VDTH - Videocon

[oplia]

Starting this thread on Videocon. It's a Sat TV company and one of the biggest pay TV operators in India (listed on NASDAQ).

 

Thesis in a nutshell:

Indian pay TV market appears to be least penetrated and fastest growing in the world. Videocon in turn appears to be the fastest growing company within this market.

Upcoming regulatory change (analog to digital shift) is expected to give signiicant boost to subscriber growth.

The company trades at 6x-7x next year's EBITDA, while growing at 40%-50% annually. I consider this to be very cheap.

Multiple tailwinds from subscriber growth, ARPU growth, industry consolidation and etc.

Currently the company is selling at all time lows.

 

More detailed story can be found on VIC.

 

Wondering if anyone has looked at this?

[kab60]

Here are my rough notes:

 

Videocon d2h ADR @ 8,16 USD (27-12-2015)

 

Valuation: Marketcap: 802m (excluding milestone payments in stock), net debt: 16.000m INR = 242m USD, EV = 1044m USD

 

Q2FY16 ADJ EBITDA: 1.912m INR = 29m USD, FY2016E = 120m USD

 

EV/EBITDA: 1044m / 120m = 8,7

 

Plus: Massive operating leverage, +30 percent EBITDA growth, growth due to volume and growth in ARPU, taking market share, penetration and pricing still low, long growth runway

 

Notes: According to management (Q2 CC) earnings should rise even more in H2 2016 because renegotiated content agreements put a small damper on EBITDA-margins in H1. According to management (Q2 CC) H2 started out very well so Q3 might include a positive surprise.

[kab60]

Greenhaven Road (I love his letters) also did a writeup: http://static1.squarespace.com/static/5498841ce4b0311b8ddc012b/t/563611eae4b01da6f9432354/1446384106163/Greenhaven+Q3+2015+Final.pdf (it's on the last pages)

[KJP]

You're not going to get dividends, so you're relying on minority shareholders getting a fair share of gains from this business.  Do you have any insight into how the Dhoots have treated minority shareholders in the past?

[kab60]

Q3 out:

Subscription and activation revenue grew 26.0% year on year to INR 6.65 billion

Adjusted EBITDA(1) grew 42.2% year on year to INR 2.01 billion

Gross subscriber base stands at 14.95 million and net subscriber base at 11.27 million

[kab60]

Just a small update; I thought the results were very good.

 

Gross and net subscribers increased by 0.67 million and 0.43 million subscribers during the quarter (up y/o/y and q/o/q), while churn was down to 0,73 per month.

 

I think the valuation is pretty crazy (as in cheap) for the #2 out of #6 satellite TV companies in India taking market share. They're gaining on volume, they're gaining on pricing, the runway for double digit growth is very long, and this is an extremely lucrative business model as witnessed in other places of the world, but here you also have a tailwind from an economy growing double digit and very low tv penetration.

 

I'm not sure how Dhoot treats minority shareholders, so that - along with only(?) one satellite - are probably the risks. As for the first I'm comforted by the fact that two proven US media execs are on the board and with a significant ownership stake, and that most of the board members will soon be independent. I'm also glad that the CEO is a young member of the Dhoot family educated in London (I believe) and not the old gang. Anyone who have more knowledge of Dhoot please do tell. As for one satellite, I really have no idea if that's an issue or if competitors usually have a backup in case something bad happens (I don't suppose satellites crash too often?).

 

 

[AzCactus]

If I'm not mistaken CoHo Capital has a stake in this company.  Not sure though. 

[intothebreach]

Thanks for the info on Coho. Here's the write-up:

 

http://www.valuewalk.com/2015/08/coho-capital/

[misterkrusty]

oplia - you beat me to posting this one.  this stock is extremely cheap, and I think victim to some forced selling as this was a "hedge-fund hotel" and y'all know what a curse that's been lately.  Certainly, the selloff is not due to fundamentals, which have been great.  Since the IPO, VDTH is down 45%, which peer Dish TV India is up ~11% and trades at much higher multiples despite lower subscriber additions.  VDTH will eventually dual-list in India - perhaps that could help to close the gap?

 

I estimate ROEs in the high 30% range just a couple years out.  that's simply assuming that VDTH just continues adding subs at similar rate to the past four years or so, and flat ARPU (adjusted for inflation).  In the long-run, there is potential to increase prices quite a bit as pay TV in India is dirt cheap ... a plain-vanilla standard definition 250-channel satellite TV package costs like $3 bucks a month.  In Malaysia, for example, it's $20.

 

Also, this sector will almost certainly consolidate.  You just don't see mature markets with 6 DTH (aka satellite TV) providers.  It'll go to 2 eventually.  I've heard the Chairman say he would expect at least 5% EBITDA margin accretion from a merger. 

 

As for the Dhoots, the bad news is that their flagship conglomerate Videocon Industries has been a disaster for shareholders, as it veered off into offshore oil exploration in the last decade, forcing them to lever up and stop paying dividends.  VDTH is very conscious of investor concerns about this, hence the 8 person board has only 1 family member (the Chairman), there are no cross-holdings, etc.  Frankly, they would be crazy to divert cashflows from VDTH to anything else, as they have a long runway of high-IRR opportunities in simply picking up analog cable subs as they are forced by the gov't to go digital.  The competition (cable) is at a disadvantage as their balance sheets are weak just as digitaliztion requires them to make large new investments they can't afford. 

[Guest Schwab711]

What effect can currency volatility have? Would it be better if the currency appreciated or depreciated?

[kab60]

What effect can currency volatility have? Would it be better if the currency appreciated or depreciated?

It's an ADR so a stronger rupee and a weaker dollar is a plus.

 

Markets have really puked this out, but I haven't really been able to find a good reason why. EBITDA might come in a tiny bit below FY guidance because of some small increases in Indian taxes, but I haven't seen anything but short term noise. My spreadsheet has it trading at 6,7xEV/EBITDA and leverage @ 2xEBITDA. They should turn FCF positive in the next couple of quarters and according to the recent QQ it seems like January started out on a high note even though the digitalization seems like it'll be lumpy.

[doughishere]

How did US companies fair during the switch from analog to digital? What did the comps look like at the beginning and after the switch?

 

Who are their competitors in the switch over? Are they doing it better?

[KJP]

For those interested, the comments to the Videocon writeup on VIC now include some discussion of the Dhoots' history and how that relates to VDTH.  I don't have access to the full discussion, but didn't see anything too concerning in what was accessible to me.

[muscleman]

A few newbie questions.

1. What's the competitive advantage of VideoCon vs DISH India? If the only competitve advantage is the number of channels offered, as stated in CoHo capital's letter, then it is not a strong moat.

2. What's the competitive advantage of satellite broadcasters vs cable cos? I understand that cable cos can offer internet and TV bundles, but can satellite broadcasters offer internet? It seems to me that cable cos have the advantage but why does satellite broadcasters and cable cos still co-exist today even in the US?

[indirect]

For me VDTH is a no go.

 

1. Is the management as good as Tata in the same business? By history of Dhoots and watching few CNBC interviews my answer is not 

 

2. Is the fiduciary gene there? Not sure but definitely not at the level of Tata.

[muscleman]

For me VDTH is a no go.

 

1. Is the management as good as Tata in the same business? By history of Dhoots and watching few CNBC interviews my answer is not 

 

2. Is the fiduciary gene there? Not sure but definitely not at the level of Tata.

 

Can you please provide a bit more details?

 

I looked through their 20-F and found a few things making me uncomfortable.

1. The satellite is leased. The lease expired in May 2015. What happened later? I can't find anything. But I guess any competitor can lease the same satellite if they pay more.

2. They have defaulted on certain bank loan payments in 2015 and before. This does not make me feel comfortable. The operations may not be as good as Coho capital described.

3. I can't figure out the moat here, especially when the satellite is leased.

 

 

[misterkrusty]

doughishere-  I'm not sure how companies in the US fared during the switchover to digital, but keep in mind that the cable sector in the US was already fairly concentrated by then, and I'm pretty sure everyone had the financial resources to upgrade their infrastructure.  In contrast, the cable sector in India is much less concentrated and there are literally thousands of tiny cable companies that serve the more rural areas that likely will not be able to make the requisite upgrades, which should allow DTH providers to poach their analog subs, especially in phase 4 (the final phase of digitalization covering the most rural areas, which contain over 50 million analog cable subs out of a pay TV market of roughly 50 million).  granted many of these will be lower ARPU subs, but the gross margins on the cheaper packages are at least as good due to lower content costs (i.e. fewer channels)

[misterkrusty]

muscleman-  regarding videocon vs dish tv india, advantages are:

 

- better distribution network (they can leverage the 200k+ stores that sell videocon industries' TVs, etc. 

- in-house installation and repair team, leading to quicker install/repair times.  this is unique among DTH operators

- domestic STB (set top box) manufacturing (thru videocon industries), allowing for lower STB costs and better availability (again, unique among DTH operators)

- better demographics.  the positioning of the four main DTH players is as follows, from high-end to low-end: TataSky, Videocon, Airtel Digital, Dish TV India.  Dish tv has the most rural sub base and thus lower ARPUs.  In the early stages of industrialization, the majority of gains in wealth flow to the more urban populations.  Dish TV has suffered more from subs switching to lower tier packages as DTH operators implement their (typically) bi-annual price increases.

 

regarding DTH vs cable, DTH is much, much better positioned.  The cable sector in India suffers from a two-tier structure where the MSOs cover the headend/satellite/programming/STB procurement portion and the LCOs (local cable operators) maintain the last-mile infrastructure.  the LCOs routinely under-report the actual sub numbers (to evade taxes) and pass on a crappy % of the money collected from subs to the MSOs.  The MSOs don't even know exactly how many analog subs they have, only how many STBs they've sold to the LCOs, who turn around and sell them to the end customers.  Digitalization is supposed to change all this, but the benefits have been slow in coming to the MSOs.  Meanwhile, the MSOs have all stretched their balance sheets to supply digital STBs in advance of digitalization. 

 

I encourage you to look at debt/ebitda and interest coverage ratios for the big MSOs (siticable, den networks, hathway).  they're terrible, as are the profitability metrics.  Videocon should be earning an ROE over 30% soon.  Dish TV might be there already (can't remember).  Meanwhile, the MSOs are earning low single digit returns on capital.

 

Yes, the MSOs have broadband, and its a good business for them, but its expensive to roll out and very expensive for the subscribers.  thus broadband penetration in India is in the mid/high single digits.

[misterkrusty]

muscleman-  every DTH operator in India leases their satellites.  (I believe this is typically the case in most countries as well.)  They currently are leasing ST-2, which is a fairly new satellite operated by SingTel.  It's difficult for companies in India to get satellite capacity due to government red-tape, and other operators sometimes have older, crappier satellites, e.g. TataSky, which is spending tons of capex to upgrade all their subs to MPEG4 STBs in order to overcome the capacity limitations of their satellite (Videocon's subs have been on MPEG4 STBs from the beginning, in addition to having a better satellite.)

 

Like most every DTH operator, Videocon found its balance sheet stretched by a subscriber landgrab that took place around fall 2012 thru fall 2013.  The IPO fully addressed all debt issues.  Today their net debt/TTM ebitda is around 2x and should rapidly decline from there.

[misterkrusty]

KJP/indirect-  regarding the Dhoots, here's the discussion from VIC:

 

mpk391:

the Dhoot family mothership - Videocon Industries - has been a disaster for shareholders.  the guy in charge there - Venugopal Dhoot (uncle of VDTH chairman) - took a decades-old consumer electronics company and steered it into offshore oil exploration and other ventures.  needing vast amounts of cash for this, he cut the dividend and levered up massively.  Supposedly they did find a lot of oil, but it will be years before any of it reaches the market due to lack of infrastructure, so the stock is the ultimate "show me" story.

 

VDTH actually filed to go public in India but withdrew their application.  maybe the price talk was coming in low because local investors feared a repeat of the above.  Just my speculation.

 

With a US listing and the Silver Eagle guys on the board (plus in the stock) there are presumably more safeguards in place for minority investors.  I say "presumably" only because I don't know what they'd be with an India listing.  I do think the current safeguards are good (e.g. only one Dhoot family member on the Board, no cross-holdings, etc.).  Talking to mgmt, they're very sensitive to this issue.

 

In any case, VDTH should be able to reinvest in its own business for years to come at a high IRR.  No reason to veer off-course, even if they could.

 

gophar571:

We spent considerable time and money hiring an outside reputable consultant and accounting firm who spent several months doing investigative work and produced a 100 page report for us on all ethical and integrity issues at the company and with the Dhoots specifically, and, frankly, came back with basically nothing.

[muscleman]

http://www.broadcastandcablesat.co.in/digitization-of-cable-tv-systems.html

 

A must read for anyone interested in India cable and DTH industries.

[muscleman]

muscleman-  every DTH operator in India leases their satellites.  (I believe this is typically the case in most countries as well.)  They currently are leasing ST-2, which is a fairly new satellite operated by SingTel.  It's difficult for companies in India to get satellite capacity due to government red-tape, and other operators sometimes have older, crappier satellites, e.g. TataSky, which is spending tons of capex to upgrade all their subs to MPEG4 STBs in order to overcome the capacity limitations of their satellite (Videocon's subs have been on MPEG4 STBs from the beginning, in addition to having a better satellite.)

 

Like most every DTH operator, Videocon found its balance sheet stretched by a subscriber landgrab that took place around fall 2012 thru fall 2013.  The IPO fully addressed all debt issues.  Today their net debt/TTM ebitda is around 2x and should rapidly decline from there.

 

I looked at most of their SEC filings, but there is no cash flow reports other than the 20-F. I am surprised that they don't give out quarterly cash flow statements.

Regarding the IRR: I think it is high but don't know exactly how high it is. They set the depreciation of their primary asset(Consumer premise equipment) to be 7 years straight line. They are growing fast AND their adjusted EBITDA - capex is turning black in just 3 years, so that likely tells us that IRR is high.

 

I think the primary risks here are corporate governance and accounting fraud.

[muscleman]

Does anyone know why there is a big discrepancy between net subscribers of 11 million and gross subscribers of 14.9 million?

I found a message on VIC explaning what is net sub vs gross sub "net subs added are gross subs added less those who churned out in the period. "

http://www.valueinvestorsclub.com/idea/VIDEOCON_D2H_LTD__-ADR/136577#messages

 

However, if the churn rate is only 0.7%, how can the net sub vs gross sub have such a big discrepancy?  ::)

[usdtor05]

gross is anyone ever that got a box. they dont take the boxes back. churn is .7%/month so over 5 years it adds up.

[muscleman]

I am comparing the financials with Dish TV India.

http://www.dishtv.in/App_Documents/Reports/Earnings-Release-for-the-Quarter-Ended-December-31-2015.pdf

 

Dish TV India's Depreciation is 18% of revenue while Videocon's is 20%. Videocon's APRU is 211 INR while Dish TV IN's APRU is 170.

So Videocon's making consumer premise devices in-house and has a much higher APRU. How come the Depreciation/Revenue ratio is higher than Dish TV India?

 

Does anyone know?

 

Also Dish TV's per quarter financing cost is over 500 million. Its debt is only 5.6 bn so how can the financial expense be so high?

 

I am trying to compare all the india DTH companies right now to see if there is any financial gimmicks with VDTH.

My biggest fear is that they fake everything including cash in their bank account, like the US listed Chinese reverse mergers back in 2011 (CCME, PUDA and a few others).