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Core business continues to drag

* SUNTV reported weak 1QFY25 performance in its core business, with ad/subscription revenue declining 5%/2% YoY owing to cricket and general elections. Higher direct costs (+720bp YoY) and operating deleverage led to a 430bp margin contraction.

* Prolonged weakness in ad revenue, coupled with risk around market share loss, and strong competition from deep-pocketed OTT players continued to pose concerns. However, the potential tailwinds from the ad revenue from 3QFY25 could be a key positive.

* SUNTV is trading at 18x P/E on FY26E with earnings likely to remain under pressure due to higher channel costs on the launch of SunNeo (a new Hindi channel) and weak core revenue. We downgrade our ratings on the stock to Neutral (from Buy), with a TP of INR860.

Revenue/EBITDA down 3%/6% YoY

* Revenue declined 3% YoY to INR12.8b (8% miss), led by all the segments.

* Revenue from the cricket franchisee (IPL; 39% revenue contribution) declined 3% YoY to INR5b,

* Adjusting for the cricket franchisee income, revenue declined 3% YoY to INR7.8b led by a shift in viewership towards cricket and elections.

* Zee’s ad revenue also declined 3% YoY.

* Operating expenses grew 7% YoY to INR5.7b driven by the increase in production costs.

* Cricket franchisee fee declined 4% YoY to INR1b.

* As a result, EBITDA declined 10% YoY to INR7.1b (15% miss), with a margin contraction of 430bp to 55.4%.

* Adjusting for the cricket franchisee costs, EBITDA declined 18% YoY to INR3.1b and margin contracted 730bp YoY to 39.8%.

* Net profit declined 6% YoY to INR5.5b (10% miss), mainly due to the decline in EBITDA. The higher depreciation cost was partly offset by the increase in other income.

* The company declared an interim dividend of INR5/share.

Valuation and view

* The prolonged weakness visible within ad revenue has hit revenue growth. Recovery within ad spends and signs of revival in the FMCG segment would remain the key monitorables for the stock.

* The continued conservative approach towards investments in OTT, with the focus remaining on movie production and monetization of its existing library, however, remains a key risk within the fast-growing OTT space.

* SUNTV’s healthy liquidity and a cash balance of INR3.6b as of Mar’24 offer room to intensify investments within the linear and hyper- competitive OTT space.

* We cut our EBITDA by 10% each for FY25/FY26E owing to slower ad recovery and higher content costs because of the launch of a new Hindi channel, SunNeo. We expect a revenue/PAT CAGR of 3% each over FY24- 26. We value the stock at 17x FY26E P/E to arrive at our TP of INR860. We downgrade our rating on SUNTV to Neutral from Buy

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