Neutral Sun TV Network Ltd For Target Rs.650 by Motilal Oswal Financial Services Ltd
Weak 3Q on all counts
* Sun TV Network (SUNTV) reported a weak 3QFY25 on all counts. Revenue/ EBITDA declined 10%/25% YoY due to continued weakness in ad revenue (-14% YoY, vs. -8% YoY for Zee) and higher production costs.
* Recovery in ad revenue remains the key near-term monitorable. However, we continue to believe that the Star-Viacom merger is a potential double whammy for SUNTV due to: 1) higher competition from the deeppocketed player for ad revenue in the core business, and 2) a potential downward revision in IPL media rights in the next renewal cycle (from FY28), which would severely impact the valuation for SUNTV’s IPL franchise (SRH).
* We cut our FY25-26 earnings estimates by 6-7% due to weaker ad revenue and higher production costs. We expect a modest ~1% earnings CAGR over FY24-27.
* SUNTV trades at ~14x one-year forward P/E (vs. 12x avg. P/E in the last five years). We believe the recent Star-Viacom merger could lead to the de-rating of its multiples.
* We maintain our Neutral rating with a revised TP of INR650, based on 6x FY27 EV/Sales for sports, 6x FY27 EV/EBITDA for the core TV business, and INR103b cash holdings (including dividends). Our TP implies ~13x FY27 P/E.
Miss on all fronts; revenue/EBITDA/PAT down 10%/25%/21% YoY
* SUNTV’s overall revenue declined 10% YoY to INR8b (16% miss).
* Advertising revenue at INR3.3b (13% below) was down 14% YoY (vs. -8% YoY for Zee).
* Subscription revenue at INR4.4b (7% below) was down 4% YoY (vs. +7% YoY for Zee).
* Operating expenses were up 16% YoY to INR3.6 driven by an increase in production costs (+26% YoY) possibly related to the new Hindi GEC channel. Employee costs/other expenses increased 2%/5% for the quarter.
* EBITDA declined 25% YoY to INR4.3b (27% miss) as margin contracted 1030bp YoY to 54.5% (800bp below).
* Depreciation dipped sharply by 43% QoQ to INR1.1b (vs. our estimate of INR1.4b), while other income grew 4% YoY to INR1.3b (vs. our estimate of INR1.6b).
* Net profit declined 21% YoY to INR3.5b (23% miss) majorly on account of poor operating performance (lower revenue and margins).
* The Board declared an interim dividend of INR2.5/share (9M dividend at INR12.5/share).
* For 9MFY25, Sun TV’s revenue/PAT declined by 8%/13% YoY due to lower contribution from movie production and higher operating expenses.
Valuation and view
* The recent Star-Viacom merger could be a potential double whammy for SUNTV due to: 1) higher competition from the deep-pocketed player for ad revenue in the core business, and 2) a potential downward revision in IPL media rights in the next renewal cycle (from FY29), which would severely impact valuations of SUNTV’s IPL franchise (SRH).
* We cut our FY25-26E earnings by 6-7% due to weaker ad revenue and higher production costs. We expect a modest ~1% earnings CAGR over FY24-27. ? SUNTV trades at ~14x one-year forward P/E (vs. 12x average P/E in the last five years). We believe the recent Star-Viacom merger could lead to a de-rating in its multiples.
* We value SUNTV on SoTP; we assign 6x FY27 EV/sales for the Sports franchise, 6x EV/EBITDA for the core TV business, 1x for cash holding, and potential dividends of INR103b to arrive at our revised TP of INR650 (implying ~13x FY27 P/E). We maintain our Neutral rating on the stock.
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