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Ad recovery, content rejig key…

Sun TV’s Q3FY21 numbers were mixed as ad recovery was slower and subscription growth was lower than expected but lower amortisation aided PAT. Revenue (standalone) was at | 972.3 crore, up 19.3% YoY boosted by IPL revenue. Ex-IPL revenue was at | 763.3 crore, down 6.3% YoY. Ad revenues at | 309 crore were down 9.4% YoY as ad spend by retail is yet to pick up. Subscription revenues were up ~3% YoY to | 424 crore. EBITDA was at | 600.7 crore, up 3.5% YoY while EBITDA margin at 61.8% was down 944 bps YoY. Margins (Ex-IPL) were 67.2%, down 400 bps YoY. Amortisation expenses were lower due to fewer movie premieres on TV. Consequently, PAT was at | 441.8 crore, up 18.3% YoY.

Delay in local retail revival leads to ad revenues decline

Ad revenues have improved sequentially in unlock phases aided by festive boost. However, the decline was due to weakness in local retail sectors like jewellery, garments and other key retail clients while FMCG remains the biggest contributor. Currently, retail advertisers contribute only 10-12% of ad mix vs. 30% earlier and rebound in ad spend across all segments will be important. No fresh movie premiers also partly contributed to lower ad revenue. Ad minutes/hour was 12 during Q3 vs. pre-Covid levels of 16 (has now reached 14 during Q4). The management expects FY22E ad revenue to reach FY20 levels. We build in 3% CAGR in TV ad revenues in FY20-23E to | 1453 crore, with ~25% fall in ad revenues in FY21E followed by ~31% growth in FY22E on a depressed base.

Subscription growth continues; albeit at lower rate

Subscription revenue has been a key relief for Sun TV in a challenging year. Cable revenues were down ~2% YoY to | 200 crore while DTH revenues were at | 224 crore, up ~8% YoY. The company is planning to revamp content (to bring in more big ticket non-fiction shows) to regain lost share in Tamil market. We expect subscription revenue growth of ~9% CAGR (FY20- 23E) to | 2021 crore. The SunNXT subscriber base has remained largely the same QoQ at ~18 mn. SunNXT ramp-up, planned movie releases and subsequent revenue growth will be the key monitorable.

Valuation & Outlook

Sun TV’s ad recovery has been lower compared to its peer. Faster rebound in ad outlook, therefore, will be important. Regaining viewership share for flagship channel and SunNXT growth will also be key for monetisation. IPL profitability, healthy cash balance and steady dividend payout are the positives. We would turn constructive when we witness SunNXT ramp-up, viewership share increase coupled with sustained ad recovery. We maintain HOLD rating on the stock. We value Sun TV at 13x FY23E EPS (same as Zee) to arrive at revised target price of | 570 (vs. earlier TP: | 480).

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