Tata Sky FY19 rev increases 8.11% due to growth in subs addition

Direct to home (DTH) operator Tata Sky has posted a net profit of Rs 364 crore for the financial year ended 31st March. This is an increase of almost 5.7 times compared to a net profit of Rs 64 crore in the previous fiscal.

PAT Margin has seen a major improvement at 5.9% compared to 1.1% in FY18. The FY19 revenue of the DTH operator has jumped 8.11% to Rs 6113 crore compared to Rs 5654 crore in the previous fiscal.

It is pertinent to note that the DTH operator has revised its financials for FY18.

According to a May 2018 Crisil report, the DTH operator had reported a net profit of Rs 408 crore for fiscal 2018 as against Rs 8 crore in FY17. It had reported a revenue of Rs 5719 crore which was an 8% increase over Rs 5302 crore in FY17.

Crisil has revised its outlook on the long-term bank facilities and debt programme of Tata Sky to ‘Negative’ from ‘Stable’ while reaffirming the ratings at ‘Crisil AA’. The ratings on the short term bank facilities have been reaffirmed at ‘Crisil A1+’.

Crisil has withdrawn its rating on the company’s non-convertible debentures of Rs 200 crore on confirmation from the debenture trustee that they are fully redeemed. The rating withdrawal is in line with Crisil’s policy.

The revision in outlook reflects Crisil’s expectation that Tata Sky’s financial risk profile may moderate over the medium term. Tata Sky’s consolidated leverage is expected to increase on account of debt-funded investment in the broadband segment.

Tata Sky has entered the broadband business through its wholly owned subsidiary, Tata Sky Broadband Pvt Ltd (TSBB). Tata Sky plans to fund the investment in a prudent manner such that adjusted net debt to EBITDA ratio will remain under 2 times despite the investments in broadband segment, and any sustained deviation will be a key monitorable.

Further, entry into the broadband segment will also expose Tata Sky to project risks, till the capex stabilises and subscribers’ ramp up.

The rating continues to factor in Tata Sky’s strong market position in the DTH business, high operating efficiency, and a comfortable financial risk profile. The ratings also factor in expectation of strong support from the parent, Tata Sons.

According to the Crisil report, Tata Sky is the second largest DTH operator in India and has industry-leading operating metrics such as average revenue per user (ARPU), subscriber growth, and low churn rate. Furthermore, consistent improvement in operating profitability has resulted in strong cash accrual over the past few years.

Tata Sons views Tata Sky as a strategic subsidiary and has articulated strong support to the latter during any exigency. These strengths are partially offset by risks inherent in the DTH industry such as evolving regulatory landscape and viewership patterns, as well as project risks for the broadband segment.

For arriving at the ratings, Crisil has combined the business and financial risk profiles of Tata Sky and its subsidiaries, TSBB and Active Digital Services Pvt Ltd (ADSL), which are strategically important to, and have significant operational integration with, Tata Sky.

It has also factored in support expected from its parent Tata Sons. Crisil believes Tata Sky will, during exigencies, receive distress support from the parent for timely servicing of debt, considering its strategic importance to the parent. Tata Sky also receives operational and managerial support from the parent.

Tata Sky is a leading player in the DTH industry, in terms of both revenue market share and subscriber market share. Further, the market position is supported by the largest high-definition subscriber base in the industry and improving churn rate. Tata Sky added more subscribers than its peers over the nine months ended 31st December 2018.

According to Telecom Regulatory Authority of India’s (TRAI) Indian Telecom Services Performance Indicators report for Q3 FY19, Tata Sky had 25% share of the total net pay active subscriber base of around 70.49 million as on 31st December 2018.

The established market position led to a healthy operating margin of 33.6% during fiscal 2019 (30.2% in fiscal 2018). While the subscriber addition and ARPU are expected to be supported by ongoing regulatory changes, the profitability is expected to be affected by increased programming and content cost.

Tata Sky’s financial risk profile had improved significantly in the past because of the reduction in debt (net of cash) and a consistent increase in cash accrual. Interest coverage and net cash accrual to adjusted debt ratio improved to 6.7 times and 0.45 times, respectively, in fiscal 2019, from 2.1 times and 0.11 time, five years ago.

Crisil said it had earlier expected Tata Sky’s net debt levels to decline further due to healthy cash generation and decline in capex intensity. However, sizeable investments in the broadband segment may increase leverage levels.

Tata Sky plans to fund the investment in a prudent manner such that adjusted net debt to EBITDA ratio will remain under 2 times despite the investments in broadband segment, and any sustained deviation will be a key monitorable.

Crisil has included the capital creditors as part of the adjusted debt as the liability has characteristics similar to external debt. Financial risk profile, however, remains constrained by negative net worth.

Tata Sky has received regular and timely funding from its parent to support capex in the past few years. Improved cash accrual since fiscal 2016 lowered dependence on equity infusion (there has been no equity infusion since fiscal 2016, due to improved accruals).

The DTH operator launched its broadband business in October 2018 through its subsidiary TSBB, which will enable it to make bundled offerings to subscribers. While the broadband business is expected to complement its existing DTH business, it will remain in the investment phase over the medium term.

Crisil believes that Tata Sky will be exposed to demand risk and implementation risks, till the project stabilises.

Tata Sky, Crisil said, has adequate liquidity driven by healthy cash accruals over the medium term, and cash and cash equivalent of Rs 538 crore as on 31st March 2019. Tata Sky also has access to fund based limits of Rs 1,130 crore, which were utilised negligibly over the 12 months through March 2019.

Crisil expects internal accrual, cash and cash equivalent, and unutilised bank lines to be sufficient to meet debt obligation and incremental working capital requirement over the medium term. Tata Sky has sufficient headroom to raise debt to meet capex and investment requirements in subsidiaries.

Tata Sky’s decision to adjust the license fee payments for fiscal 2019 against its earlier payments will also help conserve the liquidity.

Tata Sky (formerly, Space TV Ltd) commenced operations in 2004 as an 80:20 joint venture between Tata Sons and Network Digital Distribution Services FZ-LLC (NDDS). DTH operations commenced in August 2006. In fiscal 2008, Bay Tree Investments (Mauritius) Pte Ltd (Bay Tree), a part of Temasek Holdings (owned by the Ministry of Finance, Singapore) acquired 10% of Tata Sky’s equity shares.

Later, Tata Capital Ltd, Tata Opportunities Fund, through Omega FII Investments Pte Ltd (Omega), and TS Investments Ltd (TSIL) acquired an equity stake in Tata Sky. Tata Sons, NDDS, TSIL, Bay Tree, Omega, and Tata Capital Ltd (directly/indirectly) own 41.49%, 20%, 20%, 7.8%, and 0.71%, respectively, of Tata Sky’s equity capital.