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Hold Sun TV Network Ltd For Target Rs.534

Underlying trend encouraging

Sun TV Network’s Q1FY22 ad revenues were depressed as expected, but decline in subscription revenues QoQ was disappointing as the guidance was for double-digit growth in it, which stands cancelled due to uncertainties from NTO 2.0. EPS increased on change in amortisation policy for movie rights.

Sun TV is aggressively building non-fiction shows to drive ratings across the South, and also investing in fresh fiction content across languages, which should help improve the ad revenue trajectory. Movie investments remain on track, and the company expects big-budget movie releases in H2FY22. But, we are disappointed at slow progress in original content for SunNXT. We cut our EBITDA estimates by 11% / 3% for FY22E / FY23E, but increase EPS by 9% / 18% on new amortisation policy. Our target price reduces to Rs534 (from Rs536) as we cut P/E multiple to 11x (from 14x). Maintain HOLD.

* Change in amortisation policy. Sun TV has changed policy for movie rights from 100% amortisation on telecasting to four years amortisation with first two years’ amortisation rate at 30% each, and next two years at 20% each year. This will optically boost EPS, but would not have any impact on cashflows. The change is in line with global practices (the company was following a very conservative policy earlier). Cost recognition for all other contents remains unchanged.

* Tough ad market. Ad revenues rose 93% YoY (fell 22.6% QoQ) to Rs2.4bn in Q4FY21 on low base. Less advertising by local retailers impacted ad revenues for Sun TV though national ad revenues were decent. Company has been investing in non-fiction shows such as MasterChef (Tamil & Telugu), KBC (Telugu) and other international shows, which should help drive higher ratings and ad revenues in H2FY22. It also plans to refresh content in primetime Telugu GEC and is likely to make material content investment in other languages. It sees content cost rising by Rs3bn in FY22.

* Withdraws guidance of double-digit subscription revenue growth. Subscription revenues dipped 6.1% YoY (3% QoQ) to Rs4.2bn in Q1FY22. Sun TV sees near-term uncertainties on this score due to NTO 2.0, and has withdrawn its guidance of doubledigit growth. Under-investment in SunNXT is also impacting revenues, in our view.

* Investment in movies continues, but that on SunNXT stalled yet again. Sun TV has five big-budget movies ready for release in Sep-Nov’21 with total investment of Rs6bn. It would continue to add more movies to the pipeline for latter part of the fiscal, in midtier budget. However, the company is unlikely to invest in original content for SunNXT in the near term, which is disappointing, and it now significantly lags peers. SunNXT has 23.5mn users and a large proportion of it comes from partnership with telcos.

* Company sees dividend payout normalising in FY22. Sun TV cut dividend payout to 13% in FY21 while that in 10 years before FY21 averaged 62%. It guides dividend payout normalising to historical trends in FY22; and announced an interim dividend of Rs3.75 in Q1FY22.

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