This is what Bruce Berkowitz, founder, Fairholme Capital Management writes in his introduction to Part IV (basically on the importance of free cash flow) in “Security Analysis“. He gives an example of EchoStar Corp., parent of the DISH satellite TV business. I thought it could be compared to Dish TV in India.
That company went public in June 1995, on the premise that there was room for another pay-TV provider. By 2000, at the peak of Wall Street’s infatuation with all things tech, EchoStar had 3.4mn subscribers, an enterprise value (market value of equity, plus net debt) of approx. $30bn, and a reported annual loss of nearly $800mn. Worse yet, the company was consuming cash like crazy as it sought to build its infrastructure and customer base – and that alone would take it off many value investors radar.
Fast forward five years, and the subscriber topped 12mn. With many of the start-up costs behind it, free cash was flowing and growing -monthly subscriber fees are a pretty reliable income stream. Yet at that time, in 2005, EchoStar’s enterprise value was just $17bn. Clearly, the market was not giving the company much credit for its cash generating abilities. That allowed Fairholme to purchase shares in an excellent franchise business with a double-digit free cash flow yield while risk-free investments were paying 5%.
At the peak of 2008, Dish TV’s market cap was Rs 4282crs and its debt was around Rs 450 crs resulting in an enterprise value of Rs 4732 crs and a reported annual loss of Rs 414crs. Currently, its market cap is around Rs 2000 crs thanks to rights issue and the company continue to report losses.