Hold Sun TV Network Ltd For Target Rs.580 - Emkay Global
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Ad revenues rebound
* Sun TV reported a weaker-than-expected quarter, with a 5% EBITDA miss. Domestic subscription revenues were down 4% yoy vs. our est. of 4% growth. However, ad revenues surged by ~40% yoy (above our est. of 28% yoy), pointing toward a revival in ad spends.
* The viewership share across genres has been steady, indicating that investments made to bolster content offerings are beginning to yield results. Sun NXT’s content spending was once again deferred to FY23E, as focus is on showcasing movies instead of digital content.
* Ad revenue growth is improving on a monthly basis, and Sept’21 saw highest-ever revenues. FY22 ad revenues are expected to be similar to FY20. Subscription revenues should start to recover from Q3 as the contracts with distributors are in place now.
* We have moved to a SoTP-based valuation now (Exhibit 6), ascribing a higher valuation to the IPL franchise (after recent team auctions and the upcoming media rights tender). Maintain Hold and roll forward to Dec’22E, with a revised TP of Rs580 (Rs520 earlier).
Higher finance charges dent bottom line: Revenue grew 9.6% yoy but came in below our expectations due to lower-than-anticipated subscription and IPL revenues. Ad revenues were ahead of our projections by rising ~40% yoy (flat on 2-yr CAGR). In contrast, domestic subscription revenues fell by 4% yoy as a result of the uncertainty around a few contract renewals. International revenues were impacted as Sun did not account for revenues from a distributor due to payment delays. EBITDA margins contracted by 357bps yoy on higher programming costs (+33.8% yoy) and higher other opex (+46.6% yoy, adj. for Rs90mn Covid19-related provision in Q2FY21). Depreciation and amortization charges were lower due to a change in the amortization policy from Q1FY22. The higher finance charge, was due to interest (Rs226mn) on income tax
Outlook: Strong ad growth was a pleasant surprise despite southern states having longer tenure of lockdowns. Sustained economic recovery and no resurgence in Covid cases should continue to benefit ad revenue recovery in the ensuing quarters. Management believes that NTO 2.0 will not have any major impact on subscription revenue, and that it will be able to clock double-digit growth this fiscal. The Bangla GEC is also expected to break even in FY23E as the initial cash-burn is behind. However, continued deferment of content spends on Sun NXT remains a disappointment. Considering the competitive intensity, the upcoming IPL media rights auction could be a positive surprise. We have lowered FY23E and FY24E content spends due to the delays in digital content strategy, which in turn has resulted in a 3% EPS increase each year. Key risks: 1) faster market share recovery and ad growth; 2) better-thanexpected subscription growth; 3) minimal impact of OTT on traditional TV in the medium term; and 4) higher-than-expected spends on the OTT platform.
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