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Star-Viacom merger a potential double whammy for SUN

* Sun TV Network (SUNTV) reported a largely in-line 2QFY25, with revenue/EBITDA declining 12%/26% YoY (on a high base). A modest 2% YoY recovery in ad revenue (vs. -5% YoY in 1Q, -8% YoY for Zee) was offset by lower movie production revenue, higher direct costs and other expenses.

* Recovery in ad revenue remains the key near-term monitorable. However, we believe the impending Star-Viacom merger could be a potential double whammy for SUNTV due to: 1) higher competition from deep-pocketed player for ad revenue in the core business and 2) potential downward revision in IPL media rights in the next renewal cycle (from FY28), which would significantly impact SUNTV’s IPL franchise (SRH).

* Our FY25-26 earnings estimates are broadly unchanged. We build in a revenue/EBITDA CAGR of ~4% over FY24-27, with core business recording 5%/8% revenue/EBITDA CAGR.

* SUNTV trades at ~15x one-year forward P/E (vs. 12x average PE in last 5 years). We believe the impending Star-Viacom merger could lead to a derating. We maintain our Neutral rating with a revised TP of INR670, based on 10x Dec’26 EV/Sales for sports, 8x Dec’26 EV/EBITDA for core TV business, and INR92b cash holdings.

Revenue/EBITDA down 12%/26% YoY on a high base

* Overall revenue declined 12% YoY to INR9b (inline) as 2QFY24 had a boost from the release of Jailer.

* Advertising revenue at INR3.4b (3% ahead) was up 2% YoY (vs. -8% YoY for Zee).

* Subscription revenue at INR4.4b (2% ahead) was up 4% YoY (vs. +9% YoY for Zee).

* Operating expenses were up 23% YoY to INR3.7b driven by spike in production cost (+29% YoY) and higher other expenses (+34% YoY).

* EBITDA declined 26% YoY to INR5.3b (in line) as margin contracted 1160bp YoY to 58.8% (220bp below).

* Depreciation inched up sharply QoQ to INR1.9b (vs. our estimate of INR1.2b), while other income grew 53% YoY to INR1.6b (vs. our estimate of INR1.3b).

* Net profit declined 13% YoY to INR4b (3% miss) as the higher other income and lower tax rate were offset by higher depreciation and slightly lower EBITDA.

* SUNTV declared an interim dividend of INR5/share. (1H dividend at INR10/share).

* For 1HFY25, SUNTV’s revenue/EBITDA/PAT declined 7%/18%/9% YoY due to the lower contribution from movie production and higher opex.

* 1HFY25, OCF declined ~19% YoY to IN9.2b due to ~18% decline in EBITDA. Capex decline of ~37% YoY to INR1.7b led to FCF generation of INR7.4b (- 13% YoY). Despite paying a dividend of INR2b, SUNTV’s net cash increased to INR76b (from INR67b at end-Mar’24).

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