Sun Tv Equity Research Report

8/10/2019 Sun Tv Equity Research Report

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SUN TV EQUITY RESEARCH REPORT

(10MBI0039, 10MBI0002)

INDUSTRY PROFILE

Media and Entertainment:

The Indian Media and Entertainment industry experienced a modest growth of 6

per cent in 2009 reaching a size of around Rs 613 billion. The industry went

through a tough phase in 2009 due to the economic slowdown which resulted in a

decline in ad spends. With improvement in macroeconomic environment and

advertising budgets coming back on track, the Media & Entertainment industry has

recovered reasonably. Subscription revenues, which maintained healthy growth

during the slowdown period as well are also in growth trajectory, driven by the

growing subscriber base for DTH and digital cable players and the increased

penetration of print in regional markets.

TV broadcasting:

TV broadcasting refers to the uplinking of TV content for viewing. The content

beamed into Indian homes belong to different genres. Entertainment content aimed

at the general audience in Hindi and regional languages attract maximum

viewership. The rest of the viewership is targeted at specific audience and split

across news (general and business news), films, music, children`s entertainment,

education, spirituality etc. While news and movie channels enjoy larger viewership

than other channels, niche channels have significant viewership across specific

socio-economic groups. TV broadcasters have two main sources of revenue -

advertising revenues and subscription revenues. Pay channels earn revenues from


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advertising as well as subscription charges, whereas the entire revenue of free-to-

air channels comes from advertising. With the turnaround in the macroeconomic

environment, growth in ad spends is fairly buoyant. Subscription revenues

continue to remain healthy as the growth in TV audience and increasing adoption

of addressable distribution platforms has been rapidly transforming the distribution

scenario. The increased proliferation of digital platforms, primarily DTH, is

expected to increase the flow of subscription revenues further through the value

chain.

Company Profile:

Sun TV Network is the leader in South market with a strong network of channels

having presence across all genres. South market constitutes 70% of the regional

advertising market. Sun TV offers 33 channels to viewers in four states - Tamil

Nadu, Andhra Pradesh, Karnataka and Kerala.

Sun TV's (Sun) Q4FY14 results surprised positively as ad revenue grew faster thanestimates and cost control resulted in better than expected profitability. Without

quantifying, the company mentioned that the ad revenue could see an improved

trajectory while subscription gains will likely continue. Considering the improving

outlook for the company we factor in stronger revenue growth and revise our

estimates upwards.

Ad revenue surpasses modest expectations:

Sun TVs ad revenue grew by 4.7% YoY after two successive quarters of YoY ad

revenue decline. This was aided by adinventory now being maintained at 14

minutes (12+2) as against Q2/Q3FY14 when inventory was lowered to 12 minutes


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(10+2) in response to a regulatory change. The company mentioned that inventory

of its GECs primetime band is full while it has ample room to improve fill rates

in niche channels (viz. movies, comedy etc). While management refused to

comment on the ad growth outlook for FY15, it has certainly guided for improved

sentiments on the back of the favourable political outcome (stable government

formation). We now estimate ad revenue growth of 8% & 10% in FY15 & FY16

for the company.

Inline subscription revenue growth:

Domestic subscription revenue continued to see rapid growth of 25% YoY as DTH

revenue saw a sharp 6% QoQ growth while cable income was down 1% QoQ.

Management believes that there is more juice in phases I & II and has guided for

robust growth in FY15/16 as well. Added growth triggers could be the eventual

digitization of Chennai and Coimbatore & phase III/IV analog sunset.

EBIT margins ahead of estimates led by cost control:

Suns EBIT was ahead of estimates due to cost control. EBIT margin stood at a

healthy 55.3%, much ahead of estimates. The company managed to curtail

operating costs and maintained that the current margin was not due to any

significant oneoffs. The company managed EBIT margins of 50.4% in FY14,

which we believe can improve in FY15 and FY16 led by increased ad revenue

growth.

Change of estimates (Rs mn) ____Earlier estimates ___ ___Revisedestimates___

Upgrade/(downgrade) (%)

FY15E FY16E FY15E FY16E FY15E FY16E

Revenue 25,140 27,852 25,675 28,431 2.1 2.1

EBIT 13,280 14,840 13,533 15,297 1.9 3.1

EBIT margin (%) 52.8 53.3 52.7 53.8 12 bps 52 bps

PBT 12,447 14,322 13,280 15,104 6.7 5.5

PAT 8,293 9,522 8,898 10,120 7.3 6.3

PAT margin (%) 33.0 34.2 34.7 35.6 167 bps 140 bps

EPS (Rs) 21.0 24.2 22.5 25.5 6.7 5.5


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Key investment argument:

With an estimated 2m cable homes in Chennai likely to be digitized by June2012, there is a significant upside to subscription income

Lean cost structure and an extensive movie library offers strong

competitive advantage to Sun TV.

Sun TV continues to remain the market leader in the Tamil, Telugu and

Kannada GECs.

Key investment risks:

Continued inflation in cost of movie acquisition. Ad growth outlook remains

sluggish as there is no improvement in the operating environment.

Recent developments:

Sun TV has announced a final dividend of INR2.5 per share. Sun TV has

secured subscription agreement with the Tamil Nadu state-owned Arasucable.

Comparative valuations:

Important highlights of the results conference call:

Ad revenueOutlook is improving. The company is getting better acceptance of increase inrates.


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Subscription revenueWhile the Arasu renewal deal hasn't yet been signed by Sun TV (was due forrenewal in Sep 2013), the company remains positive on digitisation prospects. The

company is working to affect the two phase 27.5% tariff increase permitted by theTRAI. The company believes that its subscription income will likely reflect the

increased tariff in H2FY15.

Broadcast incomeThe company saw a dip in broadcast income due to discontinuation of certain

private producer slots. However, since midFeb 2014, it has restored some of the

slots and we are likely to see improved broadcast income in the coming quarters.

Movie capex:The company has guided for Rs 11.05bn quarterly movie amortization in FY15

Sun mentioned that it continues to face challenges in theTelugu GEC on account of aggression by competitors (Maa Telugu in particular)

and is taking steps to mitigate competition.

AP market:The company says that the business/consumer sentiment has now improved after

the bifurcation of Andhra Pradhesh as the state is now emerging from an extendedlogjam.

Sun TV Q4FY14 results (In Rs mn) Q4FY14 Q3FY14 QoQ (%) Q4FY13 YoY (%)

Total revenue 5,202 5,083 2% 4,727 10%

O/w: Advertising 2,820 2,720 4% 2,694 4.7%

O/w: Domestic subs. 1,720 1,680 2% 1,380 25%

Cable 510 540 6% 380 34%

DTH 1,210 1,140 6% 1,000 21%

O/w: International subs. 310 330 6% 260 19%

O/w: Slot fee income 260 310 16% 360 28%

O/w: IPL income 4 11

O/w: Others 87 32 172%

Income exIPL 5,197 5,072 2% 4,727 10%

Cost of revenue 435 527 17% 475 8%

IPL franchise fee

Employee expenses 506 494 2% 445 14%

Other expenses 260 342 24% 322 19%

Other expenses (exIPL) 254 306 17% 322 21%

EBITDA 4,000 3,720

O/w: broadcasting EBITDA 4,002 3,745 7% 3,486 15%

O/w: IPL EBITDA (2) (25)

EBITDA margin (%) 76.9% 73.2% 73.7%


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Long Term Debt to Equity Ratio

Companies operating with high debt to equity on their balance sheets are

vulnerable to economic cycles. In times of slowdown in economy, companies with

high levels of debt find it increasingly difficult to service the interest on their

borrowings as profit margins decline. We believe that long term debt to equity

ratio higher than 0.6 - 0.8 could affect the business of a company and its results of

operations.

Sun TVsaverage long term debt to equity ratio over the last 5 financial years has

been 0.04 which indicate that the Company is operating with a low level of debt.

Interest Coverage ratio:

Interest coverage ratio indicates the comfort with which the company may be able

to service the interest expense (i.e. finance charges) on its outstanding debt. Higher

interest coverage ratio indicates that the company can easily meet the interest

expense pertaining to its debt obligations. In our view, interest coverage ratio of

below 1.5 should raise doubts about the companys ability to meet the expenses onits borrowings. Interest coverage ratio below 1 indicates that the company is just

not generating enough to service its debt obligations.

Broadcast EBITDA margin (%) 77.0% 73.8% 316 bps 73.7% 325 bps

Depreciation & amortisation 1,123 1,061 6% 1,017 10%

Depreciation 220 220 0% 230 4%

Amortisation 900 840 7% 787 14%

EBIT 2,877 2,660 8% 2,469 17%

EBIT margin (%) 55.3% 52.3% 52.2%

EBIT exIPL 2,879 2,685 7% 2,469 17%

EBIT margin exIPL (%) 55.3% 52.8% 52.2%PAT 1,976 1,858 6% 1,775 11%

PAT margin (%) 38.0% 36.5% 37.6%

EPS (Rs) 5.0 4.7 6% 4.5 11%


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Sun TVsaverage interest coverage ratio over the last 5 financial years has been

304.63 times which indicates that the Company has been generating enough for the

shareholders after servicing its debt obligations.

Suggestions:

Assuming 360 trading dayshorizon, and your typical level of risk aversion

(avg risk taker) our recommendation regarding Sun TV Network Ltd is

'Cautious Hold'.

Volatility not too risky

In the long run the return on investment will be considerably high.

Sun Tv Equity Research Report

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