VDTH - Videocon

[misterkrusty]

first, check dish tv's depreciation schedule.  could be different from the 7 year depreciation for STBs that videocon uses.  second, videocon generally sells more expensive (higher quality) STBs than dish tv.  I think that 170 figure for dish tv is subscription revenue only, whereas videocon and the rest of them typically include some activation revenues in ARPU. 

 

TataSky probaably has the highest ARPU, then videocon, then airtel digital, then dish tv.

[Alex.N.B]

I believe VDTH just presented at the DB TMT conference in Palm Beach, just wondering if anyone had any insights from the conference?

 

Thanks!

A

[kab60]

They just announced a pretty substantial price increase of Rs. 20 or around 10 percent - http://ir.videocond2h.com/file/Index?KeyFile=33373868.

[lotus]

Is there any risk of cable providers dropping prices to compete with the shift to satellite? Surely, they won't go out of business without a fight. As I understand it, there is a minimal spread between satellite and cable costs due to the historical competition. Additionally, with the LCO market so fragmented, has that industry already competed prices down as far as they can go? Is there risk as satellite pricing grows that the market share shift will slow or is the regulatory tailwind enough to counter this?

 

Also, any risk from Facebook providing free Internet to everyone?

[misterkrusty]

I don't think the MSOs have much room at all to drop prices - look at their margins/ leverage/ returns on capital ... all terrible.

 

The LCOs are local monopolies, more or less, and they are "over-earning" vs MSOs and broadcasters - i.e. capturing more of each subscribers cable bill than they "deserve" based on value added.  This will change with digitalization but probably over many years.

 

I think the DTH players are behaving like a rational oligopoly at this point.  Certainly they weren't back around 2011, but the number of players has (for all intents and purposes) been whittled down from 6 to 4, each with their own spot along the pricing spectrum.  so while it's possible that price hikes slow growth, I don't think the players will hike prices so much that the increase in margin comes at the expense of overall NPV.  They've been hiking in-line with inflation (~6.5%) for several years now yet have still grown at a good pace. 

 

Note that the DTH guys have not hiked pricing on their lowest tier packages, given lower incomes in much of phase 3-4.  also note that the margins on low-end packs and high-end packs are basically the same.

 

Facebook's "free basics" was banned in India due to violation of net-neutrality.  Now they're talking about solar-powered drones with (frickin') laser beams.  We'll see.  Microsoft's Project Whitespace and Google's Project Loon have each run into problems with the gov't, and we still don't know if the technology will actually work on such a large scale.  Also - even if it does come to fruition, Project Loon internet won't be free, despite what some older articles have said.

[lotus]

Very good answers. And the lower margins / returns / financial flexibility of MSOs seem to highlight the competitiveness of the market and inability to lower prices. Also agree on the risk of free Internet point.

 

I guess my last question would be on capex levels. It seems most of capex comes from the Set Top Boxes. It also seems as though the digital cable industry is having a shortage of Set Top Boxes leading to higher market share gain from satellite (and up to 50% higher costs for digital cable boxes vs. satellite boxes).

 

My questions are:

1. Are digital cable set top boxes the same as satellite set top boxes?

2. Have the DTH companies been spending a disproportionate amount on capex (vs. digital cable companies) to have so many more set top boxes in the first place? If so, when can we expect capex and D&A to come down? What is the average life of a set top box (actual vs. their 7-year depreciation schedule)?

3. VDTH has 1mm in inventory vs. 11mm subscribers (with the growth in subscribers, is this enough inventory to prevent them from suffering the same shortage problems as the digital cable companies?)

[Against the crowd]

With Videocon....investors have to be careful about few things.

 

1) Do you trust their books and management presentations.

2) Do you trust that management's interest is in line with equity stake holders.

3) Do they have the management bandwidth to grow any business. In the past they have dabbled with consumer electronics, oil & gas, telecom, etc where they have not been very successful.

 

Living in India I have a hard time believing Videocon story for the above reasons and would not touch the common equity.

 

[lotus]

These risks are fair but are understood and more than accounted for in the valuation.

 

1. I trust that Sloan and Saganasky conducted sufficient diligence...and I trust everything they've put out since the acquisition. These are industry veterans with a track record of success so I have a high confidence in management.

 

2. Management has a pretty high insider ownership of 5% and a track record of generating results for investors. Yes, things appear to be in line here if not slightly better than most other companies out there .

 

3. Again I'll harp on mgmt's tremendous track record. The Videocon company that got involved in all those non-core activities is a separate company and has done terribly (this is a potential argument for why they pulled the Indian IPO of Videocon dh). This arguably puts more pressure on the Dhoot family to focus on core activities. Moreover, there are so many high IRR opportunities to invest organically in the dh business, that the Dhoot family would be crazy to divert assets elsewhere. Finally, Sloan and Saganasky have Board seats and only one member of the Board is from the Dhoot family. Also the relationship with this other, crappier, Videocon company provides a competitive advantage to the company in terms of reach and shelf space that competitors cannot match.

 

[misterkrusty]

no-  cable boxes and DTH boxes are different.  in fact, none of the DTH operators' boxes will work with any other operator.  might be true for cable as well - not sure.

 

DTH hasn't been trying harder than cable to get STBs.  the fact that they haven't faced shortages has to do with the fact that digital sub adds tend to spike for cable around deadlines for each phase of digitalization, whereas DTH adds are more stable over time.  I'm pretty sure VDTH has enough STBs - note that they are the only pay-TV provider in India that makes their own STBs and thus have easier time procuring additional boxes. 

 

we can expect capex to come down (as a % of EBITDA) as new sub additions naturally become a smaller % of the total active sub base over time.

 

I'm not sure what the avg life of an STB is, but I'm pretty sure that it's a lot longer than the 7-year depreciation schedule.  thus reported earnings are somewhat depressed by accelerated depreciation, but this defers taxes, so it's a good thing.

[misterkrusty]

Against the Crowd -  I appreciate your comments.  I've heard similar comments from other investors in India.  I agree with what Lotus said about mgmt and the board.  I'll add that I've spent many, many hours going over their numbers and comparing them to the other 5 DTH operators (there is actually a decent amount of info available on TataSky, Sun, and Airtel, FYI).  I haven't seen anything that looks fishy.  If anybody does see anything odd please let me know!

[lotus]

Edit: Solved the issue below....the difference did mostly come from the fiscal year-end. There is a very useful chart in the prospectus for anyone else interested in looking into the growth drivers.

 

Can someone help me with the difference between net subscribers and households. I believe it has to do with a combination of the company's March year-end and the high growth making things look weird. I just wanted to make sure I conceptually understand the waterfall below and that there isn't a weird dynamic where subscribers =/= households.

 

For example in 2013 the waterfall would have looked like this:

Indian HHs: 262mm

TV Penetration: 62%

Indian HHs with TV: 162mm

Pay-TV Penetration: 83%

Indian HHs with Pay-TV: 135mm

Digital Penetration: 45%

Indian HHs with Digital Pay TV: 61mm

Satellite Market Share of Digital: 60%

Indian HHs with Satellite Digital Pay TV: 36mm

VDTH Market Share: 14%

 

VDTH Calculated Subscribers: 5mm

VDTH Reported Subscribers: 6.7mm

 

Can someone help to explain the disconnect here? In more recent years, the difference is even greater which is making it difficult for me to pin down the growth drivers.

 

Sources: VDTH investor presentation, Dish TV India investor presentations, MPA Research 2014, World Bank

 

 

[misterkrusty]

lotus- you will drive yourself crazy trying to do analysis like that.  using 10 different variables to estimate the size of anything is tough ... you've got to get every single one of them right (with no rounding errors) or your answer is garbage.

 

that said, your numbers seem pretty close to my model.  I'm assuming you mean FY2013, not calendar 2013.  I've estimated 36.9M net DTH subs at the end of FY13 (did this using reported net subs from airtel, dish tv, and vdth as well as data from media articles about the other guys.  took me forever to get it right).  VDTH had 6.71M of this, or 18.2%.

 

Note that net subs here are calculated using a 120 day cutoff to calculate churn.  that is, once a sub goes 120 days without paying their bill, they are then no longer considered an active sub.  In India, it's very common for people to skip paying for a month because their kids are studying for exams, or to save money for something else, or due to power outages, etc.

 

TRAI started calculating net subs in FY14.  they do it on a zero-day basis - i.e. a sub is no longer counted the moment they fail to pay their bill.  Thus the total net subs reported by all DTH providers is about 10-11% higher than the TRAI number.

[winjitsu]

For those invested -- what are your thoughts on the currency risk? Are you guys hedging?

[winjitsu]

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?

 

1) Cable and satellite cos tend to evolve into highly profitable oligopolies, assuming rational players. You could argue the moat is economies of scale. Larger -> more negotiation power with content providers -> lower costs (Read Cable Cowboy on Malone). But at the end of the day, using the US example, Dish, DirectTV, Comcast, etc. all make money on solid ROICs because they are rational oligopolistic players. That's what makes this industry great.

 

And access to content does matter -- for example the AT&T and DirecTV merger was contingent on DirecTV renewing NFL Sunday Ticket.

 

2) Cable works well with high population densities since a majority of the cost is the initial capex in digging the hole and laying fiber optics. Satellite doesn't need to build out infrastructure, instead their money is spent on very expensive satellites. Satellites are geosynchronous, meaning they basically the entire country is covered with the satellite signal, and all you need is the receiver and decoder card to watch. So anyone, anywhere can receive the signal (including rural areas), while cable co's have to slowly build out their infrastructure.

 

[kab60]

For those invested -- what are your thoughts on the currency risk? Are you guys hedging?

I'm not. I try to invest in stuff with pretty big upside (duh!) when I invest abroad so as to make up for the currency risk. But I try not to put all (my few) eggs in one currency basket.

[misterkrusty]

Airtel Digital was the first company in the entire Indian pay-TV sector to report March-qtr results (on wed).  Gross and net adds were the highest of any quarter in the past 5 years.  Churn down yoy from 1.00% to 0.80%.

 

this would seem to confirm an earlier news article that quoted a "senior official" within VDTH as saying they did 1.7m net sub adds for FY16 (ends March).  The 1.7m figure implies a similarly big 4q16 for VDTH.

 

... and of course the shares traded down

[kab60]

Airtel Digital was the first company in the entire Indian pay-TV sector to report March-qtr results (on wed).  Gross and net adds were the highest of any quarter in the past 5 years.  Churn down yoy from 1.00% to 0.80%.

 

this would seem to confirm an earlier news article that quoted a "senior official" within VDTH as saying they did 1.7m net sub adds for FY16 (ends March).  The 1.7m figure implies a similarly big 4q16 for VDTH.

 

... and of course the shares traded down

So you get another shot at adding--thanks for the info.

[winjitsu]

Apparently Coho (whose thesis on VDTH was posted earlier) sold out with the following rationale. Just food for thought:

 

We wrote about Videocon in our 2015 June letter and anticipated holding shares for years to come due to Videocon’s attractive position in India’s high growth satellite television industry. Two things became apparent to us in relatively short order with Videocon; one, management was too promotional for our tastes and two, the economics of the Indian satellite television business were not nearly as attractive as we had envisioned. For example, while we thought average revenue per user (ARPUs) would trend higher over time due to consolidation, we realized that pervasive piracy in India was likely to keep pricing sub-optimal for some time to come. We lost 22% in six months on our position.

 

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

[rkluwer]

Strange reasoning.

 

Manangement from what i see and hear, are very positive in describing the future and opportunities thats infront of videocon. if u call that to promotional - hmmm... ill rather have that, then a manangement board that gives no color and direction for the future. I think manangement have done a lot for the IR side and the biz and seeing good growths as forecast. regarding ARPU, i think the piracy claim on prices is also addressed in the Q3 transcript, where it is said, that a big part of the indian entertainment world is doing this, but that this should decrease with the new content and offerings going fwd. I think we saw the same thing here in the western world, where we were heavy users of piracy content, but from where i sit, i can see that this has died completely, and i think the same will happen over time. Not tom, but over time. So the thesis is just starting to play out, so funny views to make them bail ship. but might explain some of the strange pressure we have seen on the stock.

 

The keep on delivering on the numbers and Airtel's report shown great growth in Q4 and increasing EBIT and ebitda margin. i will expect the same for Videocon and think that Q4 will be the best quarter to date from them, regarding subs added, due to the T-20 cricket championship. And this might also be the first quarter the turn cash flow positive......

 

The let the thesis play out for 6 months, ill call that more a spec bet, then a long-term view on a growth company thats delivering..

[kab60]

Apparently Coho (whose thesis on VDTH was posted earlier) sold out with the following rationale. Just food for thought:

 

We wrote about Videocon in our 2015 June letter and anticipated holding shares for years to come due to Videocon’s attractive position in India’s high growth satellite television industry. Two things became apparent to us in relatively short order with Videocon; one, management was too promotional for our tastes and two, the economics of the Indian satellite television business were not nearly as attractive as we had envisioned. For example, while we thought average revenue per user (ARPUs) would trend higher over time due to consolidation, we realized that pervasive piracy in India was likely to keep pricing sub-optimal for some time to come. We lost 22% in six months on our position.

 

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

Thanks, much appreciated. I haven't met or talked with management, but it's quiet interesting that they're called promotional - I can't even find the dates of their earnings releases on their website. I have it trading around 8xEV/Ebitda with massive growth on top, so I'll take a flier on ARPU as well as piracy. Not really concerned about piracy - just as I'm not really concerned about streamning - as broadband quality and penetration apparently still is shit in most of India. We'll see.

[misterkrusty]

I know Jake and I don't think his reasons for selling are surprisingly weak for a man of his intelligence.  piracy just doesn't seem like that big a deal.  i can post some articles if anyone cares.  by far, the biggest factor holding back pricing is the bifurcation of the cable industry, where the last-mile operators currently take an egregious share of the economics (vs the MSOs) and are thus reluctant to work with the MSOs on customer segmentation that will allow them to charge higher prices to the customers who can afford it.  this will change with digitalization, but perhaps not quickly.

 

secondly, I don't think mgmt is overly promotional.  the worst thing i can point to is that they reiterated guidance for 8.2-8.6b ebitda in fy16 after they knew that the govt's new taxes might cause them to miss that target.  if anyone else can point to an example where they've stretched the truth, I would appreciate hearing it

 

 

[muscleman]

Apparently Coho (whose thesis on VDTH was posted earlier) sold out with the following rationale. Just food for thought:

 

We wrote about Videocon in our 2015 June letter and anticipated holding shares for years to come due to Videocon’s attractive position in India’s high growth satellite television industry. Two things became apparent to us in relatively short order with Videocon; one, management was too promotional for our tastes and two, the economics of the Indian satellite television business were not nearly as attractive as we had envisioned. For example, while we thought average revenue per user (ARPUs) would trend higher over time due to consolidation, we realized that pervasive piracy in India was likely to keep pricing sub-optimal for some time to come. We lost 22% in six months on our position.

 

I owned VDTH but sold briefly because I see inconsistency in the market share data from VDTH and Dish TV India. Another board member and I looked into it further and it seems like it may be caused by reporting active users vs churned out but still coming back from time to time type of users. I still felt uncomfortable with the data.

Another reason is because EV/EBITDA should not be used for this business. It is unlike cable cos. The business here is not real estate like, so we need to look at P/E. There will likely be an E in the future but not now. I found it hard to predict the E.

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

Thanks, much appreciated. I haven't met or talked with management, but it's quiet interesting that they're called promotional - I can't even find the dates of their earnings releases on their website. I have it trading around 8xEV/Ebitda with massive growth on top, so I'll take a flier on ARPU as well as piracy. Not really concerned about piracy - just as I'm not really concerned about streamning - as broadband quality and penetration apparently still is shit in most of India. We'll see.

[muscleman]

Strange reasoning.

 

Manangement from what i see and hear, are very positive in describing the future and opportunities thats infront of videocon. if u call that to promotional - hmmm... ill rather have that, then a manangement board that gives no color and direction for the future. I think manangement have done a lot for the IR side and the biz and seeing good growths as forecast. regarding ARPU, i think the piracy claim on prices is also addressed in the Q3 transcript, where it is said, that a big part of the indian entertainment world is doing this, but that this should decrease with the new content and offerings going fwd. I think we saw the same thing here in the western world, where we were heavy users of piracy content, but from where i sit, i can see that this has died completely, and i think the same will happen over time. Not tom, but over time. So the thesis is just starting to play out, so funny views to make them bail ship. but might explain some of the strange pressure we have seen on the stock.

 

The keep on delivering on the numbers and Airtel's report shown great growth in Q4 and increasing EBIT and ebitda margin. i will expect the same for Videocon and think that Q4 will be the best quarter to date from them, regarding subs added, due to the T-20 cricket championship. And this might also be the first quarter the turn cash flow positive......

 

The let the thesis play out for 6 months, ill call that more a spec bet, then a long-term view on a growth company thats delivering..

 

Coho may not be telling the truth when they stated the reasons.

I emailed them in January when I found the discrepancy in the market share data and they never responded to me. Now they sold. Maybe they were unable to figure out the market share data discrepancy and became very concerned about possible frauds and sold.

[misterkrusty]

muscleman, i appreciate your comments.

 

highly doubt there is any fraud in VDTH sub data.  the discrepancy on net subs is due to the fact that they have a 120 cutoff in calculating churn.  every operator does this, and 120 days is the avg amount.  In India it is common for subs to skip one or two monthly payments each year for various reasons - e.g. the power grid is unreliable at times so why pay for something you can't use?  or maybe the kids are studying for exams.  At any given time, about 10-15% of net subs didn't pay for the current month

 

In reporting to the government (ie TRAI), the numbers are calculated on a "zero day" basis, meaning they exclude anyone who didn't pay for the current month.  thus this number is always lower.

 

because only 3 of the 6 providers are public, it can be difficult to calculate total net subs for the industry (on a reported to investors basis, not TRAI numbers) and thus it's difficult to verify market share claims.  If you're crazy like me, you could search news articles for days on end trying to get the numbers for the 3 non-public providers.  i'll save you some time: VDTH's market share claims are about right - any discrepancies I found were basically rounding errors.  by the way, lots of people cite MPA (media partners asia) for sub data, but i've found lots of errors there.  don't rely on MPA

 

also keep in mind that providers often don't specify gross vs net vs TRAI when making their claims.  the weaker guys like Reliance typically use gross numbers to make themselves look better.

[misterkrusty]

regarding EBITDA:  first, let me acknowledge that EBITDA is not always the best metric.  it's just easy to calculate.

 

muscleman: i don't believe either cable or DTH are "real estate like"  for both, the cost of set-top boxes are something like 95% of capex, and thus of depreciation.  so you calculate capex per gross subs added, then depreciate that over 7 years for each cohort of subs to estimate depreciation.  or just use Rs 550/sub for all subs which seems close enough

 

I like to look at steady-state FCF, which I define as FCF assuming the company spends just enough capex to keep the sub count flat.  to me, this is even more relevant than earnings, since the avg useful life of a STB is longer than 7 years and thus depreciation will be greater than maintenance capex for a while due to the growth.  long story short, I think that steady-state FCF should soon be about half of EBITDA, starting around this FY or next.