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Healthy recovery in place; investments in OTT hold key

* Sun TV (SUNTV) reported in-line nos – revenue/PAT was up 10%/14% YoY, with ad revenues reaching pre-pandemic (2QFY20) levels and delayed benefit from the IPL offering spillover. This was offset by a sluggish subscription revenue run-rate.

* Our FY23E/FY24E estimates are largely maintained; we build in a 6% CAGR over FY20–23E. The recent upbeat valuation for the new IPL team auction makes the stock valuation compelling at below 10x on Sept’23E. Along with intensifying content investments to win market share, this is a key positive. However, delayed investments in OTT remain a concern. We maintain a Buy rating.

Rev/PAT up 34%/38% YoY (below est); INR3.75 dividend announced

* SUNTV’s 2QFY22 revenues increased 9.6% YoY to INR8.3b (in-line), with advertising revenue increasing 40% YoY to INR3.4b – revenues reached the pre-pandemic levels of INR3.4b as of 2QFY20. Subscription revenue declined 4.5%. Overall revenues exceeded pre-pandemic levels and were up 7% v/s pre-COVID levels of 2QFY20. This was largely attributable to the spillover of delayed IPL revenues of INR520m.

* Thus, EBITDA came in at INR5.2b, up 3.7% YoY (in-line), aided by revenue growth. EBITDA margins stood at 62.8% (down 350bps YoY). Production/SG&A costs were up 34%/31% YoY (incl. INR103.2m towards IPL franchise fees), which led to overall opex increasing 21.2% YoY.

* EBITDA came in at INR4.9b, up 18.8% YoY (11% miss), aided by strong revenue growth. However, it was partly offset by opex increasing 66% YoY, primarily led by the IPL. EBITDA margins stood at 61.1% (down 760bps YoY).

* Finance costs increased due to INR225.8m interest on income tax.

Adjusted for such cost, finance costs were down 40.4% YoY to just INR9m. Other income was up 28% YoY, while dep cost was significantly lower YoY at 61%. This was potentially attributable to a) limited movie releases and b) a change in the amortization policy of movies last quarter – from the earlier policy of a 100% write-off in the first year to a far more liberal current write-off ratio of 30:30:20:20 over four years.

* Therefore, net profit increased 13.7% YoY to INR3.9b. It declared an interim dividend of INR2.5/share.

Key takeaways from management interaction

* Ad/Subs growth outlook: The de-growth in ad revenues in 1HFY22 would be neutralized in 2HFY22. Subscription revenue would grow in the double digits for FY22, aided by the sale of digital rights and contract renewals.

* It plans to invest more than INR2.5b annually in movies, in addition to INR4.5–5b in purchasing satellite rights.

* Sun Next OTT: Investments towards original content for OTT are expected to happen post Mar’22 as the company focuses on the existing movie production lineup.

* Payout policy: It expects the payout ratio to reach historical levels of ~50%. There are no plans for a buyback.

Valuation and view

* Our FY23E/FY24E estimates are largely maintained; we build in a 6% CAGR over FY20–23E. After calling off the double-digit subscription growth guidance last quarter, it indicated that with the 2HFY22 subscription growth contribution from OTT and Others, it should achieve double-digit growth in the second half.

* Intensifying content investment towards multiple non-fictional shows in the southern market, along with fictional shows during prime time, would maintain the growth momentum in viewership.

* Sun TV’s healthy liquidity, with net cash of over INR32.3b presently, offers room to intensify investments in the linear as well as OTT space – along with high dividend payout potential (45–85% payout policy) and low valuation offer support. Furthermore, adjusted for the recent high auction price from the new IPL teams, the stock is at below 10x on a Sep’23E basis.

* However, an inherent risk is that while investments in movie production have delayed OTT investments by two years (now guided for FY23), the monetization of the existing library remains a key concern as it has a risk of further delay.

* We value the stock on P/E of 14x on Sept’23E to arrive at Target Price of INR670. We maintain a Buy rating.

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