1+1>21/ · 04/01/2017 · Dish TV India . 4 January 2017 3 . Dish TV-Videocon d2h: Synergies decoded. But wait, there’s more! The Dish TV-Videocon (DITV-VDTH) merger is likely

Detailed report | 4 January 2017 Sector: Media

Investors are advised to refer through important disclosures made at the last page of the Research Report.Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

Dish TV India

Synergies and moreJay Gandhi ([email protected]); +91 22 6129 1546Aliasgar Shakir ([email protected]); +91 22 30102415

1+1>2 21/

Dish TV India

4 January 2017 2

Contents

Dish TV-Videocon d2h: Synergies decoded ............................................................ 3

Synergies of INR6.9b-7.6b (760-820bp) ................................................................. 9

Phase III/IV: Tailor-made opportunity for DTH ..................................................... 14

CCI approval likely in 3-6 months ........................................................................ 19

FCFE, return ratios to surge… .............................................................................. 21

Attractively priced at 10% FY19E post-dilution FCFE yield .................................... 24

Annexure ........................................................................................................... 26

Financials and Valuations (Dish TV Videocon) ...................................................... 27

Financials and Valuations (Dish TV India, ex-merger) ........................................... 29

Dish TV India

4 January 2017 3

Dish TV-Videocon d2h: Synergies decoded But wait, there’s more!

The Dish TV-Videocon (DITV-VDTH) merger is likely to rake in synergiesworth INR6.9b-7.6b (largely cost-led) over FY19-20. When the synergiesplay out, peak capex would be behind – both for the industry and for DITV-VDTH. Consequently, we expect the sustainable free cash flows of theMergedCo to surge materially from –INR9.6b in to ~INR17b annually inFY19/FY20 respectively.

While we attempt to decode each synergy, we highlight that it’s not justabout the synergies. DTH operators would have an edge in phase III/IVmarkets, where cable economics are not as strong. As pricing sanity sinks-inthe distribution space, DITV-VDTH would be best-placed, given thecombined scale (to reach ~20% of the C&S households by FY20).

The stock is trading at an attractive 9.8x FY19E FCFE (adjusted for dilution)(FCFE yield of 10% in FY19E adjusted for dilution). RoCE is likely to improvefrom ~7% in FY16 to ~26% in FY19.

We maintain our DCF-based target price of INR115, considering the pendingapprovals, the most crucial being that from Competition Commission ofIndia (CCI). If the merger goes through, our DCF valuation would see anupward revision of 22% to INR140/share (implying an EV of 7.8x FY19EEBITDA). We reiterate Buy.

Let’s talk synergies first – expect INR6.9b-7.6b over FY19-20 We expect total synergies of INR6.9b-7.6b (760-820bp EBITDA margin expansion) in FY19/FY20. Revenue synergies would be limited – largely from scale-led increase in carriage and advertisement revenues – in the near term. Cost synergies would fuel bulk of the EBITDA savings. Savings in content cost and transponder lease payouts would account for nearly half the EBITDA gains.

Cost Synergies Nearly half the INR6.9b-7.6b EBITDA gains to come from savings in

content…: We expect DITV-VDTH to benefit from DITV’s legacy content costadvantage, and save INR1.7b in FY19 and INR2.3b in FY20. DITV currentlypays ~INR52/net subscriber per month (28% of revenue) against VDTH’sINR71/net subscriber per month (38% of revenue) as content cost. Weexpect the combined entity’s content payout to hover at ~30% of revenue,implying a 12% CAGR escalation in content payouts (~200bp increase) overFY16-20. While our assumptions do not factor in a key regulatory risk ofuniform content payouts and carriage receivables, the regulator’s open handon placement/marketing revenues gives us enough assurance of the netcontent (Content cost – carriage rev) synergies playing out.

…and transponder costs: A standard 36MHz transponder canuplink/downlink 24-28 SD or 12-14 HD channels. Hence, to increase DITV-VDTH’s HD count to ~150 channels (currently ~60 HD channels each), theplatform would need a transponder capacity of ~415MHz. The remaining585MHz (assuming the combined entity operates at 1,000MHz) is sufficientto cater to the SD channel needs. We expect DITV-VDTH to save INR3.2b-3.7b (47-48% of total EBITDA gains) in content and transponder costs.

Detailed report | Sector: Media

Dish TV India CMP: INR85 TP: INR115 (+35%) Buy BSE Sensex S&P CNX

26,643 8,192

Stock Info Bloomberg DITV IN Equity Shares (m) 1065.8 52-Week Range (INR) 110/65 1, 6, 12 Rel. Per (%) -3/-12/-18M.Cap. (INR b) 92.2 M.Cap. (USD b) 1.4 Avg Val, INRm 528.0 Free float (%) 35.6

Financial Snapshot (INR b) Y/E Mar 2016 2017E 2018E Net Sales 30.6 31.7 36.0 EBITDA 10.2 10.9 13.0 Adj. NP 6.9 2.1 3.6 Adj. EPS (INR) 6.5 2.0 3.3 Adj. EPS Gr. (%) NA -69.7 69.4BV/Sh (INR) 3.6 5.5 8.9 RoE (%) NA 43 46 RoCE (%) 12.7 11.4 14.3 Valuations P/E (x) 13 43 25 P/BV (x) NA 15.3 9.6 EV/EBITDA (x) 9.6 8.8 6.9 EV/Sub (INR) 6,789 6,082 5,152

Shareholding pattern (%) As On Sep-16 Jun-16 Sep-15 Promoter 64.4 64.4 64.4 DII 6.8 7.3 4.0 FII 19.8 19.1 19.8 Others 9.0 9.3 11.8 FII Includes depository receipts

Dish TV India Synergies and more

+91 22 3089 [email protected]

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Dish TV India

4 January 2017 4

Ad spends, employee costs could be trimmed by INR1.3b-1.9b: Ad spends arelikely to be trimmed over FY19-20, as competitive intensity cools off. Marginalsavings could also come through in employee expenses, as overlapping positionsare trimmed. We expect savings of INR1.3b-1.9b in ad spends and employeeexpenses in FY19/FY20.

Potential savings of 90-160bp in other opex, business promotion /administration expenses: Scale-led reduction in call center charges, and bizpromotion and administration expenses could help save INR0.67b-1.45b (90-160bp).

Revenue Synergies Revenue synergies limited in near term: Revenue synergies would be restricted

to carriage and advertisement revenues in the near term. However, expectsubscription synergies to play out over the medium-to-long term as increasingconsolidation lends some pricing power to the DTH industry.

Expanded reach to help garner higher carriage and advertisement revenues:With DITV-VDTH expected to command ~20% subscriber market share (>doublethe second-largest private DTH operator), it is plausible that it would commandthe TRAI-capped monthly rate of 20 paise/subscriber/channel. Assuming only40/575 channels carried by DITV-VDTH pay carriage fees, the combined entitycould rake in INR3.45b-3.65b as carriage fees (11-12% of current INR30b+ Indiancarriage market for 20% reach). Ad revenues too are likely to jump, as scale-ledbenefits kick in. We factor in synergies of INR470m-490m from carriage and adrevenues in FY19/FY20.

But it’s not all about synergies Phase III/IV: Tailor-made opportunity for DTH: Phase III/IV presents an

incremental opportunity to grab 75-80m subscribers (~USD3b incrementalsubscription opportunity for distribution platforms). Unlike phase I/II markets,DTH is likely to take the lead in phase III/IV markets, as cable economics fallapart deeper in India’s hinterland. Private DTH operators are likely to add 30-35m subscribers in Phase IV markets, with DITV-VDTH adding ~12m subscribers(net). We expect DITV-VDTH to house 20% of the C&S households by FY19-20.Its subscriber share gain would be largely at the expense of marginal DTHoperators and MSOs. While round-1 would go to DTH operators, furtherindustry consolidation could drive the second leg of upside from improvedsegmentation/pricing at the consumer level. We expect DITV-VDTH to clock 12%revenue CAGR and 24% EBITDA CAGR over FY16-20.

FCFE, return ratios to surge as synergies play out at trough of capex cycle: Postthe “land grab” in Phase IV markets over FY16-20, capex intensity should reducesignificantly to just replacement-related capital spending. Even if DITV-VDTHcoughs up almost all its regulatory dues (estimated to be ~INR25b by FY19),partially pares down debt and continues its annual ~6m gross subscriberaddition in FY19/FY20, it would generate annual free cash flow (FCFE) of~INR17b in FY19/FY20. Synergies playing out at trough of capex cycle wouldsupport return ratios. RoCE would improve from ~7% in FY16 to ~26% in FY19.

Attractively priced at 10% FY19E FCFE yield; Buy We expect DITV-VDTH to deliver an annual FCFE of ~INR17b in FY19/FY20. The stock is attractively priced at 9.8x FY19E FCFE (FCFE yield of 10% in FY19E post dilution). Given the pending approvals – the most crucial being that of Competition Commission of India (CCI), we retain our DCF-based target price of INR115. If the merger is successfully consummated, our target price would see an upward revision of 22% to INR140 (EV of 7.8x FY19E EBITDA; largely in line with global peers).

Stock Performance (1-year)

Kindly refer our report dated 29 November 2016 on Tata Sky

Kindly refer our report dated 9 May 2016 on Videocon d2h

Kindly refer our report dated 16 December 2016,

Demonetization impact on Ad spends

http://institution.motilaloswal.com/emailer/Research/MEDIA-20161216-MOSL-ES-PG004.pdf

http://institution.motilaloswal.com/emailer/Research/MEDIA-20161129-MOSL-SU-PG006.pdf

http://institution.motilaloswal.com/emailer/Research/VDTH-20160509-MOSL-VN-PG008.pdf

Dish TV India

4 January 2017 5

Snapshot of synergies Dish TV Videocon d2h Dish TV Videocon

ex-synergies Dish TV Videocon (with synergies) Synergy benefits Comments

FY19E FY20E FY19 FY20E FY19E FY20E FY19E FY20E FY19E FY20E Revenue (INR m) 41,578 46,066 41544 46517 83122 92583 84,396 92,467 1274 -116 Scale-led carriage and ad revenue to aid top-line

Content cost (INR m) 12,015 13,216 15371 16979 27386 30195 25,668 27,850 -1718 -2345 Assumes an 18%+ escalation from Dish TV's current contentpayout on a net sub base and a 200bp increase as % of rev

Net subs 19.3 20.7 16.5 18.0 35.9 38.7 36.0 38.1 Content cost/net sub 52 53 78 79 64 65 61 63 Content cost as % of rev 28.9% 28.7% 37.0% 36.5% 32.9% 32.6% 30.4% 30.1% Savings (bp) -253bps -250bps

License fees (INR m) 2,993 3,313 2908 3256 5,901 6,569 4,614 5,061 -1,287 -1,509

Savings a/c for shift in new license regime of 8% of AGR vs curr. followed 10% of GR. Also a/c for diff. in computation of license fee. Unlike Dish TV, Videocon doesn't exclude commission & activation from revenues to compute license fee payout.

As % of rev 7.2% 7.2% 7.0% 7.0% 7.1% 7.1% 5.5% 5.5% As % of subscription rev 7.7% 7.7% 7.5% 7.5% 7.6% 7.6% 5.8% 5.8% Savings (bp) -163bps -162bps

Transponder Lease costs (INR m) 1,993 2,053 1771 1860 3,764 3,912 2,243 2,552 -1521 -1360

TataSky intends to double HD channel count from ~80 currently within its 864 Mhz transponder capacity, Even if Dish TV Videocon cuts capacity by ~30%(current combined capacity 1440 Mhz), it could more than match up with peers on HD channels and still save on costs

Transponder Capacity (Mhz) 828 828 612 612 1,440 1,440 1,000 1,000 Transponder lease cost per Mhz (INRm) 2.4 2.5 2.9 3.0 2.6 2.7 2.5 2.6 As % of rev 4.8% 4.5% 4.3% 4.0% 4.5% 4.2% 2.7% 2.8% Savings (bp) -187bps -147bps

Employee Cost (INR m) 1,756 1,896 1662 1861 3,417 3,757 2,926 3,219 -491 -538 ~60bp savings could be brought about by trimming several overlapping positions at Zonal levels.

As % of rev 4.2% 4.1% 4.0% 4.0% 4.1% 4.1% 3.5% 3.5% Savings -64bps -58bps

Ad Expenses 1,039 1,152 1246 1395 2286 2547 1,468 1,110 -817 -1438

Assumed at ~1.4x FY19 levels for Dish TV, as need to advertise could remain elevated in FY19 to increase awareness of offerings post-merger. FY20 ad spends to could revert to normal run-rate of ~INR1-1.1b annually.


Dish TV India

4 January 2017 6

Snapshot of synergies Dish TV Videocon d2h Dish TV Videocon

ex-synergies Dish TV Videocon (with synergies) Synergy benefits Comments

FY19E FY20E FY19 FY20E FY19E FY20E FY19E FY20E FY19E FY20E Commission 1,860 2,059 36 43 1896 2102 2,784 3,054 889 952 No synergies As % of rev 4.5% 4.5% 0.1% 0.1% 2.3% 2.3% 3.3% 3.3% Savings 102bps 103bps Business promotion/cust. support 1,039 1,106 1706 1945 2746 3051 2,279 2,497 -467 -554 Assumed to revert near Dish TV's FY16 levels of 2.7% of rev As % of rev 2.5% 2.4% 4.1% 4.2% 3.3% 3.3% 2.7% 2.7% Savings -60bps -60bpsOther opex (incl. purchases/uplinking/call centre charges

957 1,015 1031 1124 1988 2139 1,761 1,884 -228 -255 Call centre charges could be saved as contracts are on number of hours/calls. Rate per call could decline courtesy the scale.


Admin expenses 1,743 1,830 938 1031 2681 2861 2,705 2,219 25 -643Admin expenses could remain elevated in FY19 courtesy merger-related expenses. However, Merged Co could save on legal, rent rates, audit and stamp duty fees with scale in FY20

As % of rev 4.2% 4.0% 2.3% 2.2% 3.2% 3.1% 3.2% 2.4% Savings -2bps -69bpsKey Revenue Synergies

Carriage and Placement revenue 3459 3655 Assuming 40 channels carried @ max capped rate of INR20 paise/net sub per channel per month

No. of channels carried 40 40 @INR20p/channel/month 0.2 0.2 Gross subscribers 36.0 38.1 Ad revenue @ 10% inflation 605 666 484 532 1089 1198 1139 1309 Better ad rates could be negotiated courtesy the scale Teleport 250 250 250 250 250 250 Other operating revenue 2,671 2,992 1689 1753 4360 4744 4847 5214 488 470 As % of rev 6.4% 6.5% 3.8% 5.2% 5.1% 5.7% 5.6% Total Savings (INR m) -6890 -7573EBITDA 16,184 18,428 14874 17022 31058 35450 37,948 43,023 EBITDA margin 38.9% 40.0% 35.8% 36.6% 37.4% 38.3% 45.0% 46.5% Margin savings (bps) 760bps 824bps

Dish TV India

4 January 2017 7

Global distribution peer comparison Company Name MCap Rev. (USD Mn) EBITDA (USD Mn) PAT (USD Mn) PE (x) EV/EBIDTA (x) ROE (%)

(USD M) CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E CY16E CY17E CY18E India

Dish TV 1,407 478 560 647 167 200 234 38 56 72 36.7 25.1 19.5 8.7 7.2 NA 55.8 42.6 33.0

Hathway Cable 419 353 409 453 72 92 104 -17 -7 4 NA NA 138.0 9.2 7.3 3.4 -11.7 -6.4 2.7

SITI Networks 417 191 264 NA 48 91 NA -2 32 NA 37.8 9.3 NA 11.5 6.0 13.8 -1.9 19.8 NA

DEN Networks 180 225 262 287 38 47 56 -19 -16 -17 NA NA NA 5.8 4.6 1.3 -8.9 -8.2 -9.8

Global

AT&T Inc 237,227 166,871 169,527 171,070 53,566 55,455 56,939 17,564 18,422 18,850 13.6 12.9 12.2 6.7 6.4 1.9 11.6 22.5 26.8

Charter Communications Inc 85,618 40,019 42,195 44,747 14,082 15,584 16,985 1,354 1,490 2,221 78.5 51.7 30.6 11.2 10.1 127.8 8.0 3.3 5.6

Liberty Global PLC 27,838 17,605 17,066 17,193 8,388 8,136 8,351 -45 393 734 401.5 106.9 39.7 8.6 8.8 3.0 0.5 3.9 3.9

DISH Network Corp 26,716 15,123 14,942 14,714 3,157 3,035 2,951 1,432 1,298 1,198 19.1 21.3 23.3 12.1 12.6 16.7 49.5 49.3 27.1

Comcast Corp 166,326 80,059 83,247 89,065 26,456 27,823 29,716 8,501 8,888 9,829 20.0 18.4 16.0 8.6 8.2 2.8 15.6 15.5 16.9

Sky PLC 16,811 16,382 17,168 18,096 2,681 2,960 3,261 1,259 1,474 1,680 13.4 11.4 10.0 9.4 8.5 5.6 27.2 29.1 28.9

Dish TV India

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Exhibit 1: Deal contours: 9% premium paid to Videocon d2h on an EV/net subscriber basis Dish TV India Addition/Videocon d2h Dish TV Videocon VDTH Premium/Discount

Dish TV price (INR) 87 87 87 No of Shares (m) 1,066 858 1,924 Market Cap (INR m) 93,215 75,013 168,229 Net Debt (INR m)* 6,250 15,360 21,610 EV (INR m) 99,465 90,373 189,839 Revenue (INR m) 32,390 31,891 64,281 EBITDA (INR m) 11,374 10,093 21,467 EBITDA margin (%) 35.1% 31.6% 33.4% FY17E net subscribers 16.2 13.5 29.7 EV/FY17E sales 3.1 2.8 3.0 -8%EV/FY17E EBITDA 8.7 9.0 8.8 2% EV/FY17E net subscriber (INR) 6136 6698 6873 9%

#Assuming transaction at DITV’s CMP: INR87.45 VDTH FY17 revenue/EBITDA annualized*

Source: Company, MOSL

Exhibit 2: Key financials & performance indicators

Dish TV VDTH Dish TV Videocon Revenue (INR m) 30,599 28,559 59158 EBITDA (INR m) 10,249 8,013 18262 EBITDA margin (%) 33% 28% 31% EBITDA – Capex 1165 785 1950 Net Debt/EBITDA 0.6 1.9 1.2 Net Subscribers (m) 15.1 12.5 27.6 HD Subscribers (m) 1.4 1.4 2.8 ARPU (INR) 172 207 Churn (%) 8.3 8.8 2QFY17 Subscriber Acquisition Cost (INR) 1590 1869


Exhibit 3: DITV EV/EBITDA


7.2

47.0

14.9

13.2 7.1 4

16

28

40

52

Mar

-09

Nov

-09

Jun-

10

Jan-

11

Aug-

11

Mar

-12

Oct

-12

May

-13

Dec-

13

Aug-

14

Mar

-15

Oct

-15

May

-16

Dec-

16

EV/EBDITA (x) Peak( x) Avg (x) Median (x) Min (x)

Dish TV India

4 January 2017 9

Synergies of INR6.9b-7.6b (760-820bp) Largely cost-led; revenue synergies limited in near term

We expect revenue synergies to be limited – largely from scale-led increase in carriageand advertisement revenues – in the near term.

Cost synergies would fuel bulk of the EBITDA savings. We expect total synergies ofINR6.9b-7.6b (760-820bp EBITDA margin expansion) in FY19/FY20.

Savings in content cost and transponder lease payouts would account for nearly halfthe EBITDA gains.

Expect marginal subscription synergies over FY19-20; expanded reach to help garner higher carriage and advertisement revenues We do not expect subscription synergies to play out in the short term. Yet, over

the medium-to-long-term, increasing consolidation should lend some pricingpower to the DTH industry. Also, as DAS III/IV cable collections increase over thenext 2-3 years, the DTH industry should get enough headroom to takeconsistent price hikes. We expect revenue synergies to be restricted to carriageand advertisement revenues in the near term.

Assuming DITV-VDTH gets paid the full 20 paise per subscriber/month/channel(cap recommended by TRAI), the combined entity could rake in INR3.45b-3.65bin FY19/FY20. That works out to 11-12% market share in the INR30b+ Indiancarriage market. That’s plausible considering DITV-VDTH is expected to cater to~20% of the estimated 182m/191m C&S households in India in FY19/FY20.

Ad revenues too are likely to jump, as scale helps fish for higher ad rates.Overall, we expect carriage and ad revenues for the combined entity to outpacethe sum of DITV and VDTH’s proforma revenues by INR470m-490m.

Exhibit 4: Key revenue synergies

Dish TV Videocon d2h

Dish TV Videocon ex-synergies

Dish TV Videocon (with synergies)

Synergy benefits

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E Carriage and Placement revenue (INR m) 3459 3655 No. of channels carried 40 40 @INR20p/channel/month 0.2 0.2 Gross subscribers 36.0 38.1 Ad revenue (INRm) @ 10% inflation 605 666 484 532 1089 1198 1139 1309 Teleport (INR m) 250 250 250 250 250 250 Other operating revenue (INR m) 2,671 2,992 1689 1753 4360 4744 4847 5214 488 470 As % of rev 6.4% 6.5% 3.8% 5.2% 5.1% 5.7% 5.6%


Content cost synergies could save INR1.7b/2.3b (~250bp in margins) We do not see DTH content payouts changing dramatically as a percentage of revenue, as the DTH industry has been doling out its fair share to broadcasters (31-32% of the DTH subscription pool). Also, content cost cannot be analyzed in isolation; one needs to account for the carriage and placement fees paid to distribution platforms. On a net content basis (content cost - carriage revenue), the arbitrage between DTH and cable payouts continues to be stark.

Dish TV India

4 January 2017 10

Exhibit 5: Platform-wise net content cost per subscriber per month (INR)


Exhibit 6: Estimated net content cost per subscriber per month for DITV-VDTH


Regulatory risk not baked-in in content synergies; open hand on placement raises visibility of net content synergies playing out We expect the combined entity to benefit from DITV’s legacy content cost advantage, and save INR1.7b in FY19 and INR2.3b in FY20. DITV currently pays ~INR52/net subscriber per month (28% of revenue) against VDTH’s INR71/net subscriber (38% of revenue). We expect DITV-VDTH’s content payout to hover at ~30% of revenue. Our assumptions imply 10% CAGR in content payouts (~200bp increase) over FY16-20E. While our assumptions do not factor in a key regulatory risk of uniform content payouts and carriage receivables, the regulator’s decision to keep placement and marketing revenues under forbearance assures us of the net content (content costs less carriage & placement revenues) synergies playing out. We have not factored in upside from placement and marketing revenues.

Exhibit 7: Content cost to hover at ~30% of post-merger revenue


Exhibit 8: Content cost synergies could save INR1.7b/2.3b (~250bp in margins)




Synergy benefits

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E Content cost (INR m) 12,015 13,216 15371 16979 27386 30195 25,668 27,850 -1718 -2345Net subs 19.3 20.7 16.5 18.0 35.9 38.7 36.0 38.1 Content cost/net sub 52 53 78 79 64 65 61 63 Content cost as % of rev 28.9% 28.7% 37.0% 36.5% 32.9% 32.6% 30.4% 30.1% Savings (bp) -253bps -250bps


46

75

112

19 13 11

Dish TV Videocond2h

TataSky* Hathway SITINET DenNetworks

53

54

FY19 FY2019

351

2186

8

2450

6

2566

8

2785

0

17.5% 13.0% 12.1%

4.7% 8.5%

32.7% 34.4% 33.7% 30.4% 30.1%

FY16 FY17E FY18E FY19E FY20E

Content costs (INR m) YoY As % of rev

Dish TV India

4 January 2017 11

Potential savings of INR1.4b-1.5b annually in transponder costs Both Dish TV and Videocon d2h currently house ~60 HD channels each compared to market leader Tata Sky’s 80+ HD channels. Following our recent interaction with the Tata Sky management, we surmise that its 864MHz transponder capacity is sufficient to meet its target of doubling HD channel count. Comparing this with DITV-VDTH’s 1,440MHz transponder capacity, we believe it is well placed to rev up its HD channel count to match Tata Sky’s even if it shaves off its capacity by ~30%.

Our transponder lease savings of INR1.4b-1.5b per year assumes a capacity of 1,000MHz. Another way of looking at the potential savings is that a standard 36MHz transponder can uplink/downlink 24-28 SD channels and 12-14 HD channels. To increase HD channel offerings to 150, DITV-VDTH would need a transponder capacity of ~415MHz. The remaining 585MHz is sufficient to cater to the SD needs.

However, Dish TV and Videocon d2h currently operate on different satellites, which have a 7-degree gap in orientation. For a common platform, DITV-VDTH would need one of the following: 1. A converter (low-noise block) to cover the gaps in content feeds. However, this

is an expensive proposition, as DITV-VDTH would have to fork out INR300-350/VDTH net subscriber (a one-time outlay of INR4.9b-5.7b).

2. Change in orientation of DITV antennas so that they are aligned with VDTH’s andcover VDTH subscribers as well. This would entail a cost of ~INR100/netsubscriber (INR1.6b-1.7b). We expect DITV-VDTH to make a one-time outlay ofINR5b, considering the logistical challenges in aligning antenna orientations. OurFY19E capex includes an INR5b outlay towards LNB converters. Simulcryptingof signals will enable VDTH’s subscribers to decode DITV’s signals.

Exhibit 9: Expect transponder lease savings of INR1.4b-1.5b per year in FY18/FY19




Synergy benefits

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E Transponder Lease costs (INR m) 1,993 2,053 1771 1860 3,764 3,912 2,243 2,552 -1521 -1360Transponder Capacity (Mhz) 828 828 612 612 1,440 1,440 1,000 1,000 Transponder lease cost per Mhz (INRm) 2.4 2.5 2.9 3.0 2.6 2.7 2.5 2.6 As % of rev 4.8% 4.5% 4.3% 4.0% 4.5% 4.2% 2.7% 2.8% Savings (bp) -187bps -147bps


Expect DTH to move to new license regime before merger consummation; license fee payouts could be 160bp lower than current levels While the government has mandated DTH operators to pay 10% of gross revenue as license fees, DITV and VDTH exclude certain non-recurring and pass-through revenues for the computation of gross revenue and effectively pay 6-7% of revenue as license fees. While we expect marginal-to-no synergies in license payouts, our assumption of a 160bp annual saving factors in a shift of the industry to the recommended license regime of 8% of AGR (currently 10% of adjusted gross revenue) before the merger is consummated.

Dish TV India

4 January 2017 12

While DITV provides for the difference between the 6% cash payment towards license fees and the government-mandated 10% of gross revenue in its balance sheet, VDTH keeps this off-the-book. The incremental provisions for the combined entity should reduce from ~4% of AGR to 1.5-2% of AGR, once the DTH industry moves to the TRAI-recommended license regime.

Exhibit 10: License fee payouts could be ~160bp lower in the TRAI-recommended 8% of AGR regime




Synergy benefits

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E License fees (INR m) 2,993 3,313 2908 3256 5,901 6,569 4,614 5,061 -1287 -1509As % of rev 7.2% 7.2% 7.0% 7.0% 7.1% 7.1% 5.5% 5.5% As % of subscription rev 7.7% 7.7% 7.5% 7.5% 7.6% 7.6% 5.8% 5.8% Savings (bp) -163bps -162bps


Ad spends and employee costs could be trimmed by INR1.3b-1.9b FY19 could see some ad spends towards increasing awareness of the combined offerings. Yet, we expect savings of ~INR0.8b versus the pro-forma in FY19. In FY20, ad spends should drop further, as competitive intensity increasingly cools off. We expect DITV-VDTH to cumulatively save INR2.25b in ad spends in FY19 and FY20 (101bp in FY19 and 155bp in FY20).

While most of the sales force of both entities is likely to be retained, we expect some savings from reduction in overlapping positions such as Divisional/Zonal Heads (64bp/58bp margin savings in FY19/FY20).

Exhibit 11: Expected savings in employee costs and ad spends




Synergy benefits

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E Employee Cost (INR m) 1,756 1,896 1662 1861 3,417 3,757 2,926 3,219 -491 -538As % of rev 4.2% 4.1% 4.0% 4.0% 4.1% 4.1% 3.5% 3.5% Savings -64bps -58bpsAd Expenses 1,039 1,152 1246 1395 2286 2547 1,468 1,110 -817 -1438As % of rev 2.5% 2.5% 3.0% 3.0% 2.7% 2.8% 1.7% 1.2% Savings -101bps -155bps


Potential savings of 90-160bp in other opex, and business promotion and administration expenses in FY19/FY20 Other opex synergies are largely expected to flow from savings related to call center charges, which are fixed at a certain rate per call/hour. Scale should help DITV-VDTH to negotiate favorable rates; we assume 27-31bp of scale-led savings flowing through in call center charges in FY19/20. We also expect scale-led savings in business promotion and customer support costs (~60bp annually).

In terms of admin expenses, we do not anticipate synergies in FY19, as there could be merger-related expenses. However, in FY20, we expect savings of ~70bp (INR0.64b).

Dish TV India

4 January 2017 13

Exhibit 12: Expected savings in admin costs and other opex




Synergy benefits

FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E FY19E FY20E Commission 1,860 2,059 36 43 1896 2102 2,784 3,054 889 952 As % of rev 4.5% 4.5% 0.1% 0.1% 2.3% 2.3% 3.3% 3.3% Savings 102bps 103bps Business promotion/customer support 1,039 1,106 1706 1945 2746 3051 2,279 2,496 -467 -554As % of rev 2.5% 2.4% 4.1% 4.2% 3.3% 3.3% 2.7% 2.7% Savings -60bps -60bpsOther opex (incl. purchases/uplinking/call centre charges 957 1,015 1031 1124 1988 2139 1,761 1,884 -228 -255

As % of rev 2.3% 2.2% 2.5% 2.4% 2.4% 2.3% 2.1% 2.0% Savings -31bps -27bpsAdmin expenses 1,743 1,830 938 1031 2681 2861 2,705 2,219 25 -643As % of rev 4.2% 4.0% 2.3% 2.2% 3.2% 3.1% 3.2% 2.4% Savings -2bps -69bps


Dish TV India

4 January 2017 14

Phase III/IV: Tailor-made opportunity for DTH Private operators to add 30-35m subscribers in DAS IV; DITV-VDTH to grab ~12m

Phase III/IV presents an incremental opportunity to grab 75-80m subscribers(~USD3b incremental subscription opportunity for distribution platforms).Unlike phase I/II markets, DTH is likely to take the lead in phase III/IV markets,as cable economics fall apart deeper in India’s hinterland.

Private DTH operators are likely to add 30-35m subscribers in DAS IV, withDITV-VDTH adding ~12m subscribers (net). We expect DITV-VDTH to house20% of the C&S households by FY19-20. Its subscriber share gain would belargely at the expense of marginal DTH operators and MSOs.

While round-1 would go to DTH operators, further industry consolidationcould drive the second leg of upside from improved segmentation/pricing atthe consumer level.

We expect DITV-VDTH to clock 12% revenue CAGR and 24% EBITDA CAGR overFY16-20.

DTH operators to rule in phase III/IV markets Phase III/IV digitization presents improved monetization opportunity from an incremental 75-80m households (HH) – an incremental ~USD3b subscription opportunity (~USD2b ex broadcasters’ share) for distribution platforms. With the top-3 national MSOs expected to restrict their ambitions to digitizing their existing cable universe (MSOs’ capital allocation increasingly moving in favor of broadband), the largely cable-dark phase IV market would be DTH-ruled. Cable economics fall apart deeper in India’s hinterland. (The top-3 MSOs are estimated to have only ~25m of the incremental 75m subscriber base of phase III/IV markets).

Exhibit 13: India: Estimated C&S subscribers (m)


Exhibit 14: India: Estimated C&S subscriber mix (%)


105 119

130 139 149 158 166 174 182

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

62 62 53 49 47 38 28 16 5

5 5 15 18 19 25 32 40

45

27 26 26 27 27 30 35 40 46

8 7 7 6 7 6 5 5 4

FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E

Analogue Cable (%) Digital Cable (%)

DTH (%) Other Digital HH (%)

Dish TV India

4 January 2017 15

Exhibit 15: DTH to contribute ~50% of the Indian subscription pool


Exhibit 16: Top-3 national MSOs’ phase III/IV presence estimated at ~25m subscribers


Expect private DTH operators to add 30-35m subscribers in DAS IV, DITV-VDTH to add ~12m We expect private DTH operators to grab 30-35m subscribers in DAS IV markets. Even if DITV-VDTH maintains existing subscriber share of ~33% within the DTH industry, it could add 11-12m subscribers over the next 3-4 years (exit FY20E).

Exhibit 17: DTH to add ~35m subscribers over FY16-19


Exhibit 18: DITV-VDTH to add ~12m subscribers (net) over FY16-20


DITV-VDTH to serve 20% of C&S households by FY20; share gains to come largely at the expense of marginal players We expect DITV-VDTH to gain ~320bp in subscriber market share over FY16-20 (FY16 subscriber market share was ~17% and revenue market share was 19%) and command a reach of ~20% of the estimated ~191m C&S households in FY20. The subscriber share gain is largely expected to come at the expense of Reliance Digital TV, Sun Direct, and marginal cable MSOs.

132 128 106 74 37

67 86 121 172 233 123 151 194

251 315

23 24 24

24 27

346 389 445

520 612

FY15E FY16 FY17E FY18E FY19E

Analogue Cable Digital CableDTH Other DigitalTotal Subscription Revenue

6.7

8.0

10.2

Hathway

DEN Networks

SITINET

97

172

41

35 51 1

FY16EDigital

DigitalCable

DTH AnalogCable

Others FY19EDigital

11.7

6.8 6.8

-1.5

0.0

8.0

Dish TVVideocon

Airtel TataSky RelianceDTH

Sun Direct Freedish

Dish TV India

4 January 2017 16

Exhibit 19: DITV-VDTH holds ~17% subscriber share (FY16)


Exhibit 20: DITV-VDTH holds ~19% revenue share (FY16)


Exhibit 21: Lion’s share of the DITV-VDTH subscriber share gain to come at the expense of marginal distribution platforms


Consolidation – round-1 goes to DTH… DITV-VDTH is the first major exercise of active consolidation in the highly fragmented distribution space. This could perhaps be an inkling of more to come, with Reliance Jio’s cable outfit lurking around the corner – the ~6k MSOs/60k LCOs could be its pond to fish. Besides, over the past few years, we have witnessed passive consolidation within the cable industry, with the top-3 national MSOs accounting for 70% of the digital cable subscribers, despite owning only ~30% of the total cable subscribers.

…could drive second leg of upside from improved segmentation/pricing at consumer level The DTH industry has done better in terms of tiering of packs and segmenting its subscriber base than its cable peers. The MSOs will have to match up gradually if they intend to increase on-ground collections significantly. While ARPU benefits from pack-tiering have eluded the cable industry, given competitive pressures, increased consolidation should drive packaging and give the distribution industry much-needed headroom to increase share of the consumer wallet.

Also, within the DTH industry, Dish TV could benefit from Videocon d2h’s higher tiering of packs post the merger and capture subscribers at more price points. The table below suggests that Videocon d2h offers more options to subscribers post the INR320 price point, which Dish TV can take advantage of.

16.7%

7.4% 7.0% 3.1%

7.7% 6.8% 5.0% 6.0%

13.9%

26.4%

Dish

TV

VDTH

Airt

el

Tata

Sky

Relia

nce

DTH

Sun

Dire

ct

Hath

way

SITI

NET

Den

Net

wor

ks

Free

dish

Oth

ers

19.9%

9.8% 16.8%

3.4% 2.0% 7.0%

4.0% 4.2%

33.0%

Dish

TV

VDTH

Airt

el

Tata

Sky

Relia

nce

DTH

Sun

Dire

ct

Hath

way

SITI

NET

Den

Net

wor

ks

Oth

ers

16.7%

2.3% 2.4% 1.3% 1.3%

1.8% 1.7%

8.7%

19.9%

FY16 Dish TVVDTH net sub

share

Airtel TataSky Reliance DTH Sun Direct Free Dish Cable pack Others FY20E Dish TVVDTH net sub

share

Dish TV India

4 January 2017 17

Exhibit 22: DTH pack segmentation and prices (INR) Dish TV Videocon d2h TataSky Airtel Digital Reliance Digital TV Sun Direct

Pack A (SD) 99 99 99 99 NA 260

Pack B (SD) 270 275 215 285 260 279

Pack C (SD) 315 305 285 321 290 379

Pack D (SD) 365 320 350 366 340

Pack E (SD) 435 365 380 399 390

Pack F (SD) 535 410 425 456 430

435 560 550

500


Exhibit 23: Top three MSOs’ pack segmentation and prices (INR)

Hathway SITINET Den Networks

BST (Free channels) 160 155.0 100

Pack A (SD) 330 299 230

Pack B (SD) 425 333 280


Expect DITV-VDTH’s revenue to grow at 12%, EBITDA to grow at 24% over FY16-20 We expect DITV-VDTH’s revenue to grow at 12% over FY16-20 to INR92.4b. Given the synergies of INR6.9-7.6b, EBITDA is likely to grow at a CAGR of 24% to ~INR43b.

Exhibit 24: DITV-VDTH’s revenue to grow at 12% CAGR over FY16-20


Exhibit 25: Cost synergies to aid margins significantly


32,9

63

41,9

02

51,1

93

59,1

58

63,5

47

27.1%

22.2%

15.6%

7.4%

FY13 FY14 FY15 FY16 FY17E

Revenue YoY

1814

4

2097

4

2563

3

37,9

48

43,0

23

30.7% 33.0% 35.2% 45.0% 46.5%

37.1% 38.2%


EBITDAEBITDA marginEBITDA margin (ex-synergies)

Dish TV India

4 January 2017 18

Merger to only further tilt odds in favor of DTH in HD penetration race With just 4-5% of the 175m+ TV households (HH) subscribing to HD services (v/s 60-70% in the US), India remains an underpenetrated HD market. However, with (1) dwindling pricing differentials between HD and SD (a) television sets, and (b) set-top boxes, and (2) increasing HD content offerings, this is set to change. As per industry estimates, of the ~8m HD subscribers, DTH enjoys 95%+ share. The DITV-VDTH merger is expected to further tilt the odds in favor of DTH in the HD penetration race.

Videocon d2h’s better brand positioning in HD services is expected to rub off on the combined entity. Typically, HD ARPUs are 2-2.5x SD ARPUs.

Exhibit 26: Operator-wise HD subscriber base


Exhibit 27: Operator-wise HD channels


Exhibit 28: SD v/s HD ARPU differential


1.4 1.4

4.3

0.4 0.6 0.0 0.3

Dish

TV

VDTH

Tata

Sky

Relia

nce

d2h

Sun

Dire

ct

Free

Dish

MSO

pac

k

59 60

84

12

Dish TV VDTH Tata Sky RelianceDigital SD HD

Dish TV India

4 January 2017 19

CCI approval likely in 3-6 months HHI index indicates adequate competition even post-merger

In India, presence of premium brands such as Tata Sky and free public DTH serviceprovider FreeDish form two extremes of the ARPU spectrum. This should keep thecombined entity’s ability to abuse pricing power in check, despite its might (~17%subscriber and ~20% revenue share).

A broad HHI index suggests that the distribution space is well within globalbenchmarks of a concentrated market. Consequently, we believe CCI’s approval to theamalgamation of Dish TV and Videocon d2h is a high probability event. We expect CCIapproval to take 3-6 months from the date of announcement (November 11, 2016).

Free-to-premium distribution offerings in India to keep combined entity’s pricing power in check In India, pay TV distribution services range from free-to-premium. Public DTH service provider FreeDish, which offers only free-to-air channels, and premium brands such as Tata Sky form two extremes of the ARPU spectrum. Besides, there are three national MSOs (~70% subscriber market share in digital cable) that are still struggling to improve on-ground collections (current phase I/II/III&IV collections at INR100-105/INR75-80/<INR30). Such a competitive landscape is expected to curb any intention of DITV-VDTH to abuse might-led pricing power.

Exhibit 29: Estimated platform-wise industry consumer-level ARPUs FY15E FY16E FY17E FY18E FY19E

DTH ARPU (INR) 267 285 305 327 343

Analogue Cable ARPU (INR) 160 163 165 166 166

Digital Cable ARPU (INR)

Phase I 250 263 284 312 343

Phase II 200 210 229 252 277

Phase III/IV 160 165 181 208 240

Other Digital ARPU (INR) 200 210 231 254 280


Expect CCI approval to come through The pay TV distribution space is fragmented, with seven DTH operators (six private + one public), three national MSOs, ~6,000 regional/marginal MSOs, and ~60k LCOs. Given the highly fragmented distribution space, we expect the Dish TV-Videocon d2h merger to pass the CCI net comfortably.

Even based on a broad Herfindahl-Hirshman (HHI) index which is typically used to gauge the changes in concentration of an industry in the event of a merger, the pay TV distribution market has a pre-merger/post-merger HHI of 779/979 (HHI delta = 200), significantly lower than global benchmarks of a concentrated market (assuming India to be the relevant market, as DTH services are pan-India and the entire distribution space considered as competition, offering substitutable services). Even if one assumes only the DTH industry as relevant market and DTH services as relevant product, the pre/post-merger HHI stands at 1,663/2,182, implying a moderately concentrated market.

Dish TV India

4 January 2017 20

Exhibit 30: HHI using C&S market as relevant market

FY19E Pre-merger HHI

Post-merger HHI

Dish TV 10.5 109 VDTH 9.1 82 Dish TV VDTH 19.80 392 Airtel 9.24 85 85 TataSky 8.85 78 78 Reliance DTH 2.14 5 5 Sun Direct 6.70 45 45 Hathway 6.76 46 46 SITINET 6.49 42 42 Den Networks 7.01 49 49 Freedish 15.38 237 237 Others 17.62 0.05 0.05 Sum of squares of sub mkt sh. 779 979 Inc/(Dec) in HHI 200


Exhibit 31: HHI using DTH market as relevant market

FY19E Pre-mergerHHI

Post-merger HHI

Dish TV 16.8 283 VDTH 14.6 213 Dish TV VDTH 31.9 1016 Airtel 14.9 221 221 TataSky 14.2 203 203 Reliance DTH 3.4 12 12 Sun Direct 10.8 116 116 Freedish 24.8 613 613 Sum of squares of sub mkt sh 1663 2182 Inc/(Dec) in HHI 519


Note: HHI Index is computed as the summation of the squares of subscriber market share of each industry participant. # An HHI Index <1,500 indicates a competitive market # An HHI Index between 1,500 and 2,500 indicates a competitive and moderately concentrated market # An HHI Index >2,500 indicates a highly concentrated market # As a general rule, mergers that increase the HHI Index by more than 200 points in a highly concentrated industry (HHI >2,500) could raise anti-trust concerns.

Dish TV India

4 January 2017 21

FCFE, return ratios to surge… …as synergies play out close on the heels of a Digitized India

Post the “land grab” in DAS IV markets over FY16-20, capex intensity should reducesignificantly to just replacement-related capital spending.

Even if DITV-VDTH coughs up almost all its regulatory dues (estimated to be ~INR25bby FY19), partially pares down debt and continues its annual ~6m gross subscriberaddition in FY19/FY20, it would generate annual free cash flow (FCFE) of ~INR17bannually in FY19/FY20 respectively.

Synergies playing out coupled with lower capex intensity would support return ratios.RoCE would improve from ~7% in FY16 to ~26% in FY19.

FY20 to mark the end of growth capex We expect the private DTH industry to add 30-35m subscribers over the next 3-4 years. Even if DITV-VDTH maintains its existing subscriber share of ~33% within the DTH industry, it could add 11-12m subscribers over the next 3-4 years. FY16-20 is consequently expected to be relatively capex-heavy, considering the expected DAS IV “land grab”. However, FY21-25 capex would largely entail just replacement-related spending. (Expect replacement demand of 3-3.5m set-top boxes annually over FY21-25, implying 7-8% of net subscriber base). We have assumed a one-time capex of INR5b in FY19 towards infrastructure integration costs.

Exhibit 32: Capex intensity reducing; to hit steady state by FY22


Working capital cycle factors in nearly complete payment of regulatory dues Currently, DITV and VDTH’s pay license fees at the rate of 6% v/s the government-mandated 10% of gross revenue. While DITV provides for the remaining 4% in its balance sheet, VDTH’s balance 4% is off-the-books, as it recognizes this as contingent liability. Our FY19/FY20E working capital cycle captures the regulatory dues/(repayments) of both DITV and VDTH; provisions are modeled based on the expected reduction in difference between the license fee booked in P&L at TRAI-recommended 8% of AGR (currently 10% of adjusted gross revenue) and 6% annual payment.

17.9 15.9 16.4 24.2 12.0 12.1 9.8 9.3 9.3 9.2

30.2%

24.8% 22.3%

28.7%

13.0% 12.0% 9.0% 8.0% 7.5% 7.0%

FY16 FY17E FY18E FY19E FY20E FY21E FY22E FY23E FY24E FY25E

Capex (INR b) Capex to sales

Dish TV India

4 January 2017 22

Exhibit 33: DITV-VDTH proforma working capital cycle FY19E FY20E

INR m In Days INR m In Days Inventories 751 4 950 4 Sundry debtors 857 10 2,536 10 Loans and advances 7,513 72 18,228 72 Total Current Assets (ex-cash) 9,121 21,713

Sundry Creditors 3,940 41 5,414 41 Other current Liabilities 13,744 144 18,888 144 Provisions 17,816 140 12,192 90 Total Current Liabilities 35,499 36,494

Net working capital (ex-cash) -26,378 -239 -14,781 -189Regulatory Liabilities 15625 8526 Provisions (ex-reg. liability) 2190 17 3666 27 Net working capital (ex-cash & regulatory liabilities) -10,752 -117 -6,255 -126


Free cash flow to hit the roof Even if DITV-VDTH coughs up almost its entire regulatory dues (estimated to be ~INR25b by FY19), pares down debt by INR3.4b in FY20, and continues its combined gross subscriber addition rate of ~6m annually, we are looking at a free cash flow (FCFE) generation of ~INR17b annually in FY19 and FY20.

Exhibit 34: Free cash flow to hit the roof Dish TV Videocon FY16 FY17E FY18E FY19E FY20E

PBT 1,596 3,576 8,419 18,560 24,536 Depreciation 11,996 13,091 13,856 16,156 15,742 Other Income -84 520 760 461 711 Interest Paid 5,955 4,826 4,117 3,694 3,457 Direct Taxes Paid 3,995 -981 -2,530 3,712 4,907 (Inc)/Dec in Wkg. Cap. -6,909 -1,067 965 -4,133 -11,597Others 130 0 0 0 0 CFO 16,678 19,964 25,588 38,449 37,757 Capex 15762 14404 16441 18,771 14,854 FCFF 916 5,561 9,147 19,678 22,902 Less: Interest (1-t) 5,230 4,101 3,424 2955 2766 Net Borrowings -5,303 -787 -8,124 -23 -2,979FCFE -9,618 673 -2,402 16,699 17,157


Dish TV India

4 January 2017 23

Synergies playing out + lower capex intensity to support return ratios We expect DITV-VDTH to save 760-820bp in margins in FY19/FY20, as the INR6.9-7.6b synergies (largely cost-related) play out. Incidentally, completion of DAS IV digitization is expected to come close on the heels of the merger period, hence industry’s peak capex is expected to be behind by FY20. Dish TV Videocon’s capex-to-sales ratio is expected to decline from ~30.2% in FY16 to ~12% in FY20 and even lower over FY21-25. Consequently RoCE (Regulatory dues included in capital employed) is expected to improve from ~7% in FY16 to ~26% in FY19.

As favourable operating leverage gains outpace the equity growth; RoEs too are set to soar. We expect Dish TV Videocon’s RoEs to improve from ~23% in FY17E to ~59% in FY19.

Exhibit 35: DITV-VDTH - Return ratios set to improve

#Capital employed includes regulatory liabilities Source: Company, MOSL

20.7

34.8

58.8 56.0

6.8 8.8 12.3

26.4 32.6


RoE RoCE

Dish TV India

4 January 2017 24

Attractively priced at 10% FY19E post-dilution FCFE yield Expect 21% upside from current valuations if merger goes through

The stock is attractively priced at 9.6x FY19E FCFE adjusted for dilution (FCFE yield of10% in FY19E adjusted for dilution); Buy.

Pending approvals, we retain our target price. However, on successful consummationof the merger, our target price would see an upward revision of 22% to INR140 (EV of7.8x FY19E EBITDA; largely in line with global peers).

Our DITV-VDTH DCF valuation assumes 4% CAGR each for net subscribers and ARPUsand 8% EBITDA CAGR over FY19-25. WACC is assumed at 12.2%.

Attractively priced at 10% FY19E post-dilution FCFE yield We expect DITV-VDTH to deliver an annual FCFE of ~INR17b in FY19/FY20. The stock is attractively priced at 9.6x FY19E FCFE (FCFE yield of 10% in FY19E) post dilution. Given the pending approvals – the most crucial being that of Competition Commission of India (CCI), we retain our DCF-based target price of INR115. If the merger is successfully consummated (to which we ascribe high probability), our target price would see an upward revision of 22% to INR140 (EV of 7.8x FY19E EBITDA; largely in line with global peers).

Exhibit 36: Attractive on FCFE yield and FCFE per share basis


0.35

-1.25

8.67 8.91 0%

-1%

10.2% 10.4%

FY17E FY18E FY19E FY20E

FCFE/share (INR) FCFE Yield

Dish TV India

4 January 2017 25

DCF valuation: Key assumptions Our DITV-VDTH DCF valuation assumes 4% CAGR each for net subscribers and ARPUs and 8% EBITDA CAGR over FY19-25. WACC is assumed at 12.2%.

Exhibit 37: DITV-VDTH – DCF valuation

INR b FY19E FY20E FY21E FY22E FY23E FY24E FY25E FY19-25 CAGR

Net subscribers (m) 36.0 38.1 40.0 41.6 42.8 44.1 45.4 4% YoY (%) 102 6 5 4 3 3 3 ARPU (INR/month) 175 183 190 198 206 212 218 4% YoY (%) 4 4 4 4 4 3 3 Revenue 84.4 92.5 100.8 108.9 116.5 123.5 130.9 8% Revenue growth (%) 129 10 9 8 7 6 6 EBITDA 37.9 43.0 47.4 50.1 53.6 56.8 60.2 8% EBITDA margin (%) 45 47 47 46 46 46 46 EBITDA growth (%) 179 13 10 6 7 6 6 Capex 24.2 12.0 12.1 9.8 9.3 9.3 9.8 Capex/Sales (%) 29 13 12 9 8 8 8 Change in working capital 4.1 11.6 0.0 0.0 0.0 0.0 0.0 Tax outflow 4 5 12 13 15 16 17 Tax rate (%) 20 20 33 33 33 33 33 FCF 5.3 13.9 23.7 27.0 29.7 31.9 33.8 FCF growth (%) 29 166 70 14 10 7 6 Terminal value 487 Mar' 19E PV of FCF Net Debt (Mar-19E) 25 WACC Calculations

PV-Explicit Period 92 Wt (%) Cost Risk Free ERP Beta

PV-Terminal Value 204 Equity 0.6 15.2% 7.4 6.5 1.2 Equity Value 270 Debt 0.4 7.9% Equity Value per Share (Mar-19E) 140 WACC 12.3% Implied FY19 EV/EBITDA 7.8x Implied FY19 EV/Sub (INR) 8,204


Dish TV India

4 January 2017 26

Annexure

Exhibit 38: FY16 Revenue - Indian Media Value Chain (INR b)


Exhibit 39: FY16 EBITDA- Indian Media Value Chain (INR b)


59.2 58.5

34 29.2

25.7 25.7 21.1 20.8 20.5 18.7

Dish TVVideocon

Zee Ent Network 18 Airtel DigitalTV

SUN TV TV18Broadcast

JagranPrakashan

Hathway DB Corp PVR

18.3 15.4

1.5

9.9

13.7

2.4

5.8 3.7

5.4 3.3

Dish TVVideocon

Zee Ent Network 18 Airtel DigitalTV

SUN TV TV18Broadcast

JagranPrakashan

Hathway DB Corp PVR

Dish TV India

4 January 2017 27

Financials and Valuations (Dish TV Videocon)

Income Statement (INR Million) Y/E March 2019E 2020E Net Sales 84,396 92,467 YoY (%) 128.7 9.6 Operating expenses 46,448 49,444 Cost of goods and services 32,525 35,462 Employee Cost 2,926 3,219 Selling & distribution exps 6,531 6,660 Administrative exps 4,466 4,103 EBITDA 37,948 43,023 EBITDA margin (%) 45.0 46.5 Depreciation 16,156 15,742 Interest 3,694 3,457 Other Income 461 711 PBT 18,560 24,536 Tax 3,712 4,907 Tax rate (%) 20.0 20.0 Adjusted PAT 14,848 19,629 Change (%) 313.3 32.2 Exceptional items 0 0 Reported PAT 14,848 19,629

Balance Sheet (INR Million) Y/E March 2019E 2020E Share Capital 1,924 1,924 Share Premium 15,434 15,434 Reserves 7,850 27,478 Net Worth 25,207 44,836 Loans 26,619 23,553 Capital Employed 51,827 68,389 Gross Fixed Assets 152,688 169,709 Less: Depreciation 102,465 118,207 Net Fixed Assets 50,223 51,502 Capital WIP 11,715 6,715 Investments 7,868 7,868

Curr. Assets 10,347 31,713 Inventory 751 950 Debtors 857 2,536 Cash & Bank Balance 1,226 10,000 Loans & Advances 7,513 18,228

Current Liab. & Prov. 35,499 36,494 Creditors 17,683 24,303 Provisions & other liab. 17,816 12,192

Net Current Assets -25,152 -4,781Miscellanous exp 7,086 7,086 Application of Funds 51,826 68,389

Dish TV India

4 January 2017 28

Financials and Valuations (Dish TV Videocon)

Ratios Y/E March 2019E 2020E Basic (INR) Adjusted EPS 7.7 10.2 Growth (%) -13.2 -28.1 Cash EPS 16.1 18.4 Book Value 13.1 23.3 DPS 0.0 0.0 Payout (incl. Div. Tax.) (%) 0.0 0.0

Valuation P/E 11.1 8.4 Cash P/E 5.3 4.7 EV/EBITDA 2.9 2.3 EV/EBITDA (excl lease rentals) 2.9 2.3 EV/Sales 1.3 1.1 Price/Book Value 6.6 3.7 EV/net subscriber (INR) 3,060 2,585 EV/net subscriber (USD) 47 39

Profitability Ratios (%) RoE 58.9 56.0 RoCE (adj for reg. liab) 26.4 32.6 RoIC NM NM Turnover Ratios Debtors (Days) 10 10 Inventory (Days) 4 4 Creditors. (Days) 185 185 Asset Turnover (x) 3.8 2.3

Leverage Ratio Debt/Equity (x) 1.1 0.5

Cash Flow Statement (INR Million) Y/E March 2019E 2020E Op.Profit/(Loss) bef Tax 37,948 43,023 Other Income 461 711 Interest Paid -3,694 -3,457 Direct Taxes Paid -3,712 -4,907 (Inc)/Dec in Wkg. Cap. 477 -11,597 CF from Op.Activity 31,480 23,774 (inc)/Dec in FA + CWIP -50,306 -12,021 (Pur)/Sale of Investments -5,548 0 CF from Inv.Activity -55,854 -12,021 Issue of Shares 858 0 Inc/(Dec) in Debt 20,154 -3,066 CF from Fin.Activity 21,012 -3,066 Inc/(Dec) in Cash -3,362 8,687 Add: Opening Balance 5,000 1,226 Closing Balance 1,638 9,913

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Financials and Valuations (Dish TV India, ex-merger)

Income Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Net Sales 14,366 19,578 21,668 24,258 27,816 30,599 31,656 36,029 YoY (%) 32.4 36.3 10.7 12.0 14.7 10.0 3.5 13.8 Operating expenses 11,977 14,595 15,873 18,745 20,462 20,350 20,776 23,003 Cost of goods and services 7,803 9,905 11,010 13,098 13,829 14,006 13,740 15,274 Employee Cost 566 710 822 891 1,013 1,229 1,505 1,626 Selling & distribution exps 2,847 2,909 3,036 3,321 4,275 2,836 3,082 3,525 Administrative exps 761 1,071 1,005 1,436 1,345 2,280 2,448 2,579 EBITDA 2,388 4,984 5,795 5,513 7,354 10,249 10,880 13,026 EBITDA margin (%) 16.6 25.5 26.7 22.7 26.4 33.5 34.4 36.2

Depreciation 3,654 5,180 6,276 5,973 6,138 5,907 6,509 7,071 Interest 1,511 1,778 1,284 1,327 1,754 2,087 1,925 1,344 Other Income 880 386 512 660 547 640 470 700 PBT -1,897 -1,589 -1,252 -1,127 10 2,895 2,916 5,310 Tax 0 0 0 0 0 -4,029 817 1,752 Tax rate (%) 0.0 0.0 0.0 0.0 0.0 -139.2 28.0 33.0 Adjusted PAT -1,897 -1,589 -1,252 -1,127 10 6,924 2,100 3,558 Change (%) -27.6 -16.3 -21.2 -10.0 NA NA -69.7 69.4 Exceptional items 0 0 594 -415 0 0 0 0 Reported PAT -1,897 -1,589 -658 -1,542 10 6,924 2,100 3,558

Balance Sheet (INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Share Capital 1,063 1,064 1,065 1,065 1,066 1,066 1,066 1,066 Share Premium 15,314 15,336 15,378 15,378 15,418 15,434 15,434 15,434 Reserves -15,750 -17,338 -17,996 -19,531 -19,617 -12,693 -10,593 -7,035Net Worth 628 -938 -1,553 -3,089 -3,134 3,807 5,907 9,465 Loans 10,763 14,003 16,330 14,460 14,839 12,313 12,526 5,401 Capital Employed 11,390 13,065 14,777 11,371 11,705 16,120 18,433 14,866

Gross Fixed Assets 23,520 29,267 35,788 42,314 47,218 56,683 64,812 73,888 Less: Depreciation 9,883 15,063 21,449 27,422 32,790 38,664 45,172 52,243 Net Fixed Assets 13,637 14,204 14,339 14,891 14,428 18,020 19,640 21,645 Capital WIP 4,421 3,884 6,535 2,808 4,972 6,100 5,000 5,000 Investments 2,002 1,500 0 1,180 2,000 2,320 2,320 2,320 Curr. Assets 6,808 6,752 10,676 8,831 9,985 8,486 11,547 11,031 Inventory 44 69 86 75 99 126 172 187 Debtors 215 286 304 415 637 725 692 753 Cash & Bank Balance 3,074 3,851 6,403 5,399 4,286 3,392 6,000 5,000 Loans & Advances 3,475 2,546 3,883 2,943 4,964 4,244 4,683 5,092 Current Liab. & Prov. 15,478 13,275 16,773 16,339 19,608 22,612 24,435 25,130 Creditors 12,471 8,277 10,099 7,837 9,038 10,315 10,423 11,095 Provisions & other liab. 3,007 4,999 6,674 8,503 10,570 12,297 14,012 14,034 Net Current Assets -8,670 -6,523 -6,097 -7,508 -9,623 -14,126 -12,888 -14,099Miscellanous exp 0 0 0 0 0 4,655 0 0 Application of Funds 11,390 13,065 14,777 11,371 11,705 16,120 18,433 14,866

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Financials and Valuations (Dish TV India, ex-merger)

Ratios Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Basic (INR) Adjusted EPS -1.8 -1.5 -1.2 -1.1 0.0 6.5 2.0 3.3 Growth (%) -44.1 -16.3 -21.3 -10.0 -100.9 NA -69.7 69.4 Cash EPS 1.7 3.4 4.7 4.6 5.8 12.0 8.1 10.0 Book Value 0.6 -0.9 -1.5 -2.9 -2.9 3.6 5.5 8.9 DPS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Payout (incl. Div. Tax.) (%) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Valuation P/E NM NM 13.1 43.1 25.5 Cash P/E 18.7 14.7 7.1 10.5 8.5 EV/EBITDA 18.0 13.7 9.6 8.8 6.9 EV/EBITDA (excl lease rentals) 21.7 15.5 10.0 8.9 6.9 EV/Sales 4.1 3.6 3.2 3.0 2.5 Price/Book Value NA NA NA 15.3 9.6 EV/net subscriber (INR) 8,712 7,796 6,789 6,082 5,152 EV/net subscriber (USD) 133 119 104 93 79

Profitability Ratios (%) RoE NM NM NM NM NM NM 43.2 46.3 RoCE (adj. for reg. liab) NA NA 1.2 -5.3 9.8 12.7 11.4 14.3 RoIC NM NM NM NM NM NM NM NM Turnover Ratios -10 -2 -3 -4 15.3 23.6 20.2 26.8 Debtors (Days) 5 5 5 6 8 9 8 8 Inventory (Days) 1 1 1 1 1 1 2 2 Creditors. (Days) 380 207 232 153 161 185 183 176 Asset Turnover (x) 2.5 2.8 2.7 3.7 5.4 5.1 5.1 5.4

Leverage Ratio Debt/Equity (x) NA NA NA NA NA NA NA NA

Cash Flow Statement (INR Million) Y/E March 2011 2012 2013 2014 2015 2016 2017E 2018E Op.Profit/(Loss) bef Tax 2,388 4,984 6,390 5,098 7,354 10,249 10,880 13,026 Other Income 880 386 512 660 547 640 470 700 Interest Paid -1,511 -1,778 -1,284 -1,327 -1,754 -2,087 -1,925 -1,344Direct Taxes Paid 0 0 0 0 0 4,029 -817 -1,752(Inc)/Dec in Wkg. Cap. 3,084 -1,369 2,125 413 962 -751 5,730 211 CF from Op.Activity 4,841 2,223 7,743 4,844 7,109 12,080 14,339 10,840

(inc)/Dec in FA + CWIP -9,311 -5,210 -9,061 -2,799 -7,838 -10,627 -7,029 -9,075(Pur)/Sale of Investments 504 502 1,500 -1,180 -820 -320 0 0 CF from Inv.Activity -8,807 -4,708 -7,562 -3,978 -8,658 -10,948 -7,029 -9,075

Issue of Shares 33 23 43 0 41 17 0 0 Inc/(Dec) in Debt 1,585 3,240 2,327 -1,870 379 -2,526 213 -7,124CF from Fin.Activity 1,617 3,263 2,370 -1,870 419 -2,509 213 -7,124

Inc/(Dec) in Cash -2,349 778 2,552 -1,004 -1,129 -1,377 7,523 -5,360Add: Opening Balance 5,422 3,074 3,851 6,403 5,399 4,286 3,392 6,000 Closing Balance 3,074 3,851 6,403 5,399 4,270 2,909 10,914 640

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N O T E S

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Disclosures

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