Sun TV Network - Worst is behind - Centrum

Sun TV Network posted 4%YoY decline in revenues on the back of de-growth in analog subscription revenues and the movies business. However, ad revenue growth was at 4% and management expects this to turn double digit going forward. Digitisation in Chennai will help the company grow its DTH and analog subscription revenues at a faster pace. We have lowered our estimates marginally but maintain BUY rating on the stock.

Q2FY13 marginally below expectations: Revenues de-grew by 4% YoY to Rs4333mn on the back of 28% de-growth in analog subscription revenues and no revenues form movies business. Operating profit was down 10% YoY to Rs3290mn as margins contracted by 506bps. Profitability was down by 15.8%YoY to Rs1517mn, 12% below expectations.

Worst is behind for advertising: Advertisement revenues grew by mere 4%YoY during the quarter on following the economic slowdown. Management believes that sectors such as FMCG, mobile handsets, consumer durables continue to do well while BFSI remains a laggard. It remains optimistic of double digit ad growth for coming quarters and is confident that the worst was behind as more than 55-60% of the revenues of the company come from the FMCG sector, which has increased spending. We have modeled 8.5% growth for FY13 and 15% for FY14E.

Subscription revenues to grow: On a sequential basis analog subscription revenues grew by 13% but declined by 28% YoY. Post digitization in Chennai and from Phase-II in key cities we expect a healthy growth rate. Also, the company plans to become a pay channel in the city of Chennai which could further spurt revenues. On the back of Phase-I in digitisation, management expects DTH revenues to grow at a healthy rate as MSO has not been able to meet the demand for STBs. Hence the DTH offtake has increased by 3x from 350 connections/day to more than 1000/day. This will help the company increase DTH revenues as the ARPU form this is Rs38 currently. International subscription revenues grew by 44%YoY on the back of currency gain and increase in reach and deeper penetration.

Margins continue to be under pressure: Operating margins declined by 506bps as the company invested more in in-house programming and on the back of increase in satellite transmission cost. EBIT margins too declined by 526bps and were at a four year low as the company spent more than Rs910mn on content for movies. We continue to maintain our view that this cost would only increase going forward as the acquisition cost of movies has significantly increased in the past few years due to increasing competition among broadcasters.

Other Highlights: The radio business posted a topline of Rs500mn with operating profit of Rs110mn and PAT of Rs10mn. For IPL the company believed that for FY14 and FY15E the losses would be ~Rs300mn and Rs40mn respectively. Post that the company will start making a profit and after year 5 it expects the annuity profit to be Rs600mn.

Estimates lowered; Maintain BUY: We have lowered our FY13/FY14 estimates by 7% and 2% respectively on the back of lower advertisement growth, lower margins and lower other income. The stock is currently trading at 18.8x and 15.9x FY13E and FY14E respectively. We value the stock at 18x FY14E with our target price of Rs371 and maintain BUY rating on the stock.

Source : Equity Bulls

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