* SUN TV surprised positively with 19% yoy advertisement growth after disappointment of many quarters. Increased spends from national advertisers post demonetisation and GST transition, and monetisation of Kannada and Malayalam channels aided growth.
* Programming & Content cost increased by 51% yoy, 16% higher than estimate while the same is attributable to sharp focus on commissioned-based content production model.
* Ad growth is expected to be healthy in the ensuing quarters while content cost would remain high, owing to increased competitive scenario. The company is looking to launch new channels outside the four core states in FY19, but its execution would be key.
* We are raising EPS by 5% each for FY19/20E on account of higher ad growth while we were already factoring in healthy increase in content cost. Digitization benefits from Tamil Nadu are expected to start from FY19. Retain ACCUMULATE with a revised TP of Rs1,175.
Robust advertisement growth
Standalone revenue at Rs6.8bn grew by 15.9% yoy. After many quarters of disappointment, ad growth of 19% yoy surprised positively. Ad revenue stood at Rs3.6bn. Domestic subscription revenue increased by 16% yoy to Rs2.8bn. EBITDA was in line with estimate at Rs4.9bn, up 11% yoy with EBITDA margin of 72% (-259bps yoy). EBITDA was impacted by higher costs. Programing & Content cost increased by 51% yoy (16% higher than estimate). Programming & Content cost has increased by 38% in 9MFY18 on the back of sharper focus on commissioned model and increased programming hours. Employee cost was up 20.6% yoy. Other expenses was up 5.4% yoy. PAT stood at Rs2.7bn, up 11% yoy.
Strong ad growth after many quarters has given rekindled hope that market share improvement is on track and it can sustain for the next three quarters with a favorable base. Increased content cost indicated both higher investment and change in the business model. We appreciate higher content investment, but the same should yield results with improvement/sustainability of market share in a hyper competitive scenario. In the interim, margin pressure would not be an issue if the company continues to deliver healthy ad growth followed by digitization led benefits in subscription revenues. In order to expand the network, the management has guided for a channel launch in FY19 but language has not been disclosed. We note that ad revenue in regional markets has been compounding at a healthy rate amid rising viewership and growing inclination of advertisers to spend on those channels. Channel launch would be good to drive ad growth in the long term while execution would be key for SUN TV, as it would be the first channel out of the four core states. Further, SUN TV has to safeguard its market share in Tamil Nadu, as Zee and Star have increased content spends and viewership share too. In Malayalam, Zee and Kerala Communicators Cable are expected to launch channels in FY19.
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