Sun TV Network Limited - Improving earnings trajectory; reiterate BUY - Antique

Sun TV 3Q ad revenues were much better than expected. Ad revenues grew by 20% YoY, 7% ahead of our estimates. This compares with 5% YoY growth reported in 1HFY13 and is in line with management stance of a likely double digit growth in 2HFY13. Subscription revenues grew by 16% YoY vs. 9% decline in 1H, led by growth in DTH (13% YoY) and revenues from deal with Arasu Cable.

Expect growth momentum in subscription to improve from here on given uptick from cable TV digitalisation in Chennai (~2m subs) and contribution from Phase II (4m subs). We forecast subscription revenues to grow at a CAGR of 21% over FY13-15e vs. 2% YoY growth in FY13e. With ad spends likely to improve from here on, earnings are likely to grow at a CAGR of 21% (FY13-15e) vs. 8 % growth in FY13e. Stock trades at 19x FY14e vs. 27x for peers such as ZEE. Expect valuation gap vs. ZEE to narrow to 10% vs. 20% currently. Raise target price to INR510, for an upside of 16% from current levels. Target price implies EV/EBITDA FY14eof 14x vs. 16x for ZEE.

Strong advertisement growth; margins better than expected

Sun TV 3Q revenues came in at INR4.85bn up 14.3% YoY, led by strong growth in ad revenues. Ad revenues (60% revs) grew by 20% YoY to INR2.93bn and was 7% higher than our estimates. Management highlighted that growth was broad-based with all key sectors including FMCG and consumer durables contributing to growth. EBIT margin stood at 56% and was 358bps higher than our estimates. Margin beat was largely driven by lower content ammortisation cost during the quarter. Consequently, recurring PAT at INR1.89bn was up 13.1% YoY and came in 7% higher than our estimates.

Strong subscription growth... momentum likely to continue

Subscription revenues stood at INR1.31bn, up 16% YoY. While revenues from DTH (INR945m) grew 13% YoY, cable subscription revenues at INR370m increased 28% YoY. Cable subscription revenues include INR75m from its recent tie up with Arasu Cable. Sun TV stands to gain from the impending digitalisation in Chennai city (~2m C&S HHs). Besides, five other cities i.e., Hyderabad, Bangalore, Mysore, Coimbatore and Vishakapatnam (potential ~4m C&S HHs) are due to go digital which should further provide upside to its cable subscription revenues. Forecast subscription revenues to grow at 21% CAGR over FY13-15e.

Valuation and outlook

At our FY14e earnings estimate, the stock trades at 19x vs. 27x for peers such as ZEE. With revival in ad growth, strong growth in subscription revenues, we believe the stock could re-rate to 22x. Reiterate BUY with a target price of INR510, upside of 16% from current levels.

Source : Equity Bulls

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