In line with our expectations, Dish TV reported strong Q3FY09 performance with its topline growing at 72% y-o-y and 11% q-o-q.
The company added 0.79mn subscribers during the quarter, taking the net subscriber base to 4.2mn.
ARPUs for the quarter decreased from Rs151 during the last quarter to Rs137 this quarter; this decrease can be attributed to heavy subscriber addition during the free set-top box scheme launched and discontinued by the company in October 2008.
The management has guided for an average annual ARPU of Rs146. However, we believe that Dish TV should end FY09E with average ARPUs of Rs139.
We believe that it would be difficult for the company to raise ARPUs in the next quarter and still maintain subscriber growth because of the highly subsidized offerings of other DTH players.
Nevertheless, if the company succeeds in raising ARPUs, it would be a significant positive for the stock.
As the DTH business is built around scale, a higher subscriber base results in cost efficiencies on many fronts viz. content costs, dealer commission and advertisement costs.
Dish TV added 2mn subscribers y-o-y, leading to substantial savings on programming and selling costs due to sliding scale mechanism. It has also reversed the provision for annual bonus to employees, resulting in savings on the staff cost front too.
Tight cost management has expanded the company’s EBITDA margins by 37 percentage points. We expect the company to be EBITDA positive by FY10.
The company is on track to achieve our estimated topline and bottomline numbers in FY09E and FY10E. The stock has delivered a return of 23% since we initiated coverage on it with a ’BUY’ rating.
We revise our rating on the stock to HOLD with a target price of Rs20.3. The stock offers a potential upside of 11% from current levels.