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IPL lifts EBITDA; focus on new channels, OTT investments

* Sun TV (SUNTV)’s 3QFY21 revenue recovered with 19% YoY growth (in-line), led by INR2b IPL revenue. Ad and subscription revenue, on the other hand, remained sluggish.

* EBITDA/PAT estimates for FY22E were largely maintained – we factor in 11%/14% growth over FY20. Viewership recovery is yet to see a steady uptick, although newfound vigor in fresh content and investments in new channels and OTT should be the key to growth and valuations. A steady dividend payout and low valuation offer support. Maintain Buy.

Ad and subscription revenue trends remain weak

* SUNTV’s 3QFY21 revenues increased 19% YoY to INR9.7b (in-line), with subscription revenues increasing 3% YoY to INR4.2b. Advertisement revenues declined 10% YoY, while subscription revenues were up by 3% YoY.

* Production costs were down 11% YoY, while SG&A expenses were up 2.4x YoY to INR1.8b (including INR413.9m toward IPL franchisee fees) – leading to an overall opex increase of 58% YoY.

* EBITDA, thus, was up 4% YoY to INR6b (in-line), supported by better-thanexpected IPL revenues; EBITDA margins stood at 61.8% (down 940bps YoY).

* Other income stood at INR621m (down 2% YoY), while depreciation and amortization costs came in 52% YoY lower at INR687m – as only six movies were premiered in 3Q.

* Net profits thus increased 18% YoY to INR4.4b (10% beat) on account of lower-than-expected D&A charges.

Highlights from management commentary

* Expect FY22 ad revenues to be in line with FY20 levels with the launch of some big-ticket shows from 1QFY22.

* Content costs are expected to rise 20–25% in FY22E (over FY20 costs).

* Investment in Sun NXT would commence with INR2.5b annual investment guidance from 1HFY22. It would continue to focus on the SVOD and telco tie based revenue models.

* Sizeable investments would go toward Bengali and Marathi, which have a potentially larger market than Malayalam. It plans to spend INR3–3.5b on five large-ticket movies in FY22 and additionally on small-ticket movies.

Valuation and view

* Subscription growth has slowed –it had remained steady in the last few quarters on the back of OTT subscriptions and digitization in Tamil Nadu. We expect subscription revenue to grow in the double digits in FY22E. Furthermore, viewership trends are yet to see a steady uptick.

* It plans to launch new TV shows/movies and a Marathi channel in FY22, which offers a silver lining to ad and subscription growth.

* SUNTV’s healthy liquidity, with INR36b net cash (1HFY21), 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 expect FY20–23E revenue/EBITDA/PAT of 5%/4%/5% on the back of an improving macro environment, coupled with the revamping of content aiding.

* SUNTV trades at FY22E/FY23E P/E of 14x/14x. We roll forward our valuation to FY23E, valuing it at FY23E P/E of 16x, to arrive at Target Price of INR640. Maintain Buy.

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