Dish TV’s short-term bank facilities downgraded by CARE

MUMBAI: Credit rating agency CARE Ratings has downgraded direct to home (DTH) operator Dish TV’s short-term bank facilities worth Rs 850 crore due to the weakening credit profile of the company at a consolidated level. The ratings for short-term bank facilities have been downgraded from A3+ to A4+.

CARE stated that the financial profile stands weak on account of stretched liquidity position due to sizeable debt repayments in the near term and the company would continue to remain in the investment mode.

In addition, impairment on goodwill as of 31st March 2019 has resulted in a decline in reported net-worth. The rating factors the declining operational metric derived from meagre gross addition to the subscriber base and average revenue per user (ARPU) during Q2FY20.

The rating also factors in a further significant decline in the market capitalisation of the company and the high level of pledging of the promoter holding. As of 30th September 2019, amongst the total promoter holding of 55.27% in DTIL, 94.60% has been pledged.

The ratings assigned to bank facilities of Dish TV continue to take into account substantial provision made by the company towards license fee costs, which upon materialisation would necessitate incremental debt funding, under the current scenario of reduced financial flexibility of Zee group.

Furthermore, the ratings also take into account currency risk associated with the procurement of Consumer Premise Equipment’s (CPE) and the increasing competition faced both from peers and allied technology platforms.

The ratings, however, continue to derive strength from experienced management and DTIL’s leadership position in the Direct-to-Home (DTH) industry with net subscriber base of 23.94 million as of 30th September 2019 translating to a market share of about 35%.

DTIL’s overall credit profile has deteriorated on account of large repayments towards bank obligations and fund requirements for the purchase of CPE’s. The consolidated debt stood around Rs. 2558.65 crore as on 30th September 2019 (Rs. 2808.61 crore as on 31st March 2019).

For H2 FY20, the company has to service debt of Rs. 650 crore and is likely to spend around Rs. 250-300 crore towards the purchase of CPE’s. Further, the company has considerable trade payables, of which obligation towards Zee Entertainment Enterprises Limited (ZEEL) stood around Rs. 250 crore to be repaid before 31st March 2020.

The obligations would be met through the cash accruals from the business operations. Thus the expected cash outflow is close to envisaged cash inflows.

Further, the actual business performance post-merger has been lower than estimated thus the goodwill of Rs. 6275.42 crore has been impaired by Rs. 1543 crore to Rs. 4732.49 crore as on 31st March 2019 by the company in its audited financials for FY19. This has resulted in decline in the reported net-worth base which stood around Rs. 5447.15 crore as on 31st March 2019 vis-à-vis Rs. 6736.05 crore as on 31st March 2018.

Dish TV has accounted for impairment of goodwill (created on account of its merger with Vd2h) and other recoverable amounting to Rs. 1562.54 crore, which has been charged to profit & loss account, resulting in a loss for FY19. Further tax outgo remained higher in H1FY20 owing to a lower MAT credit entitlement, which in turn led to a net loss of Rs. 131.79 crore (vis-à-vis PAT of Rs. 45.21 crore in H1FY19).

The DTH company has filed a petition before the Telecom Disputes Settlement & Appellate Tribunal (TDSAT) regarding a demand letter received by the Ministry of Information & Broadcasting (MIB) alleging a short payment in license fees paid.

This has occurred due to interpretational differences of the term ‘Gross Revenue’, basis for which license fees are paid. In the meanwhile, the company continues to create a provision on a conservative basis.

As of 31st March 2019, DTIL has created a provision of Rs. 3256.48 crore (vis-a-vis Rs. 2,785 crore as on 31st March 2018). In the event the demand materialises, the company may have to raise additional debt. On considering the same as debt, the overall gearing stands at 1.11x as of 31st March 2019.

The CPEs rented/leased to the subscribers are majorly imported from Korea due to marginal presence of CPE manufacturers in India. This has led to a larger outflow of forex and increased exposure to depreciating INR against USD.

Dish Infra Services Private Limited (DISPL) funds these imports majorly by availing debt (medium-term buyers’ credit facility in USD). This strategy postpones the forex loss related to debt in proportion to its term repayments. The foreign exchange fluctuations gain/loss is capitalised as a fixed asset cost. This strategy results in a limited impact of forex loss on profitability as the company recognises such loss in proportion to the amortisation term of fixed assets.

As rupee depreciates against the dollar, it increases the liability on account of forex debt which further affects the financial profile of DISPL. DISPL generally follows a hedging policy to hedge 25% upfront at the time of taking the forex loan (supplier’s credit) and 25% within six months due for loan repayment.

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