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Sharp cost savings in a weak environment aid earnings

* Sun TV Network (SUNTV)’s EBITDA, up 9% YoY, was largely in-line as costs were kept in check in a modest revenue growth environment. The dividend payout fell sharply to just INR5/share, the lowest since FY10 (v/s INR25/share in FY20), despite strong cash reserves.

* Given the impact of the second COVID wave, we cut our FY22E EBITDA/PAT estimates by 9%/6%, but maintain our FY23E estimates. We see the delayed investment in OTT as a key risk that could dilute its competitive position. However, viewership improvement in linear TV and low valuations offer support. Maintain Buy.

Ads and subscriptions grow prior to second wave impact

* SUNTV’s 4QY21 revenues increased 6% YoY to INR7.8b (in-line), with subscription revenue up 7% YoY to INR4.3b. Advertisement revenues grew 8% YoY.

* Production costs were up 23% YoY on the low base of 4QFY20. However, tight cost measures in employee/SG&A (down 8%/17%) kept the overall operating cost flattish (up just 1.5%).

* EBITDA subsequently improved 9% YoY to INR5.5b (in-line); EBITDA margins stood at 69.9% (up 140bps YoY).

* Net profits were flattish (up 2% YoY) at INR4.5b (6% above estimate) on account of lower-than-expected tax, partly offset by higher depreciation and interest cost.

Highlights from management commentary

* Ad revenue growth is expected to recover by 2QFY22 and double-digit subscription revenue growth is estimated in FY22.

* It is estimated to invest a total of INR10–12b in movie production over the next two years, with some big-ticket projects and 6–8 fiction shows lined up for release as the market opens up.

* Capex of INR2–2.5b is commissioned for FY22 towards procuring satellite rights.

* The company is not planning aggressive movie acquisitions for OTTs, like other players, which have borne the brunt of sub-optimal returns.

Valuation and view

* Subscription revenue is expected to grow in the double digits in FY22E, led by digitization trends, along with a rise in OTT subscriptions. Viewership trends are yet to see a steady uptick.

* Plans to launch new TV shows / movies and a Marathi channel in FY22 have been delayed given the second COVID wave. However, the most concerning factor is the delayed OTT investment – besides monetizing the existing library, the company has not made any material inroads in the space.

* Furthermore, it has curbed the dividend payout to just INR5/share, the lowest since FY10.

* Sun TV’s healthy liquidity, with INR 8.8b net cash in FY21, offers room to intensify investments in the linear as well as OTT space. This, along with high dividend payout potential and low valuations, offers support.

* We revise our FY22E EBITDA/PAT estimates by 9%/6%, weighed by the impact of the second wave. However, we maintain our FY23E estimates, building growth of 13%/19% over FY20.

* Sun TV trades at FY22E/FY23E P/E of 14.1x/12.9x. We value the stock at FY23E P/E of 15x to arrive at Target Price of INR620. Maintain Buy

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