Deutsche Bank Markets Research Hoting Buy .4cia India Broadcasting / Movie & Entertainment Dish TV DSIV BO 210:41-4:er, DfRr IN Back to the good old days of operating leverage EN,17",n,a , SSE DSTV I ov: inflation in content cost provides vinibilitv on siren() earninas growth During FY10-12, Dish TVs EBITDA grew 4.2x as the company doubled its number of subscribers and entered into fixed content cost deals with the broadcasters. We believe operating leverage will play out for Dish again as its content costs are now largely fixed, at least for the next 1.5 years (with 5-6% annual increase), and it aggressively adds subscribers. EBITDA growth of 72% in 4QFY15 (22% ahead of estimates) is a testimony. Continuing strong subscriber addition and an ARPU increase of INR 10 (4%) in May 2015 will be strong near-term catalysts. Filed content cost deals resulted in a big beat in earnings Dish TV reported sales/EBITDA growth of +19%/+72% (+2%/+22% vs. our est.). Strong customer addition of 405k net subscribers (vs. our 180k est.) and flat content cost were key drivers for the beat. If one stripped off the impact of activation revenue (accounting change done in Q4FY14), EBITDA growth would still have been 72%. Dish TV has content cost fixed for at least the next 20 months (management guiding for 5-6% annual inflation). The Star and Zee content-cost deal expires September 2016, India Cast in March 2017, and Sony in March 2018. While fixed content costs will drive earnings growth over the next six quarters, ARPU increases will drive long-term earnings growth. Cost pass-through for cable (broadcasters push) gives DTH players headroom to raise prices (see Figure 2 for ARPU trend). Dish also implemented differential pricing for metros, which is working well, but it may have to roll back the price increase if peers do not follow; otherwise, subscriber addition may be affected. DTH seems to be benefitting trout a delay in digitization Phase 3 and 4 Despite 1.3mn gross subscriber additions in 2HFY15, Dish is still gaining 28% incremental market share. It seems that the DTH companies are probably gaining market share in Phase 3 and 4 areas. Maintaining Buy; revising target price to INH105 (up 25%) We have increased our earnings estimates (19-21%) and target price to factor in strong customer addition of 1.4mn in FY16/17 (vs. 1.2mn earlier) and lower content cost increase of 8/10% in FY16/17 (vs. 12% earlier). Our estimates are below management guidance of 5-6% content cost increase and 1.4-1.7mn net subscriber adds in FY16. Our target of 11x September 2016 EV/EBITDA is intact. Key risk: slower-than-expected growth in ARPU. 1;::::,•:7 Year End Mar 31 2013A 2014A 2015E 2018E 2017E Sales (INini) 21,668.0 25089.8 27.818.2 31.887.9 37.032.6 EBITDA IINRm) 5,795.2 6261.3 7,296.7 8391.0 11,795.1 1:18 EPS FDIINFII -1.18 -0.36 0.04 3.26 5.47 01.0 DB EPS FDIINR1 -1.18 -0.36 -0.26 2.71 4.61 to Change -0.0% -0.0% -113.7% 20.5% 18.7% San* Dazsca• &At *mown Capin / 1 05 EPS s fury *Med ind includee nen-moaning nun Wuples em yelOscalculacces vie average nevioncal putts tor p.m wore eft/ sow Ines 51•Cvneol erg twin yarn. 444444 Pre +4.44d1 urea sew yter•nd 0014 Dare 27 May 2015 Forecast Change Price at 26 May 201511NR) Price target - 12mth IINR) 52-week range 11NR) Bombay Stock Exchange OISE 301 COUP,: 40101a Mart0j FAancn Research Analyst Research Analyst 1+91)22 7183 4055 (+91122 718043% g.bhatiagdb.com [email protected] 97 65 105 00 97.65 51.15 27.644 .K,.y 011.1111ff Price target Sales (FYE) OD Prot margin IFYE1 Net profit (EYE) San. riouna,... sink 105 50 15 Co es 30 84.00 to 105.00 77.145 to 77.818 1.2 to 4.2 25.0% 2.5% 256.3% -272.6 to 37.3 I -113.7% 5414 11/14 9 3 1103 0_N eanbov Mock Eacha44)15•040441 Performance l%) lm 3m 12m Absolute 28.5 23.6 84.9 Bombay Stock Exchange 0.8 -3.8 11.8 1BSE 301 Soiew Onsach• Sort Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) CONFIDENTIAL DB-SDNY-0117098 SDNY_GM_00263282 EFTA01457523