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Sun TV Network Ltd.

(STNL) established in 1992, is engaged in producing and broadcasting satellite television and radio software programming. It is one of the largest Television & Radio entertainment company, with a dominant position in the southern states of India. STNL’s flagship channel, Sun TV is one of the most watched channels in India. Revenue for 9M FY21 de-grew by 14% YoY and stood at Rs. 2,374.3cr. EBITDA and PAT for the period de-grew by 14.1% and 8.9% YoY to be at Rs. 1,519.3cr and Rs. 1,038cr, respectively.

Investment rationale:

Advertisement revenue to be a growth driver: STNL’s advertisement revenue constituted 42% of the total revenue in FY20. Majority of its share comes from local retail players like local jewelers, silk saree retailers, etc. Advertisement revenue witnessed sequential growth in Q3 FY21 due to a festive quarter, however, low mall footfall due to strict lockdown restrictions led to revenue dip of ~9% YoY. In Q4 FY21, recently concluded assembly elections is likely to have kept the positive momentum in the advertisement momentum.

Off lately the reemergence of the Covid-19 second wave would slower the momentum, but we are confident of sharp revival in the business post ease of restrictions. In 2020, television media remained the largest contributor with 41% market share in the advertisement industry. The industry is expected to grow at a CAGR of 11.6% to reach Rs.70,343cr by 2022. On the back of strong regional presence, we expect STNL’s advertisement revenue to grow at 16% CAGR over FY21E- FY23E

Strong investment in OTT platform and fresh content to propel viewership and subscription:

India being the world’s fastest growing OTT market, is set to emerge as the world’s sixth-largest by 2024. OTT platforms have benefitted highly due to the COVID19 pandemic. STNL’s OTT platform, SunNXT has ~18mn subscribers as of Dec. 2020. The company has further planned to invest ~Rs. 250cr in SunNXT in FY22. STNL’s subscription business includes OTT and DTH subscriptions. Its DTH revenue grew ~8% YoY in Q3 FY21.

The company’s flagship channel SUN TV is the third highest watched TV channel in India. It is in the process of launching new shows to boost viewership. After Tamil & Telugu, Marathi channels have the highest contribution in regional viewership. STNL’s Marathi channel is expected to be launched in FY22. The company is planning to give investment priority to Tamil & Telugu channels followed by Bengali and Marathi. We anticipate this segment to grow at a 11% CAGR over FY21-FY23E.

Launch of new big budget movies:

STNL’s movie distribution was affected majorly in the lockdown phase. The company is planning to make investment of ~Rs. 300cr in movie production in FY22. Five big ticket movies are already in process with big celebrities, of which 3-4 are expected to be released in FY22. Some small budget movies are also in the pipeline with investments of Rs. 5-10cr per movie. Regional cinema contributed 47% to the Indian film industry in 2019 and was led by Tamil and Telugu films. India’s film industry is expected to clock in estimated revenues of ~Rs. 33,000cr by FY24. STNL’s continuous focus towards movie production will be a major growth driver for profits in the coming years

Valuation:

At current market price of Rs. 521.3, STNL is trading at a TTM P/E multiple of 16x. In the last 10 years (i.e. FY10-20), earnings have grown by 10.3% CAGR with an average RoE of 27.3%. During the same period, MCAP has degrown by 4% CAGR. Going forward, earnings are likely to grow by 8% CAGR with an average RoE of 21.7%. We value STNL at a P/E multiple of 15.5x to its FY22 earnings to arrive at a target price of Rs. 623 per share. Thus we assign ‘BUY’ rating to the stock.

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