Why DISH TV is still a speculative bet-negative equity, cash burn..

Earlier, I blogged about the irrational exuberance in the valuations of Dish TV as reflected by high EV/subscriber, which even exceeded the replacement cost (http://financeandcapitalmarkets.blogspot.in/2012/02/each-dishtv-subscriber-worth-rs-8000.html). Given that nea

Some points to note from the Sep-12 earnings release(http://www.dishtv.in/Library/Images/EarningsReleasefortheQuarterEndedSeptember30,2012.pdf) are

1. They are STILL playing the subsidy game(not passing on cost increase due to rupee depreciation etc to the subscriber)-increase in SAC from Rs 2145 in earlier quarter to Rs 2273 now. 
2. New adds may be of lower quality yet not be recognized as churn. As announced recently, all new subscribers will get 70 FTA(free to air) channels for 4years IF they recharge for minimum Rs 200 in period of 6months. Given the SAC of Rs 2300 odd now, the minimum revenue they will get in 4years is Rs 200*8=Rs 1600, that too after entertainment tax/content cost etc would be max Rs 1000 or so. Breakeven will not happen if subscribers cotton on to this...
3. Distribution network is 1480 distributors, 114000 dealers, 8567 towns supported by 4 call centres/1600 agents/11 languages. This network is somewhat hard to replicate, and an ingredient of the valuation given to them. But is it worth even 800 crores??
4. MD&A(http://www.dishtv.in/Library/Images/AnualReport2011-12/ManagementDiscussionandAnalysis.pdf)  and investor presentation(http://www.dishtv.in/Library/Images/CompanyPresentation_Oct2012.pdf) both focus on irrelevant metrics and gloss over the earlier aggressive accounting(till FY13, STB was depreciated over 5years but the upfront payment was amortized over 3yrs) and mounting losses. 

On an active base of 10MM subscribers(gross subscribers 13.9MM), the company is valued at an EV of Rs 9600 crores(Rs 1600crs debt consolidated FY12 + 8000crores odd equity). That amounts to Rs 9600/active subscriber or Rs 6900/gross subscriber. Given that the SAC is itself just Rs 2273, and ARPU Rs 159/month(of which hardly 40% accrues to company after content costs etc), this is really irrational valuation.

There are solid academic research like that of Ashwath Damodaran(http://people.stern.nyu.edu/adamodar/pdfiles/Seminars/AIMR3.pdf) on valuing companies in distress/loss making companies. But it is still hard to support such valuation levels. Maybe investors are in for a hard landing.

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.