Dish TV India

MEDIA

DSTV.NS DITV IN

EQUITY RESEARCH

Reiterate Buy, TP revised to INR108

July 1, 2013 Rating Remains Target price Increased from 107 Closing price June 28, 2013 Potential upside

Focus on value-focused subscribers and FCF, industry dynamics improving

Action: Maintain Buy with a revised DCF-based TP of INR108 We raise our TP to INR108. While our FY14F EBITDA is up by 2%, our avg EBITDA FY14-15F are down by ~5% (our FY14-15F FCF are higher), which are offset by lower cost for equity that reflects the ~60bps YTD reduction in risk-free rate and roll forward our TP base to FY14F. Increase in STB price focus on value-focused subscribers, FCF DTH companies, including Dish, have increased set top box (STB) prices to reduce subsidy, attract quality customers and improve their FCF and balance sheet. While cable operators have also raised STB prices, the higher price differential between cable operators and DTH should imply relatively lower subscriber addition for DTH in the short term, even as it may have a positive impact on the churn rate. We lower our subsidy forecast on STB by INR200/yr but scale back our DTH market share estimates from 35%/40%/45% to 20%/30%/30% in phases 2/3/4, which leads to lower subscriber additions of 2.2/5.0mn (vs 4.1/6.4mn earlier) in FY14/FY15F. Better content negotiation; guidance of 8%-10% growth in FY14F Dish being the market leader, according to management, has been able to extract better terms on content cost with broadcasters. Content cost rise in FY13 was at ~5.1% vs. managements earlier guidance of 12-15%. Dish has guided for 8-10% y-y rise in FY14. We estimate a 10% rise in FY14F vs. 15% y-y earlier. Valuation: Inexpensive given improving FCF, growth prospects The stock currently trades at EV/EBITDA multiple of 9.3x FY14F (6.4x FY15F EBITDA) which is ~28% discount to its three-year average trading multiple of 13.8x.

Buy
INR 108 INR 61 +77%

Anchor themes We believe that the Indian media industry is at an inflection point as digitization is now a reality. We believe that MSO's transition to digital packages will positively impact ARPU. Nomura vs consensus We have the highest TP on the Street, as we expect that the heightened focus on free cash flow and pick up in subscriber addition, especially in Phases 3-4, have not been completely factored in by consensus.
Research analysts India Media Ankur Agarwal, CFA - NFASL ankur.agarwal@nomura.com +91 22 4037 4489 Lalit Kumar - NFASL lalit.kumar@nomura.com +91 22 4037 4511

31 Mar Currency (INR)

FY12 Actual Old

FY13F New Old

FY14F New Old

FY15F New

Revenue (mn) Reported net profit (mn) Normalised net profit (mn) FD normalised EPS FD norm. EPS growth (%) FD normalised P/E (x) EV/EBITDA (x) Price/book (x) Dividend yield (%) ROE (%) Net debt/equity (%)

19,580 -1,331 -1,331 -1.25 na na 15.1 na na 98.8 -1,081.8

22,484 -1,459 -1,459 -1.37 na N/A N/A N/A N/A 53.4 -379.6

21,668 -660 -1,254 -1.18 na na 13.1 na na 28.6 -697.7

27,831 -1,093 -1,093 -1.03 na N/A N/A N/A N/A 27.3 -277.9

25,537 632 632 59.40c na 102.6 9.3 na na -27.4 -817.7

37,893 598 598 56.26c na N/A N/A N/A N/A -14.1 -348.9

33,146 1,841 1,841 1.73 191.3 35.2 6.4 na na -172.3 193.1

Source: Company data, Nomura estimates

See Appendix A-1 for analyst certification, important disclosures and the status of non-US analysts.

Key company data: See page 2 for company data and detailed price/index chart.

Nomura | Dish TV India

July 1, 2013

Key data on Dish TV India

Incomestatement(INRmn)
Year-end 31 Mar Revenue Cost of goods sold Gross profit SG&A Employee share expense Operating profit EBITDA Depreciation Amortisation EBIT Net interest expense Associates & JCEs Other income Earnings before tax Income tax Net profit after tax Minority interests Other items Preferred dividends Normalised NPAT Extraordinary items Reported NPAT Dividends Transfer to reserves Valuation and ratio analysis Reported P/E (x) Normalised P/E (x) FD normalised P/E (x) FD normalised P/E at price target (x) Dividend yield (%) Price/cashflow (x) Price/book (x) EV/EBITDA (x) EV/EBIT (x) Gross margin (%) EBITDA margin (%) EBIT margin (%) Net margin (%) Effective tax rate (%) Dividend payout (%) Capex to sales (%) Capex to depreciation (x) ROE (%) ROA (pretax %) Growth (%) Revenue EBITDA EBIT Normalised EPS Normalised FDEPS Per share Reported EPS (INR) Norm EPS (INR) Fully diluted norm EPS (INR) Book value per share (INR) DPS (INR)
Source: Company data, Nomura estimates

Relative performance chart (one year)

FY11 14,367 -5,058 9,309 -10,163 -761 -1,614 2,381 -3,996 -1,614 -1,534 1,226 -1,922 3 -1,919 FY12 19,580 -6,115 13,465 -12,975 -748 -258 4,960 -5,219 -258 -1,780 707 -1,331 0 -1,331 FY13F 21,668 -6,599 15,069 -14,729 -822 -482 5,794 -6,276 -482 -1,284 511 -1,254 0 -1,254 FY14F 25,537 -7,259 18,277 -15,722 -903 1,653 7,757 -6,104 1,653 -1,336 315 632 0 632 FY15F 33,146 -8,711 24,435 -20,698 -991 2,746 10,430 -7,684 2,746 -1,220 316 1,841 0 1,841

Source: ThomsonReuters, Nomura research

(%) Absolute (INR) Absolute (USD) Relative to index Market cap (USDmn) Estimated free float (%) 52-week range (INR) 3-mth avg daily turnover (USDmn) Major shareholders (%) Promoters 84.85/56.7 3.32 1M -8.7 3M 12M -9.2 -1.2 -5.0

-13.9 -16.8 1,094.1

-4.6 -11.7 -15.8

64.8

-1,919 0 -1,919 0 -1,919

-1,331 0 -1,331 0 -1,331

-1,254 594 -660 0 -660

632 0 632 0 632

1,841 0 1,841 0 1,841

Source: Thomson Reuters, Nomura research

Notes

na -33.7 na na na 16.4 na 30.4 na 64.8 16.6 -11.2 -13.4 na na 70.0 2.5 -190.7 -6.8

na -48.7 na na na 15.8 na 15.1 na 68.8 25.3 -1.3 -6.8 na na 33.5 1.3 98.8 -1.1

na -51.7 na na na 6.7 na 13.1 na 69.5 26.7 -2.2 -3.0 na na 41.8 1.4 28.6 -1.9

102.6 102.6 102.6 181.5 na 6.6 na 9.3 43.8 71.6 30.4 6.5 2.5 0.0 0.0 21.5 0.9 -27.4 6.2

35.2 35.2 35.2 62.3 na 3.4 na 6.4 24.3 73.7 31.5 8.3 5.6 0.0 0.0 37.1 1.6 -172.3 9.8

Interest expense also factors in interest on the provision created for entertainment tax

32.4 113.1 na na na

36.3 108.3 na na na

10.7 16.8 na na na

17.9 33.9 na na na

29.8 34.5 66.1 191.3 191.3

-1.81 -1.81 -1.81 na na

-1.25 -1.25 -1.25 na na

-62.05c -1.18 -1.18 na na

59.40c 59.40c 59.40c na na

1.73 1.73 1.73 na na

Nomura | Dish TV India

July 1, 2013

Cashflow(INRmn)
Year-end 31 Mar EBITDA Change in working capital Other operating cashflow Cashflow from operations Capital expenditure Free cashflow Reduction in investments Net acquisitions Reduction in other LT assets Addition in other LT liabilities Adjustments Cashflow after investing acts Cash dividends Equity issue Debt issue Convertible debt issue Others Cashflow from financial acts Net cashflow Beginning cash Ending cash Ending net debt
Source: Company data, Nomura estimates

FY11 2,381 424 1,143 3,948 -10,052 -6,104 2,318 2 836 -2,949 0 56 1,751 -1,152 655 -2,293 5,550 3,257 7,545 FY12 4,960 -2,312 1,457 4,105 -6,553 -2,448 821 521 344 -762 0 22 2,185 -784 1,424 662 3,257 3,919 10,154 FY13F 5,794 4,278 -359 9,713 -9,063 650 -1,282 0 1,106 474 0 0 427 -1,175 -748 -274 3,919 3,645 10,855 FY14F 7,757 1,123 926 9,806 -5,485 4,321 0 0 315 4,636 0 0 -3,000 -1,336 -4,336 300 3,645 3,945 7,555 FY15F 10,430 4,766 3,806 19,002 -12,312 6,690 0 0 316 7,006 0 0 -3,000 -1,220 -4,220 2,785 3,945 6,730 1,770 Notes

With positive FCF generation of INR650mn in FY13, we expect FCF generation of INR4.32bn in FY14F which implies FCF yield of 6.7%

Balancesheet(INRmn)
As at 31 Mar Cash & equivalents Marketable securities Accounts receivable Inventories Other current assets Total current assets LT investments Fixed assets Goodwill Other intangible assets Other LT assets Total assets Short-term debt Accounts payable Other current liabilities Total current liabilities Long-term debt Convertible debt Other LT liabilities Total liabilities Minority interest Preferred stock Common stock Retained earnings Proposed dividends Other equity and reserves Total shareholders' equity Total equity & liabilities Liquidity (x) Current ratio Interest cover Leverage Net debt/EBITDA (x) Net debt/equity (%) Activity (days) Days receivable Days inventory Days payable Cash cycle
Source: Company data, Nomura estimates

FY11 3,257 0 227 44 2,687 6,215 2,000 18,474 384 158 27,231 4,317 10,711 3,286 18,313 6,485 2,063 26,861 1,063 -693

FY12 3,919 0 286 69 2,326 6,600 1,500 18,044 43 152 26,340 3,880 6,408 4,999 15,287 10,194 1,798 27,278 1,064 -2,002

FY13F 3,645 2,782 304 86 3,706 10,522 0 20,808 67 151 31,548 6,040 10,425 6,674 23,140 8,460 1,504 33,104 1,065 -2,621

FY14F 3,945 2,782 373 67 2,378 9,544 0 19,970 67 151 29,732 6,040 9,372 7,573 22,985 5,460 2,210 30,656 1,065 -1,989

FY15F 6,730 2,782 484 150 2,586 12,732 0 24,105 67 151 37,055 6,040 13,464 8,650 28,154 2,460 5,524 36,138 1,065 -148

Notes

We expect a reduction in debt as the company is likely to generate strong FCF in FY14F. Dish TV has a negative working capital cycle as shown in Fig 16, where we have captured the way to calculate Dish TVs working capital cycle

370 27,231

-939 26,340

-1,556 31,548

-924 29,732

917 37,055

0.34 -1.1

0.43 -0.1

0.45 -0.4

0.42 1.2

0.45 2.2

3.17 2,039.3

2.05 -1,081.8

1.87 -697.7

0.97 -817.7

0.17 193.1

7.4 2.6 900.3 -890.3

4.8 3.4 512.3 -504.1

5.0 4.3 465.5 -456.3

4.8 3.8 497.7 -489.0

4.7 4.5 478.4 -469.2

Nomura | Dish TV India

July 1, 2013

Increase in set top box (STB) price by DTH companies; focus on FCF and quality customers
Dish TV had increased the price of STB twice in Feb-13 from INR1,690 to INR2,000 per box, which was followed by other domestic DTH companies. While some cable operators such as Den Networks also increased prices of STB, the price differential between cable operators and DTH companies has increased, which has resulted in lower subscriber additions by DTH companies. This is also visible in subscriber additions (as shown in the table below) between 1 March 2013 and 12 April 2013 where multi system operators (MSOs) have seeded 4.45mn STBs vs. 0.38mn STBs seeded by DTH players. DTH companies have consciously taken this decision to improve their balance sheet, FCF and add value-focused customers than just subscriber additions (that can positively impact the churn rate going forward), in our view. Fig. 1: Dish TV Increasing price of standard definition set
up box
INR
2,100

Fig. 2: Declining SAC/ARPU The proxy for the payback period is coming down with the increase in STB prices
20

1,900

18

1,700

16

1,500

14
1,300

12
1,100 Jan'12 July'12 Feb'13 Feb'13

Source: Company data, Nomura research

Source: Company data, Nomura research

Fig. 3: Phase 2 Impact on subscriber additions on account of STB price increases

As of 1-Mar-13 26-Mar-13 12-Apr-13

Total subscriber 16 16 16

Digitization 55% 67% 85%

Digital Total 8.8 10.7 13.6

Subscribers MSO DTH 4.7 4.07 9.15 4.45

Source: Company data, Nomura research

We increase our estimated consumer premise equipment (CPE) price charged by the company to subscribers, which should increase the lease rental income for the company. We increase our CPE charge estimate by INR200 per year (in Q3) over FY14-16F (during digitization) and INR400 thereafter, which should help reduce the subsidy to zero by FY17F. While the company has indicated that it will reduce the subsidy to zero in the next 12-18 months, we believe that such a sharp increase will be contingent on the rate at which MSOs increase prices of STBs. We adjust our DTH market share estimate in analog subscribers (which convert to digital) from 35%/40%/45% to 20%/30%/30% in phases 2/3/4, while we maintain Dish TVs incremental share estimate of 24% in the DTH industry. This means a lower number of subscriber additions for Dish TV vs. our earlier expectation.

Scale advantage visible in content negotiation with broadcasters; lower guidance of 8-10% y-y growth in FY14F
Dish being the market leader in the DTH industry with ~28% market share, according to management, has been able to better negotiate over content cost with broadcasters. While management reduced its earlier guidance of 12-15% increase in FY13 content

Nomura | Dish TV India

July 1, 2013

cost to ~12% in the Q3 conference call, the actual increase in content cost was ~5.1%, which was much better than our expectation and earlier management guidance. Management also guided for 8-10% y-y increase in FY14 content cost, lower than our expectation of a 15% increase. Hence, we reduce our FY14F content cost growth estimate from 15% to 10%.

Fig. 4: Dish TV - Growth in programming and other costs

Highlights the ability to negotiate better terms
60%

Fig. 5: Content cost as a % of sales a decline would likely lead to margin expansion
60.1%

50% 56% 40% 50.4% 30% 46% 44.4% 20% 36% 10% 32.2% 0% FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F 26% FY08 FY09 FY10 FY11 FY12 FY13 FY14F FY15F 31.4% 30.1% 27.7% 36.2%

Source: Company data, Nomura estimates Source: Company data, Nomura estimates

As well, management has been very pragmatic in deciding fixed/variable based payment for content cost which it is able to negotiate because of the company being a leading player in the DTH industry. The company has shifted from fixed fee deal to variable (per subscriber basis) for properties such as sports, which are expensive. This has resulted in a decline in content cost, down by ~4% y-y in Q1FY13 and ~3% in Q2FY13.

Strong uptick in ARPU likely post billing of digital packages by MSOs, although near-term pressure due to down trading
Dish TV took a price increase of INR20 in July-12 ex-south Indian Pack. While we were building in average revenue per user (ARPU) of INR160 for FY13F, actual ARPU came in at INR158 on account of down trading in package (the percentage of subscribers on the base pack has increased from a run rate of 54% to 58% in Q4) and increased the time lag between subscription getting expired. The company has also increased the package price by ~10% across all packs and region, effective from April 2013 which was followed by other DTH companies which would get reflect in FY14F ARPU. We retain our APRU assumption of INR173 for FY14F as we factor in a 10% price increase that the company has taken and managements intention to go for further price increases. While management has indicated that APRU has the potential to reach close to INR250 in the next 3-4 years, we are currently building in INR209 in FY16F. Implementation of the digital addressability system (DAS) and the billing of digital package by MSOs in phases 1 and 2 is likely to mean more headroom to increase ARPU for the DTH industry. While digitization is mostly done in phases 1 and 2 and MSOs have seeded set up box, they have not started billing as per the digital package which is significantly higher than their current package prices for subscribers. Once the billing as per the digital package starts, DTH players including Dish TV will have more headroom to increase ARPUs, in our view. In addition, given that carriage fee, which is MSOs one revenue stream, is trending down with the onset of digitization, they are likely to have a bigger incentive to behave rationally on the ARPU front, we believe.

Nomura | Dish TV India

July 1, 2013

Churn rate fell to 0.8% in Q4 from 1% in Q3; emphasis on value-focused customers and churn management strategy yield results
Dish TVs churn rate declined to ~0.8% in Q4 from 1% in Q3. Apart from win-backs of customers, the decline in churn rate can be attributed to: Set up box price increase by DTH players as well as some cable operators such as Den Networks in Feb-13, which has increased the subscriber switching cost. This can also been seen from the fact that Airtels DTH churn rate has come down from 1.3% in Q3 to 1.1% in Q4. Dish TVs offer of 70 basic free channels (mostly free-to-air) for subscribers as a part of the existing base package. As highlighted in our report, Misplaced conclusion about a price war, dated 11 October 2012, this was a churn management strategy which became evident in Q4. While we continue to factor in a 1% churn rate, we do not rule out a positive surprise on this front. Its too early to extrapolate 0.8% churn rate and we will wait for 1-2 quarters to check its sustainability.

FCF generation likely to increase from INR650mn in FY13F to ~INR432bn in FY14F

Dish TV has generated ~INR650mn FCF in FY13 and should generate ~INR4.32bn (preinterest outflow) in FY14F, as per our estimate. This implies a FCF yield of ~6.7%. Reduction in debt level We estimate gross debt at INR14.5 bn and net debt at ~INR9.5bn in end-FY13F. We expect the debt level to come down gradually from FY14F as the company would repay debt from positive FCF post payment of interest. Lower subscriber addition As highlighted above, the increase in STB price should lead to lower subscriber addition by the company over FY14-16F. This should lead to lower capex and thus increase FCF, in our view. Reduction in subsidy on consumer premise equipment (CPE) The company has increased the CPE price from INR1,690 to INR2000, and this should reduce the subsidy and thus improve FCF for the company, in our view.

Summary of our estimate changes

Based on our review of numbers and discussion with management, we revise our estimates to capture the trends in FY13F and following points: We now factor in a delay in phases 3/4 of digitization from three months earlier to six months, based on our discussions with various stakeholders in the industry. While the government may continue with the current deadline for phases 3/4 of digitization, the shifting of all analog subscribers may take 3-6 months after the deadline in phases 3/4 based on what has happened in phases 1/2. In phase I, the digitization deadline was extended in Kolkata and Chennai, while in phase 2, ~4mn subscribers out of 16mn were on analog cable after the expiry of the deadline of 31 March 2013. We increase our lease rental estimate from INR740 to INR1,050 for H1FY14 post CPE price increase taken by company from INR1,690 to INR2,000 for Feb-13. We estimate that the company will further increase the price of CPE by INR200 per year over FY1416F (till digitization) and INR400/240 in FY17/18F to completely remove the subsidy on STB. As DTH companies have increased the price of STB, we reduce our DTH share estimates for analog subscriber from 35%/40%/45% to 20%/30%/30% in phases 2/3/4 while we maintain our estimate of 24% incremental share in the DTH industry for FY1416F. As a result of the low DTH share in phases 2/3/4 of digitization and the delay in the deadline, we revise our subscriber addition estimate for Dish from TV from 4.1/6.4/3.1 mn earlier to 2.2/5.0/4.0 mn in FY14/FY15/FY16F.

Nomura | Dish TV India

July 1, 2013

We now factor in a content cost increase of 10% (vs. 15% y-y earlier) in FY14F to factor in management guidance of 8-10% increase. Based on data release by the ministry of information and broadcasting, there were lower number of analog connections in phases I/II. Accordingly, we revise our number of analog household estimates from 10/20/40/38mn to 6/16/43/43mn (total 68mn) in phases 1/2/3/4 digitization. Lower subscriber addition would lead to lower capex and thus our lower depreciation estimate. We reduce our tax rate estimate for FY15F from 20% to 0% as the company has mentioned that it will be paying minimum alternate tax (MAT) from FY16F and no tax till FY15F.

Fig. 6: Change in estimates

INR mn

Revenue
- y-y growth

EBITDA
- margin

PAT
Source: Nomura estimates

FY14F 25537 17.9% 7,757 30% 632

New FY15F 33146 29.8% 10,430 31% 1,841

FY16F 46528 40.4% 17,193 37% 7,011

FY14F 27,831 23.8% 7,601 27% -1,093

Old FY15F 37,893 36.2% 11,751 31% 598

FY16F 50,445 33.1% 19,079 38% 6965

FY14F -8% 2%

Change FY15F -13% -11%

FY16F -8% -10%

Fig. 7: Nomura vs consensus

INR mn, except for EPS which is In INR

Revenue
- y-y growth

EBITDA
- margin

PAT

Nomura FY14F FY15F 25537 33146 18% 30% 7,757 10,430 30% 31% 632 1,841

Consensus FY14F FY15F 25568 30026 18% 17% 7305 9052 29% 30% 83.1 1385

Difference FY14F FY15F 0% 10% 6% 15%

Source: Bloomberg, Nomura estimates

Valuation methodology
We value the stock based on discounted cash flow to arrive at our new TP of INR108 as we roll forward our TP base to FY14F from H1FY14. We reduce our cost of equity estimate from 14.9% to 14.2% to capture the decline in Indias 10-year government bond yield from 8.2% to ~7.5%. The stock currently trades at an EV/EBITDA multiple of 9.3x FY14F EBITDA (6.4x FY15F EBITDA) which is ~28% discount to its 3-year average trading multiple of 13.8. In our view, this is compelling in the context of EBITDA likely tripling (an EBITDA CAGR in FY13-16E of ~44%) over FY13-16F and our ~INR4.32bn of free cash (pre interest outflow) flow generation estimate for FY14F that translates to 6.7% FCF yield. Our target price implies EV/EBITDA multiple of 11.7x FY15F EBITDA (7.1x FY16F EBITDA when the complete benefit of digitization will be visible). Cash flows are discounted back to FY14F. Our valuation methodology remains unchanged.

Nomura | Dish TV India

July 1, 2013

Fig. 8: DCF-based target price of INR108

INR mn except for target price which is in INR
Year Sales
Growth

FY11 14367
32%

FY12 19580
36%

FY13E 21668
11%

FY14E 25537
18%

FY15E 33146
30%

FY16E 46528
40%

FY17E 53195
14%

FY18E 58784
11%

FY19E 64565
10%

FY20E 69986
8%

2021E 76322
9%

2022E 83880
10%

2023E 92392
10%

Terminal
6%

EBITDA
EBITDA Margin

2381
17%

4960
25%

5794
27%

7757
30%

10430
31%

17193
37%

19059
36%

19642
33%

20630
32%

20829
30%

22294
29%

24348
29%

26734
29%

D&A Interest Taxes

Tax Rate

3996 1534 (3)

0%

5219 1780 0
0%

6276 1284 0
0%

6104 1336 0
0%

7684 1220 0
0%

7868 1057 1753

20%

7638 934 2271

20%

7439 983 2556

20%

7141 1124 2956

20%

5389 1282 3498

20%

4225 1461 6894

33%

3992 1663 7912

33%

3898 1891 9028

33%

Capital Expenditure Working Capital FCFE

Cost of Equity

10052 1602 (7600)

14.2%

6553 (977) (4349)

14.2%

9063 3985 (568)

14.2%

5485 1830 2766

14.2%

12312 8080 4977

14.2%

9494 4691 9581

14.2%

4975 1490 12369

14.2%

4408 2090 13785

14.2%

3997 1663 14217

14.2%

3549 2261 14760

14.2%

3677 3249 13511

14.2%

3807 3905 14871

14.2%

3940 4626 16501

14.2%

213753
14.2%

Discount Factor Time Discounted FCFE PV of FCFE Add: cash Sub: PV of provision Total PV No. of shares Target Price (FY14)

0 0 0 125,153 6,727 17,064 114,816 1064.7 108

0 0 0

0 0 0

1.0 0.0 2766

0.9 1.0 4359

0.8 2.0 7349

0.7 3.0 8309

0.6 4.0 8110

0.5 5.0 7325

0.5 6.0 6660

0.4 7.0 5339

0.3 8.0 5147

0.3 9.0 5002

0.3 9.0 64789

Source: Company data, Bloomberg, Nomura estimates

Fig. 9: Cost of equity

Cost of Equity Assum ptions

Fig. 10: Sensitivity of target price to terminal growth and cost of equity

Rd Beta Rm-Rf Re
Source: Bloomberg, Nomura estimates

7.5% 1.12 6.0% 14.2%

Terminal g 4% 5% 6% 7% 8% 12.2% 121 130 143 161 187

Cost of Equity 13.2% 14.2% 107 96 114 101 123 108 135 116 151 127

15.2% 87 91 96 102 110

16.2% 80 83 86 91 97

Source: Nomura estimates

Nomura | Dish TV India

July 1, 2013

Fig. 11: TP sensitivity to DTH market share in phases 3/4 of digitization and increase in CPE price/ year by Dish TV over FY14-16F
INR

Fig. 12: Target price sensitivity to churn rate and DTH market share in phases 3/4 of digitization
INR

Churn

CPE price increase 0 100 200 300 400 500

DTH market share in phase 3/4 20% 25% 30% 35% 91 98 105 111 92 99 106 113 94 101 115 108 95 102 109 116 96 103 111 118 97 104 112 119

40% 118 120 122 123 125 126

0.8% 0.9% 1.0% 1.1% 1.2%

DTH market share in phase 3/4 20% 25% 30% 35% 103 111 118 125 99 106 113 120 94 101 115 108 88 95 102 109 83 89 96 102

40% 132 127 122 116 109

Source: Nomura estimates

*Note we assume INR 400 increase in CPE price from FY17F subject to STB cost price as the upper limit Source: Nomura estimates

Fig. 13: EV/EBITDA trading multiple Stock trading is at ~ 28% discount to its 3 year average trading multiple of 13.8x
EV/EBITDA FY1 19 3 year average EV/EBITDA 1 stdev 1 stdev

Fig. 14: Zee vs. Dish TV EV/EBITDA trading multiple Dish is trading at a 44% discount to Zee vs. 3-year average discount of 6%
30 Premium/discount Dish Zee 80%

60%
17

25 40%

15

20
13

20%

11

15

0%

-20% 10 -40%

Source: FACTSET, Capitaline, Nomura research

5
Feb-11 Feb-12 Feb-10 Feb-13 Apr-11 Apr-10 Oct-10 Dec-10 Oct-11 Dec-11 Oct-12 Dec-09 Dec-12 Oct-09 Aug-09 Aug-10 Aug-11 Aug-12 Jun-10 Jun-11 Jun-12 Apr-13 Apr-12

-60%

Source: FACTSET, Capitaline, Nomura research

Fig. 15: The 10-year Indian government bond yield has declined by ~60bps YTD
8.0

Fig. 16: Dish TV Negative working capital cycle

Inventory Debtors Advances to vendors, distributors etc Income received in advances Trades Payable Advances/ deposits received Creditors for fixed assets Other creditors WC days
Source: Company, Nomura research

7.8

7.6

FY12 4 5 7 73 48 15 52 11 -181

FY13F 4 5 7 60 118 15 90 11 -277

FY14F 4 5 7 64 48 15 90 11 -211

FY15F 4 5 7 96 48 15 90 11 -242

7.4

7.2

7.0 Jan-13 Jan-13 Jan-13 Feb-13 Mar-13 Mar-13 Apr-13

Apr-13 May-13 May-13 May-13 Jun-13

Source: Bloomberg, Nomura research

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July 1, 2013

Impact on Dish TV of the depreciation of INR vs. USD

INR has depreciated by ~8.8% YTD vs. USD (from 55 to ~59.8) which, in our view, will likely have a limited adverse impact in the short term, but given Dishs market leadership position, we expect Dish to pass the price increase to consumers. We look at major FX components that could impact the company Dish TV has ~INR12bn of buyers credit in USD as companies receive a credit period of ~60 days from CPE suppliers. The depreciation of INR by ~8.8% could lead to additional cash outflow of INR1142mn (including interest) from the company which is ~1.7% of its current market cap. The company also has inventory of 1.6mn STB vs. our expectation of ~ 2.2mn gross subscriber additions in FY14F. Depreciation of INR vs. USD would mean an increase in the price of STB/CPE for DTH companies. As per news on Indiatelevision.com, DTH companies such as Tata Sky and cable operators such as Hathway and Den intend to increase STB prices at the consumer end to pass on the impact of the depreciation of INR. Hence, we see a marginal and only a short-term impact owing to depreciation of INR on Dish TV. Transponder lease cost which is ~7.6% of total cost is paid in USD (the company paid ~ INR1.2 bn in FY13). So, even if we assume a 5% growth and 8.8% INR depreciation, the PV of incremental cash flow till perpetuity would be INR1,205, on our estimates, which is ~1.9% of its market cap. Investment risks Delay in digitization: We assumed six months further delay in phases 3 and 4 of digitization. Any further delay in digitization would mean slower subscriber additions, which would result in a deviation from our estimates. A change in government regulation: The India media industry, which includes cable operators, broadcasters, DTH players, etc, is regulated by the government. Any change in government policies, such as tax rate and the import duty on STB can adversely impact our estimates. Competition: Aggressive strategy by a competitor Indias DTH industry has six players (excluding DD Direct), with Dish being the market leader, with a 29% market share. Currently, there are six DTH players and any aggressive strategy by a competitor to increase its market share can result in an increase in the churn rate. This would adversely impact our numbers. Depreciation of INR vs. USD: Dish imports STBs from Korea. If the depreciation of INR vs. USD sustains itself it would lead to increase in the cost of STBs. We assume that the company will pass on the increase in the cost of STBs due to the depreciation of INR vs. USD. So, our estimate might be adversely impacted if the company decides not to increase STB prices.

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Appendix A-1
Analyst Certification
We, Ankur Agarwal and Lalit Kumar, hereby certify (1) that the views expressed in this Research report accurately reflect our personal views about any or all of the subject securities or issuers referred to in this Research report, (2) no part of our compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this Research report and (3) no part of our compensation is tied to any specific investment banking transactions performed by Nomura Securities International, Inc., Nomura International plc or any other Nomura Group company.

Issuer Specific Regulatory Disclosures

The term "Nomura Group" used herein refers to Nomura Holdings, Inc. or any of its affiliates or subsidiaries, and may refer to one or more Nomura Group companies.

Materially mentioned issuers

Issuer Dish TV India Zee Entertainment Enterprise Ticker DITV IN Z IN Price INR 62 INR 247 Price date 01-Jul-2013 01-Jul-2013 Stock rating Sector rating Disclosures Buy Not rated Buy Not rated

Dish TV India (DITV IN)

Rating and target price chart (three year history)

INR 62 (01-Jul-2013) Buy (Sector rating: Not rated)

Date Rating Target price 03-Oct-12 Buy 03-Oct-12 107.00 14-May-12 Not Rated Closing price 81.40 81.40 55.70

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology Our 12-month target price of INR108 is based on a DCF valuation methodology. We have assumed 6% terminal growth, risk-free rate of 7.5% (10-year Indian government risk free bond), beta of 1.12 and market premium of 6%. Based on these numbers, we have taken cost of equity of 14.2%. Cash flows are discounted back to FY14F. Risks that may impede the achievement of the target price Delay in digitization: We assume six months further delay in phase 3 and 4 each of digitization. Any further delay in digitization would mean slower subscriber addition, which would result in a deviation from our estimates. Change in government regulation: the media industry, which includes cable operators, broadcasters and DTH players, is regulated by the government. Any change in government policies, such as tax rates and import duty on STB, could adversely affect our estimates. Competition: aggressive strategy by a competitor Indias DTH industry has six players (excluding DD Direct), with Dish the market leader at 29% market share. There are six DTH players, and any aggressive strategy by a competitor to increase its market share could result in an increase in churn rates. This would adversely affect our numbers. Depreciation of INR vs. USD: Dish imports STBs from Korea. The depreciation of INR vs. USD would increase the cost of STBs. We assume that the company will pass on the increase in the cost of STBs due to the depreciation of INR vs. USD. So, our estimate might be adversely impacted if the company decides not to increase STB prices.

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Zee Entertainment Enterprise (Z IN)

Rating and target price chart (three year history)

INR 247 (01-Jul-2013) Buy (Sector rating: Not rated)

Date Rating Target price 13-Jun-13 291.00 23-Jan-13 276.00 10-Jan-13 270.00 03-Oct-12 Buy 03-Oct-12 238.00 14-May-12 Not Rated 01-Mar-11 137.00 Closing price 216.70 234.65 225.80 194.65 194.65 122.45 120.80

For explanation of ratings refer to the stock rating keys located after chart(s)

Valuation Methodology We value the stock using discounted cash flow (DCF) as we believe the benefits from digitization will become more apparent in the medium term (FY15-FY16F). Our target price of INR291 is based on 12.41% cost of equity which implies a multiple of 15.7x FY15F EV/EBITDA (falls to 10.2x FY16F Ev/EBITDA), which is broadly in line with its four-year average trading multiple of 15x. Risks that may impede the achievement of the target price A weaker-than-expected recovery in ad-revenue growth poses a risk to our earnings estimates for ZEE; higher-than-anticipated competition in the Hindi GEC space; any deterioration in the ratings of ZEE's flagship channel Zee TV; or slower-than-anticipated ramp of digitization and an increase in ARPU.

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Important Disclosures
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The distribution of all ratings published by Nomura Global Equity Research is as follows: 43% have been assigned a Buy rating which, for purposes of mandatory disclosures, are classified as a Buy rating; 40% of companies with this rating are investment banking clients of the Nomura Group*. 46% have been assigned a Neutral rating which, for purposes of mandatory disclosures, is classified as a Hold rating; 48% of companies with this rating are investment banking clients of the Nomura Group*. 11% have been assigned a Reduce rating which, for purposes of mandatory disclosures, are classified as a Sell rating; 23% of companies with this rating are investment banking clients of the Nomura Group*. As at 31 March 2013. *The Nomura Group as defined in the Disclaimer section at the end of this report.

Explanation of Nomura's equity research rating system in Europe, Middle East and Africa, US and Latin America
The rating system is a relative system indicating expected performance against a specific benchmark identified for each individual stock. Analysts may also indicate absolute upside to target price defined as (fair value - current price)/current price, subject to limited management discretion. In most cases, the fair value will equal the analyst's assessment of the current intrinsic fair value of the stock using an appropriate valuation methodology such as discounted cash flow or multiple analysis, etc. STOCKS A rating of 'Buy', indicates that the analyst expects the stock to outperform the Benchmark over the next 12 months. A rating of 'Neutral', indicates that the analyst expects the stock to perform in line with the Benchmark over the next 12 months. A rating of 'Reduce', indicates that the analyst expects the stock to underperform the Benchmark over the next 12 months. A rating of 'Suspended', indicates that the rating, target price and estimates have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including, but not limited to, when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the company. Benchmarks are as follows: United States/Europe: please see valuation methodologies for explanations of relevant benchmarks for stocks, which can be accessed at: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia, unless otherwise stated in the valuation methodology. SECTORS A 'Bullish' stance, indicates that the analyst expects the sector to outperform the Benchmark during the next 12 months. A 'Neutral' stance, indicates that the analyst expects the sector to perform in line with the Benchmark during the next 12 months. A 'Bearish' stance, indicates that the analyst expects the sector to underperform the Benchmark during the next 12 months. Benchmarks are as follows: United States: S&P 500; Europe: Dow Jones STOXX 600; Global Emerging Markets (ex-Asia): MSCI Emerging Markets ex-Asia.

Explanation of Nomura's equity research rating system in Japan and Asia ex-Japan
STOCKS Stock recommendations are based on absolute valuation upside (downside), which is defined as (Target Price - Current Price) / Current Price, subject to limited management discretion. In most cases, the Target Price will equal the analyst's 12-month intrinsic valuation of the stock, based on an appropriate valuation methodology such as discounted cash flow, multiple analysis, etc. A 'Buy' recommendation indicates that potential upside is 15% or more. A 'Neutral' recommendation indicates that potential upside is less than 15% or downside is less than 5%. A 'Reduce' recommendation indicates that potential downside is 5% or more. A rating of 'Suspended' indicates that the rating and target price have been suspended temporarily to comply with applicable regulations and/or firm policies in certain circumstances including when Nomura is acting in an advisory capacity in a merger or strategic transaction involving the subject company. Securities and/or companies that are labelled as 'Not rated' or shown as 'No rating' are not in regular research coverage of the Nomura entity identified in the top banner. Investors should not expect continuing or additional information from Nomura relating to such securities and/or companies. SECTORS A 'Bullish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a positive absolute recommendation. A 'Neutral' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a neutral absolute recommendation. A 'Bearish' rating means most stocks in the sector have (or the weighted average recommendation of the stocks under coverage is) a negative absolute recommendation.

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Target Price
A Target Price, if discussed, reflects in part the analyst's estimates for the company's earnings. The achievement of any target price may be impeded by general market and macroeconomic trends, and by other risks related to the company or the market, and may not occur if the company's earnings differ from estimates.

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Nomura | Dish TV India Additional information is available upon request and disclosure information is available at the Nomura Disclosure web page: http://go.nomuranow.com/research/globalresearchportal/pages/disclosures/disclosures.aspx Copyright 2013 Nomura International (Hong Kong) Ltd. All rights reserved.

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