -10.0 -128.3 630.4 148.6Cash EPS 4.7 4.6 6.0 8.0 11.6Book Value -1.5 -2.9 -2.6 -0.4 5.0DPS 0.0 0.0 0.0 0.0 0.0Payout (incl . Div. Tax.) (%) 0.0 0.0 0.0 0.0 0.0

ValuationP/E NA NA NA 26.9 10.8Cash P/E 12.5 13.0 9.8 7.3 5.1EV/EBITDA 12.5 13.0 9.8 7.4 5.0EV/EBITDA (excl lease renta ls ) 17.3 15.6 10.5 7.7 5.0EV/Sales 3.4 3.0 2.6 2.2 1.8Price/Book Value NA NA NA NA NAEV/net subscriber (INR) 6,761 6,290 5,619 4,980 4,248EV/net subscriber (USD) 112 104 93 83 71

Profitability Ratios (%)RoE NA NA NA NA NARoCE 1.2 -5.3 11.3 26.7 51.4

Turnover RatiosDebtors (Days) 5 6 6 6 6Inventory (Days) 1 1 1 1 1Creditors . (Days) 232 153 160 164 172Asset Turnover (x) 2.7 3.7 5.3 5.5 5.9

Leverage RatioDebt/Equity (x) NA NA NA NA NA

Cash Flow Statement (INR Million)Y/E March 2013 2014 2015E 2016E 2017EOp.Profi t/(Loss ) bef Tax 6,390 5,098 7,392 9,457 12,843Other Income 512 660 582 582 582Interest Pa id -1,284 -1,327 -1,564 -1,491 -1,122Direct Taxes Pa id 0 0 0 0 0(Inc)/Dec in Wkg. Cap. 2,125 413 640 691 441CF from Op.Activity 7,743 4,844 7,049 9,239 12,744

(inc)/Dec in FA + CWIP -9,061 -2,799 -7,413 -7,405 -7,209(Pur)/Sa le of Investments 1,500 -1,180 0 0 0CF from Inv.Activity -7,562 -3,978 -7,413 -7,405 -7,209

Is sue of Shares 43 0 0 0 0Inc/(Dec) in Debt 2,327 -1,870 364 -1,833 -5,534Dividends Pa id 0 0 0 0 0Other Financing Activi ties 0 0 0 0 0CF from Fin.Activity 2,370 -1,870 364 -1,833 -5,534

Inc/(Dec) in Cash 2,552 -1,004 0 0 0Add: Opening Ba lance 3,851 6,403 5,399 5,399 5,399Closing Balance 6,403 5,399 5,399 5,399 5,399

Dish TV India

23 July 2014 6

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Disclosure of Interest Statement DISH TV INDIA LTD Analyst ownership of the stock No

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