Dish TV: Merger benefits can provide trigger

Operational performance in the last few quarters has been sub-par

The Dish TV stock gained about 6 per cent from its weekly low on expectation that the cost savings arising out of the merger with Videocon d2h would be higher than anticipated and provided a boost to future performance.

The stock has been an underperformer over the last one year, shedding a third of its market value due to increasing competition and deteriorating financial performance. However, it could get some relief in the near term.

As far as merger benefits go, in addition to the ~5.10 billion synergy gains expected in FY19, there might be an additional ~7.6 billion cost saving in FY20. The maximum saving, according to the management, will be from set-top box costs (about ~1.1 billion) and interest expenses (~800 million). Content costs, administration and back-end costs will contribute to other savings over the next one year.

Analysts at Citi said the key gains from the merger would be from content cost synergies as Dish TV’s expenses on this account were much lower than those of Videocon d2h. This, coupled with lower transponder, employee and promotional expenses, is expected to bring down operating costs. Other analysts are cautiously optimistic. For instance, ICICI Securities pegs the synergy benefits at ~2.5 billion in FY19 and ~3 billion in FY20.

Merger benefits seem to be the only key trigger as Dish TV’s operational performance over the last few quarters has been sub-par. In the December quarter, the company’s average revenue per user (ARPU) declined 4.6 per cent, year-on-year, to ~144, weaker than the marginal increase in Airtel’s ARPU at ~233. Also, Dish TV is adding subscribers at a slower pace than its peers. The company’s additions at 250,000 in Q3 were not only lower than its average over the last eight quarters (380,000), but also significantly lower than Airtel’s 416,000 additions in Q3. The management said slower rural recovery was responsible for the same. Dish TV’s subscriber base is skewed as rural markets make up 75 per cent of the base. The additions are expected to stabilise from the current quarter on pricing from discounts and higher additions from Videocon d2h. Videocon has 19 per cent of the subscriber share while the figure for Dish TV stands at 24 per cent.

Dish TV’s stock valuations are working in its favour. Analysts at Citi said the stock was attractively priced after the underperformance and with the merger coming through, the stock could see good returns. Yet, given the business pressures and changing customer preferences, investors should wait for gains to come through over the next couple of quarters, especially on the integration and execution fronts, before considering the stock.