Subscription growth strong; content investment intensity high
* Strong subscription overshadowed by weak ad growth: Revenue declined 2% YoY (7% miss) in 1QFY20, as strong subscription revenue growth (+28% YoY to INR4.0b) was overshadowed by flattish ad revenue (+2% YoY) amidst a weak ad market. The impact was accentuated by early accrual of partial IPL revenue in 4QFY19, leading to lower contribution in 1QFY20. EBITDA too was down by 7% YoY (9% miss), as content cost (accounted in operating cost) doubled YoY owing to the new Bangla channel launch and the recent high-cost fiction program launch. Subsequently, PAT was down 7% YoY to INR3.8b (13% miss).
* Concall highlights:
(1) Subscription revenue is expected to grow by over 20% in FY20, as 35% of the market is still analog.
(2) Ad spends will be muted for the year; expect mid-single-digit growth in ad revenue.
(3) SUNTV plans to invest ~INR1,500m toward OTT content over the next 18 months, but it targets to be cash neutral – a large deal is likely to be signed soon with a leading telecom player and an OTT player.
(4) The company aims to achieve a 50% market share in south and gradually expand the pie thereafter.
* In a high content investment mode: SUNTV continues delivering steady growth in subscription in the NTO regime; however, a weak market scenario raises concerns about overall revenue growth (estimated at just 7% in FY20). Further, high intensity of content investment toward new programs, Bangla channel launch and OTT will likely keep opex at elevated levels. We, thus, cut our EBITDA/PAT estimates by 7%, building an 11% PAT CAGR over FY19- 21.
* Valuation view: We lower our TP to INR600 (prior: INR690) to factor in the cut in our estimates, valuing it at 14x P/E on FY21E EPS of INR44. The stock is attractively priced at 10x on FY21E; however, efforts to turn around business earnings (PAT growth estimated at only 6% in FY20) will have to be more extensive and multifaceted amidst overall market weakness. Maintain Buy.
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