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.

Essar redefines factoring/assignee to save promoter entities from guarantee

It is not often that I cross-post items across blogs. But having spent 2-3hrs to piece the Essar puzzle together, I thought that the final analysis on the 27% yielding Essar bonds maturing 2016, deserved a wider audience. A rather longish post, but well worth the read(http://specialsituationsindia.blogspot.com/2012/01/27-yield-essar-energy-425-2016.html). For those of you impatient to get to the factoring bit, just fast forward towards the end. For best results, read the other post on Essar, under the same tag.

How ‘Difficult to value’ companies are enhancing their market value

·         List in different market-Makemytrip.com chose to list in USA compared to India, which may not have given it that good a value. Conversely, Biocon chose to list in India despite being ‘new’.

·         Spinoff integrated businesses-Concoco Philips announced the spinoff of E&P and R&M in Jul-11, other smaller players expected to follow suit.

·         Delist holding company and get PE investment/sell off in full-Some Indian companies are following this policy as they are frustrated by the high holding company discounts(upto 70%-80%).  For example, Nirma’s delisting is  presumed to be due to this.

·         Accounting/Reporting:- If the companies make it easy for analysts to value them by clear segment reporting, periodic self SOTP valuations, internal arms length transfer pricing etc, then they may attract a lower conglomerate discount. ITC and Tata Investment corporation have done this to a good extent

·         Transparently communicate strategies:- M&M, Escorts, DCM Shriram and others are adopting this approach to reduce the SOTP discount/even attract a premium.

·         Marketing to correct investor base:- FIIs hold nearly 60% in microirrigation player Jain irrigation. Selling the story to foreign FII investors is easier in the present legal scenario, where FIIs+FDI can go even upto 100%.

·         Asset sale instead of spinoff:- Piramal’s strategically timed asset sale avoided legal hassles.

Why Mercator Lines is a BUY thanks to coal play.

In June-11, the CEO claimed that the expected valuation of Mercator's coal mining assets would be $150MM for 20% or an implied equity valuation of $750MM for all the assets( http://www.moneycontrol.com/news/ipo-upcoming-issues/mercator-lines-to-launch-ipocoal-division-by-year-end_561459.html). But surprisingly, the global coal prices have only risen till then, but the company's share price has fallen around 40% and the total mcap is just $140MM. Instead of screaming 'BUY' from the rooftops, I thought I'll explore the possible reasons for that, and invite reader comment on the same. For those who have not heard of the company, it is a shipping company which has ventured into dredging, coal mining and oil & gas. It essentially aims to replicate Adani. Read about the company here(http://www.mercator.in/investors/mllinvestorppt.pdf) and download its FY11 annual report here(http://www.mercator.in//investors/AnnualReport/Mercator%20Annual%20Report%202010-11.pdf). The possible explanations for it-other than calling it a case of the bi polar Mr Market of Graham fame-are

1. Coal Mines not as promised:-The coal mines are in Mozambique(85% stake in 1BN tonnes estimated reserves) and in Indonesia(230MM tonnes). The present coal profits-around 20 crores/quarter-are derived from the Indonesian mines. Now, the CIA World Fact book shows that Mozambique is a debt laden poor company with crumbling and inadequate infrastructure. Mercator's 30yr license was to commence from last year(2010) but it is still looking for a partner to operate the mine. The fact that they have not yet found a partner  in the M&A crazy world of coal acquisitions, that too in the next big continent('Africa') speaks volumes for the asset quality-because the global majors are not that slow....
2. Shipping business value destroying? Holding companies are valued at even less than the cash on their books(like Piraral Holdings) because investors are worried that good assets will go to stem the cash drain from bad assets/ill advised actions. But this rationale does not really hold, because the company WAS profitable till the crisis, and is still recognized as an efficient operator. 
3. Market has priced in political risks of expropriation?:-If we content that the Indonesian export tax on coal will make exports uneconomic, then the entire coal IPO valuations stems on Mozambique. Given that the royalty is just $1/ton(sounds too low right?), Mozambique may be tempted to do an Indonesia and hike the royalty. It may even go further to nationalize the mines-but given the diplomatic relations etc involved, that seems a tad bit unlikely. 
4. Market still views it as a shipping company:-Despite the company's efforts to change its name, market itself as a coal company etc, it is still viewed, monitored and valued as a shipping company. But whatever the value is, would it be negative?
5. Consolidated v/s Standalone numbers:-The Jun-11 quarterly consolidated EPS is Rs 0.6 but the standalone(only shipping) is a loss of Rs 1.61. Investors who do not read beyond the fineprint and panicked at thestandalone loss, may have dumped it.
6. Unsure IPO prospects:- Where the global markets may have frozen, investors may be sceptical about the prospects of the IPO happening. But at any EV, it is a no brainer!
7. No clarity on holding structure:- The group organizational chart is not given, and it is difficult to ascertain the vital element of which company holds the coal mines(i.e which SPV). Mercator claims it to be housed in Singapore and ultimately Mozambique, but little clarity on that.
8. Why have other investors not caught on yet? Maybe this stock is off their screens, and in the flight to safety this may have been ignored...

None of these reasons(except 1 and 3) hold much water. And for the huge margin of safety, I think this is a classic Graham stock, which is hurt by the distressed shipping sector valuations.  Other non financial advantages are

• Qualified and stable management team since inception-promoter CEO is from IIT Roorkee, aptly complemented by a Chartered Accountant, the Jt MD. 
• Loyal independent directors:-Unlike some other companies, it has not seen an exodus of independent directors in the wake of Satyam. But then, it did have a clean image. 
• Trading at historically low multiples:- P/BV is around 0.6. 

Recomendation:BUY @ CMP Rs 25. It seems a no brainer and multi bagger.

Assessing legal risk-an investor guide

Open any annual report, and chances are that you would see a plethora of legal risks(here, legal merely means a violation of any contract/law, which is under dispute). An IIM-A Prof famously said 'law changes at the stroke of the pen'. That pen stroke can cost billion-just ask Vodafone, SKS Microfinance, Reliance Communiations, RNRL, Reliance Industries, HCC, JSW Steel etc-all victims of recent legal related issues.They may be

1. Tax related-that table you see attached to the audit report, listing the forum/subject matter/tax amount and period of the dispute. This may be related to direct or indirect taxes. While the company/its legal expert would ordinarily have evaluated the chances of winning before deciding to litigate, remember that companies starved  of cash flow may have little option, but to contest perfectly valid tax claims. While Vodafone TDS dispute hogged the headlines, there are many other disputes below the surface such as service tax on real estate, license fee for telecom, TDS issues for telcos/airlines etc
2.  Litigation related:- Companies typically wriggle out of disclosures when they are on the losing side by claiming the protection of 'sub judice' disputes. Still, where amounts at stake are signifc
3. Proposed legislation/Draft Reports:- It is sad that most investors/analysts may not bother to read the detailed draft/bill, but prefer to rely on the press release/some summary out there. Whether it be the Lokayukta reportwhere Sesa Goa crashed till it released clarifications), AP MFI Bill/Central MFI Bill(which lead to SKS microfinance stock see-sawing), mining bill(where mining stocks fell); market did overreact before sanity prevailed. For the recent bills(on ports, land acquisition) etc, this knee jerk reaction has decreased, maybe because noone expects these bills to be passed during the current log jam of Parliament. 
4. C&AG Reports:- Thanks to an activist C&AG, and a media hungry for that next soundbyte/breaking news, C&AG reports are the next source of fear for companies. Even a mighty giant like Reliance lost 10% due to a C&AG accusation of goldplating. Given this, what hope do others have? This, although actual legal action and enforcement would take years, due to which NPV would be lesser
5. Political:- The Mayawati Govt threw hurdles into RPower's projects in UP, thanks to his links with her rivals the SP. Mamta Bannerjee's Govt's first act was to confiscate the Singur properties of Tata Motors, which she perceived as siding with the Left.  When the DMK fell out of favour with the UPA at the centre, the AIDMK state Govt leapt on Sun TV like a hungry vulture. To keep Sharad Pawar's NCP toeing the party line at the state level, HCC's premier project Lavasa(where his shadow ownership is whispered about) was held up for months on environment grounds,  till court intervention. As infrastructure analysts would concur, projects(especially irrigation, roads) are doled out as rewards for electoral support-though the PPP framework is reducing this. 
6. Raids by income tax/labour inspectors/receipt of notices:- Satyam is fighting a case where the IT Dept has demanded thousands of crores of additional liability on (as per Satyam) non existent income. This would impact the valuation till the matter is resolved. People with legal flair can analyze and benefit. Also, at times, there are news announcement of 'search and seizures','surveys','raids' etc. One should note that unless the company is formally charge sheeted/arrests made/fines recovered, this news is as good as noise. 

Moral:- One can crystal out certain lessons from these sorry tales

1. Avoid a knee jerk reaction, and read the full bill/draft/details, and assess the probability of loss. This would need more than passing legal knowledge, so using an expert may help for important issues
2. Assess political leanings of corporates, as change of governments(more common in this coalition era) may turn corporate fortunes topsy turvy
3. Where a landmark tax verdict has been rendered, chances are that the next Budget will contain an amendment to reverse that favourable(to taxpayer) verdict with retrospective effect. This has happened for the offshore oils services income tax, cigarettes excise duty, lottery tickets service tax, realty service tax etc; and is likely to happen again. So hesitate before factoring in tax wins in the valuations.

GTL-a value pick despite everything?

         

• The group is present across the entire telecom value chain except VAS. But the risk of 'tunneling' revenues/profits/cash flows outside listed subsidiaries exists. As mentioned in their global group presentation, the promoters are also in businesses like tower manufacturing, active infrastructure provision, which may be sold to the listed companies at non arms length. Investors will have to rely on the auditors/tax authorities to ensure that this does not happen.

•  The GTL Aircel deal signed below promised a Rs 2750Cr/year revenue potential. Of that, Rs 1250Crore was deployment related, which is contingent on network expansion, which is muted across all operators. But assuming that even 40% of the other revenue materializes @ 25% EBITDA, we are looking at  a gross profit boost of Rs 270Cr per annum, which even post 20%tax, will boost bottom line by Rs 216Crore.

• GTL Infrastructure has a Mcap of Rs 1465Crores(as per closing prices on  11 Jul 2011), with Rs 5040 Crore debt. While GTL has a mcap of Rs 878Crores, with own debt of just 2374 crores, with much better earnings quality/stability. But, unless the unwary investor realizes that GTL guarantees the debt of its 'associates'-GTL Infra, GPAL & GNRL(latter 2 alone add up Rs 750Crores), he will be suckered into thinking GTL is safe, till the lenders have a margin call. I have blogged upon this in my other post here(http://thescambuster.blogspot.com/2011/07/gtl-group-corporate-governance-sham.html)

• The reason I would consider investing in GTL Infrastructure is that  the company is the towers business. Even at Rs 30lakh/tower(not unreasonable assuming that the Aircel Deal closed at Rs 48 lakh/tower), GTLs 33000 odd towers would be valued at almost Rs 10,000Crores EV. This is nearly double its existing debt, and leaves ample amount on the table. 
• GTL has a decent earnings visibility, and Aircel deal is promising but is burdened by debt, intercompany transactions and guarantees. 

Conclusion:- If there is any movement in the corporate governance and structure of the group, I would consider GTL(both companies). It is a pity to see value destruction but since the tunneling/group company risk is too high here, only rumours/concrete restructuring actions will see any movement. Perhaps, it may bounce back like how SKS(post MFI bill) and Money Matters(don't know why).