CMP : RS 474 (21.08.2020)
TARGET : RS 540
PERIOD : 12 Months
Potential gains : 13%
About Sun TV Network Ltd.
Sun TV Network Ltd., incorporated in the year 1985, is a Mid Cap company (having a market cap of Rs 18701.29 Crore) operating in Media & Entertainment sector.
Sun TV Network Ltd. key Products/Revenue Segments include Income From Advertisement which contributed Rs 1395.12 Crore to Sales Value (48.73 % of Total Sales), Subscription Income which contributed Rs 1308.57 Crore to Sales Value (45.71 % of Total Sales), Other Services which contributed Rs 145.20 Crore to Sales Value (5.07 % of Total Sales), Income from Content Trading which contributed Rs 13.53 Crore to Sales Value (0.47 % of Total Sales), Income from Films Production & Distribution which contributed Rs .03 Crore to Sales Value (0.00 % of Total Sales)for the year ending 31-Mar-2018.
Q1 results in line with expectations:
Sun TV’s Q1 FY21 numbers came in line with our expectations as Ad revenues fell sharply by 66%
yoy. This was due to Covid related lockdown and absence of original programming. On the other
hand, subscription revenues maintained momentum. Also absence of IPL led to yoy fall, as the
base year included ₹2.44 bn of IPL revenues. Profitability at the bottomline was impacted due to
higher amortization expenses. Lower corporate Ad spending led to a steep drop in Ad revenues.
Subscription revenues were up by 11.5% yoy as Cable TV revenues went up by 34.8% yoy while
DTH revenues were down by 5.3% yoy. EBITDA declined by 39% yoy, while margins went up to
68.7 % (up 660 bps yoy) as content cost went down due to lack of any new content addition in
the quarter. Higher other income was reported at ₹1.08 mn due to MTM gains on investments
and tax refund. PAT at ₹2.83 bn, was down 25.8% yoy.
Ad revenues are on a recovery path, at 75% of pre-Covid levels:
The Covid-19 led lockdown hit ad revenues, which fell sharply by 65.8% YoY. In the current quarter,
ad revenues recovered partially and currently are at 75% of pre-Covid levels. Ad spends from
FMCG (55% of total Ad revenues in Q1), e-commerce, auto, consumer durables, pharma are seeing
a pickup. Sun has reduced ad minutes to 12 min/hour from 16 min/hour due to low volumes
and to keep the ad rates intact. The company plans to increase it once normalcy returns. Also,
original fiction programming across all languages resumed with better than pre-Covid viewership
in Tamil market. Ad revenues are likely to grow with pent up demand and with start of festive
season. Tamil market contributes 45% of regional ad revenues at industry levels while Telugu at
20-25% and Kannada, Malayalam at ~10-15% as per management. Sun TV’s revenue mix is also in
the similar range. On the radio front, it will be last to see ad recovery as per management. The
management said that original fiction programming across all languages resumed with 80-90%
slots being filled. While fresh content is getting telecast across all prime time slots, non-prime
time original programming slots will be filled soon as normalcy returns. In flagship Tamil market,
viewership is 20% up from pre-Covid levels. Taking into account all factors, we expect ad revenues
to decline 20% in FY21E followed by 15% YoY growth in FY22E on a low base.
Subscription revenues growth momentum continues:
Subscription revenue growth of 11.5% in Q1FY21 provided a major boost during a weak
macroeconomic scenario. Consequently, cable revenues were up significantly ~34% YoY to ₹2.26 bn
(included SunNXT revenues) while DTH revenues were down ~5% at ₹ 2.16bn. Lockdown affected the
DTH revenues in some areas of Tamil market, which will pick up with normalised scenario. Due to this,
we could see a strong qoq growth in Q2. The management mentioned that there is still headroom
for increase in subscription prices. Subscription revenue contribution is ~40% of revenues in normal
scenario. The management expects it to increase over time. The Bangla market was impacted during
June quarter due to lockdown. The company maintained guidance for healthy double digit growth
in subscription in FY21E. We expect subscription revenue growth of 17% in FY21E and 15% in FY22E.
Content cost, however, will remain high as the company ramps up Sun NEXT.
Digital segment traction remains strong:
The management said SunNXT, OTT arm of the company, is growing at 100% YoY and current
subscriber count is 17.5 million. Majority of customers present on the platform are through partnership
arrangements with telecom companies. Investment target of ₹1 bn in SunNXT in FY22 is intact, with
majority of investment expected to happen in H2FY21E. The management also indicated that with
focused approach on SunNXT, content spends could be higher than anticipated as it gets ramped up.
IPL scheduled in September-November 2020:
IPL is scheduled to be held in September-November 2020. The management indicated their earnings
may decline slightly as there is no clarity yet on sponsorship money/live attendance, etc. Also, travel
and other costs will increase due to change in venues. Sun TV expects its IPL franchise Sun Risers
Hyderabad (SRH) to earn at least ₹1 bn of revenues this year. This would be a significant drop as
compared to ₹2.4 bn in FY 20. However, confirmation of IPL does assure some earnings recovery.
Outlook & Valuation:
The Covid-19 outbreak badly affected the ad scenario and creation of fresh content. Ad flow is
witnessing some recovery in Q2. Its trend will be important, going forward. We believe FMCG and
pharma sectors will continue to be the main drivers, while e-commerce and auto sectors (with its
festive launches and rural recovery) will make a comeback. Among key positives, fresh content
is being telecast across all channels with gains in viewership.
We expect Sun TV to capitalize on
the viewership gains once ad scenario normalises. IPL is scheduled to be held in Q2, Q3, assuring
some more earnings protection. Focus on ramping up SunNXT is also a step in the right direction.
Subscription revenues will continue to be strong driven by recovery in DTH business once revival
happens and ongoing Cable TV business resilience.
Since the company has cash balance of ~₹40bn,
we expect it to maintain a healthy dividend payout.
We maintain BUY recommendation with a
target price of ₹540 per share (13.5x FY22E EPS).
Recommendations: Buy for Long term gains of a year.
Note: The analysis is based on the information received from the company fundamentals and its technical trends. Investing in securities always depending upon the market conditions and risk.
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