Sun TV Network - Courting double digit Ad growth - Centrum

We recently interacted with the management of Sun TV Network to get their feedback on business environment. The key highlights are:

- Ad revenue growth to be healthy: Advertisement revenue growth is expected to be in double digits for Q3FY13E while for Q4FY13 it should be in high single digit. For FY14E the management is optimistic of growing at double digits depending on the economic environment. However, they believe H2FY14 could be better when the economy bounces back. Volume growth in niche channels (kids, comedy etc) is expected to bounce back aiding revenue growth. On the pricing front, the management will not raise prices in January which they normally do, but will consider a partial hike from April 2013 depending on the economic condition which will further aid growth. We have modelled 8% ad growth for FY13E and 14% for FY14E.

- Digitization could be the game changer: Sun TV Network channels are expected to become pay channels in Chennai city post digitization. The management is expecting an ARPU of Rs25/month and believes that there are 2mn households in Chennai of which 1.5mn are yet to get digitized. They are expecting revenue of Rs20-25mn/month from this. For Phase-II, 5 key cities in the 4 southern states are expected to get digitized - Hyderabad, Bangalore, Vizag, Mysore and Coimbatore - accounting for 4mn households. The management expects revenue of Rs60-70mn/month from these cities post digitization. We have not built in these assumptions in our estimates though this could be an upside to our estimates. On the DTH front as well, the management is confident of maintaining ARPU of Rs38/month and increasing subscriber base on the back of digitization. Currently the company has ~8mn DTH subscribers.

- International subscription revenues: The management is confident of growing the international subscription revenues by 12-15% YoY on the back of an increase in subscriber base. Further 10-12% growth is on account of Rupee depreciation which will help the company post ~25% growth in this vertical. Entry into new geographies on a new platform in Canada, UK and US markets will drive growth.

- To re-start movies business in FY14: The management is planning to re-start the movies business from Q2FY14 with an annual outgo of Rs60-80cr and distribute 5-8 movies every year. Since Q3FY12 the company has not distributed any movie.

- Radio business: In the radio business the company is expected to post revenues of ~Rs1bn in FY13E with profits of ~Rs50mn. It will further bid in Phase-III auctions when these are announced.

- IPL - to break even from Year 3: The management is confident of breaking even on the IPL franchise from year-3 with losses in year-1 and year 2 capped at Rs300mn and Rs100-50mn respectively. From Year 6 onwards the company will make profits of Rs600mn as it will only have to pay BCCI 20% of revenues instead of Rs850mn thereby increasing profitability.

- Financials & Valuations: We expect the company to post revenues of Rs19.4bn and Rs22.2bn in FY13E and FY14E respectively. PAT would be at Rs6.9bn and Rs8.1bn. The stock is trading at 25.3x FY13 and 21.3x FY14E EPS of Rs17.4 and Rs20.6 respectively. We currently have a BUY rating on the stock with a target price of Rs454 (22x FY14E).

Source : Equity Bulls

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