Let me clarify a few basic things. Do not mix and confuse things.
1) Data is transmitted digitally (in 1s and 0s)
2) SD (Standard Definition - 720px x 480px / 720px x 576px + 2 channel stereo audio) and HD (High Definition 1080p/i + 5.1 channel audio) are represent the picture quality/resolution. They do not talk about the compression format. (MPEG 4 or MPEG 2). HD doesn't mean MP4.
3) HDMI and Co-axial AV cables are medium for transmitting data. HDMI cables allow video and audio to be sent over a single cable where as RCA/AV cables use separate cables to transfer audio and video. HDMI has better output quality.
4) Compression / encryption format is a way to decrease the no of bits that are required to transmit the same (video/audio) content to save bandwidth. MPEG 4 is better than MPEG 2.
Heavily compressing the data will lead to low picture and audio quality.
Coming back to the question - Compression technology or transmission cables has nothing to do with the quality of SD channels. Ofcourse, when you stretch a smaller picture it will look blurred unless some enhancement of picture is done.
In my observation, SD channels on a HD STB + HDMI are bettter than SD STB + AV cables. HD STB upscales the SD content to HD which is better than leaving it to the TV. Most TVs simply stretch the picture which will make it blurred. Even better picture quality can be obtained by doing enhancing while broadcasting itself which is exactly what RDTV is trying to advertise (HDjusted channels).
If DTH provider is compressing channels a lot to save space then quality suffers. MPEG 4 compression is better than MPEG 2 as if same number of bits are used to transmit content in these formats, MPEG 4 will have a better quality. This can be seen in DishTV. Probably they are using heavy MPEG 2 compression for SD channels and decent MP4 compression for HD channels as they have enough space on separate satellite. Hence SD picture quality is low.
PS: I watch SD content using Videocon HD Zapper Box on a 42 inch TV and no issues with picture quality. A normal SD STB would have blurred the picture when scaled to this size.