Saturday, September 8, 2012


SD-DVR innovation, aggressive ad spends driving growth
Dish TV’s newly launched SD-DVR in Phase 1 and 2 areas of digitisation (42 cities) has met with an impressive response so far due to its ability to record unlimited SD content at a lower price than rival HD-DVRs (INR1,690 versus ~INR6,000). We do not expect other DTH companies and MSOs to launch an SD recorder in the near term, which will give Dish TV an advantage to target Phase 1 and 2 subscribers. The company has hiked ads in major newspapers in Phase 1 areas and also restarted ads on TV channels. In spite of the increase in ad expense in Q2FY13, management reiterated that the company will not exceed its ad budget and things are moving as per plan. 

Operational metrics on track
The free cash generation remains on track and no fund raising will be required for Phase 1. The company added ~0.5mn gross subscribers in Q1FY13 (0.41mn in Q4FY12), taking total gross subscriber base to 13.4mn and net subscriber base to 9.8mn. Churn rate continues to remain at ~1%. ARPUs will continue to increase in the near term from the current INR156 due to price hikes and higher HD penetration.

Outlook and valuations: Positive; maintain ‘BUY’
We expect Dish TV to benefit during the digitisation process due to its huge brand and limited ability of smaller MSOs to switch to the digital platform. At CMP of INR66, the stock is trading at EV/EBITDA of 12.1x and 8.8x FY13E and FY14E, respectively. We maintain ‘BUY’ and assign ‘Sector Performer’ rating to the stock.

To read report in detail: DISH TV

>Bharti Remains a Buy on 3 Key Reasons

I. Business trends should improve longer-term
We remain confident on the outlook for the Indian telecom sector longer-term with the heavy spectrum outgo for 2G likely to temper competitive intensity. While the staggering of spectrum payments will help blunt the blow, the outgo will still be substantial, translating into much more rational behavior by most operators. 

The operating leverage from the resultant uptick in rev/min (either through reduced discounting or absolute hike) will benefit everyone. Bharti, being the largest operator with the strongest balance sheet, is most leveraged to this trend. A 1p increase in rev/min results in ~6% wireless EBITDA and 3% consolidated EBITDA upgrade. It also results in a 6% increase (Rs20/sh) in Bharti’s fair value.

II. Material earnings downside unlikely but priced in
The required run rate to meet street expectations on financials now appears in line with recent operating trends. However the stock price seems to imply a further deterioration. We believe this reduces the probability of any major disappointment on earnings hereon.

We believe the current intensity in competition (largely led by incumbents) will continue for some time and put pressure on rev/min in the near-term. However, we also believe that: i) the declining trend is unlikely to be a prolonged one and will (eventually) reverse in the long run; and ii) a large part of this near-term pain appears largely factored in the estimates though we would stop short of calling this a bottom – in case the current phase is prolonged beyond our expectations (low probability, in our view).

III. Multi-year low valuations and declining ownership provide downside support
Moderate expectations combined with the sharp underperformance (43% YTD), multi-year low valuations (1.7 std dev below mean on EV/EBITDA) and falling ownership levels (institutional ownership is down 400bps from Dec-08 till Jun-12) provide downside support. That said, we do believe that near-term stock performance will remain subdued until evidence of underlying business (and profitability) stabilization.

To read report in detail: BHARTI AIRTEL

>Talwalkars Better Value Fitness

Industry in a sweet spot: Fitness and slimming market is Rs40bn industry and is set to grow by 18.9% to Rs80bn over 3 years with fitness services such as gymnasium comprising 50% of this market (Rs20bn). It is an under-penetrated market with less than 5% penetration of the urban population. Key growth drivers being i) increasing young population ii) booming middle class with growing discretionary spends iii) growing number of lifestyle diseases and iv) increasing realization of a need for healthy lifestyles.

Market leader with aggressive expansion plan: TBVFL holds the highest market share (~8-10%) and is the market leader in the organized health club market in India which is highly fragmented. TBVF has aggressive expansion plans over the next 3 years with gym counts increasing by 2.2x over FY12-15E. From the current 128 gyms we expect the count to go up to 281 gyms by FY15E. The share of owned gyms is expected to fall from 70% in FY12 to 50% in FY15E. We expect the company to add 53 owned gyms over 3 years compared to 100 gyms under the subsidiary and franchisee models. This envisages a capital outlay of Rs2.4bn over 3 years.

Low capex and high RoI business model: For Tier-II and Tier-III towns the company plans to expand through the franchisee format and have the benefits of zero capex, faster rollouts, wider customer base along with revenue share & one time royalty income. Under the subsidiary model the company will operate
through the Talwalkars brand and own 51% stake. It would also have an option to buy back the subsidiary health club at any point of time @ 3.5x EV/EBITDA multiple. These business models have helped the company minimize its capex requirement and increase RoCE and RoI.

Focus on increasing same store sales growth: TBVF is increasing its focus on optimizing its product offerings by introducing new services to leverage current asset base and the existing customer portfolio. Services such as spa, personal trainer, aerobics, ZUMBA® and Reduce, are gaining precedence and currently garner 29% of the revenues. New services have been launched to cater to the 16-30-year age group and for those over 50 years.

Robust financials: Net sales will have a CAGR of 32.8% over FY12-15E to Rs2801mn while operating profit will become 2.3x by FY15E to Rs1239mn. Net profit is set to grow at a CAGR of 38% over FY12-15E to Rs578mn in FY15E. RoCE is expected to increase from 10.5% in FY12 to 15.5% in FY15E while RoE would grow from 16.1% in FY12 to 25.2% in FY15E as 65% of gyms added each year will be either in the HiFi format or subsidiaries. TBVF is expected to turn free cash positive from FY14E on the back of strong cash flow from operations on back of negative working capital and with lower capex requirement under the subsidiary and HiFi models.

Valuations: Global fitness companies are trading at an average of 16x CY12E and 13.5x CY13E while Indian retail companies are trading at significant premiums. TBVF is currently trading at 11.6x FY13E and 8.1x FY14E EPS of Rs12.8 and Rs18.3 respectively. We expect the stock to re-rate from current levels and hence value the stock at 12x FY14E (10% discount to international peers) and arrive at a target price of Rs219 (47% upside from current levels).   

Key risks: i) Increasing competition with low entry barrier; ii) Seasonality in business; and iii) Significant investment plans to setup a recreation club could impact financials in near term.

To read report in detail: TBVF