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Sunday, February 12, 2012

Each DishTV subscriber worth Rs 8000-irrational exuberance?

A picture speaks a thousand words, as in the above case. I had blogged earlier about the seemingly long breakeven point for Dish TV DTH subscribers(http://financeandcapitalmarkets.blogspot.com/2011/12/20months-cash-cost-breakeven-dangers-of.html), and then I decided to analyze whether the equity markets shared my views or not. Taking a short term view does not work in market valuations, so I decided to analyze the trend for the past 5yrs(Mar07 till date), using data released by the company and the market cap data from BSE. Some interesting points
  1. The company hypes up gross subscriber base, but also reports a net subscriber base. The difference between the two presumably(because I could not find any company definition) is the dormant subscriber base who have a Set Top Box, but who do not subscribe from Dish TV. Since investors may still assign a value to gross subscriber base in hope of returning customers, I decided to calculate the EV metric separately for both
  2. After the slide in Mar09(in EV/subscriber terms), it dramatically rose till Mar11, perhaps driven by the explosive growth in subscriber base. However, that was not accompanied by a commensurate rise in ARPU/decline in subscriber acquisition costs. Hence, the market punished the stock with a stagnant share price since then despite the continuing subscriber addition, and the Digitization Bill 2011. 
Despite the slide in valuations, paying even Rs 6650-8133 per subscriber(on gross/net basis respectively) seems too rich for the following reasons.
  1. given that the Dish TV's own Freedom card(at just Rs 750) permits even other operator's Set Top Boxes to be compatible with Dish TV. If other operators can copy that technology, then they can cannibalize each other's base without incurring the customer acquisition cost of around Rs 2200+ which they incur currently. In fact, the minor dealer's commission will be offset by the cost of the card viz Rs 750.
  2. As Dish TV is competing against Airtel with 7.1 active subscribers and counting, it would soon be  a war of attrition, as smaller operators try to cannibalize the installed base on price basis. Of course, MNP and low voice tariffs fizzled out, but even if that happens for DTH, the adjustments period may take 1-2yrs which would drain cash. 
  3. Reliance is the dark horse in this, as its 4G ambitions would impact the DTH market in some way, and given their historic cost competitiveness strategy, other operators would do well to heed the threat and scramble to reengineer their costs. And cost cutting does not seem the strength of the Essel Group, more so Dish TV.
Point (1) could be an upside IF Dish TV manages to acquire customers cheaply using its Freedom Card. But without further information, one cannot factor this into the valuation.
Conclusion:-AVOID the stock. If LEAPs were available, they would have been perfect to short the stock, but in the short 3 month horizons available, that is too narrow to use options.

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