Sun TV Networks - Multiple levers ahead - Phillip Capital

We recently met the management of SunTv. Our key takeaways of the meeting are as follows:

Advertising revenue growth will continue to gain traction in FY14: The management indicated that the months of January and February of 2013 have seen robust advertising revenue growth. The management expects FY2014 to see robust advertising growth of ~12% and advertising activity is likely to pick up towards the end of Q2FY14 into the festival season and H2FY14. The management also indicated that they are currently witnessing strong traction from local advertisers which include auto dealers who are giving substantial offers to clear their inventory. While the latter is an indicator of short term momentum but we believe local advertising will have a significant impact on SunTV over the medium to long-term.

Huge subscription revenue potential: Digitization Addressable System (DAS) holds significant revenue potential for the company with the implementation of Phase 1 and Phase 2 which is underway. Phase 1 implementation of DAS in Mumbai, Delhi and Kolkata will help in collection of subscription revenues from the south Indian audience in these regions while the implementation DAS in Chennai will unlock significant subscription revenue potential. The management indicated that they have signed contracts on Ala carte basis with the MSOs in these regions and expects subscription revenues in 3-4 months time frame. We estimate an annual Phase 1 (including Chnennai) revenue accrual of Rs 386mn in FY15E while FY14 will see accruals of Rs 176mn (considering Chennai for 3 months and Rest of Phase 1 for 9 months). In Phase 2 cities of Bangalore, Hyderabad, Coimbatore, Mysore and Vizag the estimated subscriber base in around ~4.2mn. We estimate an ARPU of 20 per subscriber/ month which will translate to a revenue potential of Rs Rs 770mn from Phase 2 alone. At the current rate (Q3FY13) analog revenues will translate to ~Rs 1.5bn annually. Thus we note that Phase 1 including Chennai and Phase 2 could potentially almost double the analog subscription revenues by FY15E.

FY14 operating and amortization expenses growth likely to be modest: The management indicated that operating expenses are stabilizing and most operating expenses are likely to see manageable rise. The director fees (Salary + perquisites paid to promoters) will increase in-line with profitability but other salary costs will largely increase by 8-10%. The management also indicated that movie amortization expenses in FY14 will be in the manageable range of Rs 3.25- 3.5bn - our estimate for the same is Rs 3.1bn.

FY14 EBIT (ex- IPL) margins likely to see improvement: Thus, considering robust revenue growth and stabilizing cost structure in FY14, we estimate EBIT margins are likely to see improvement of 250bps YoY to 55.1%. We expect EBIT margins FY15E to further improve by 170bps on account of strong revenue accruals led by digitization gains.

Maintain Buy recommendation: We have marginally downgraded our FY14E earnings on account of postponement of DAS revenue accruals. We continue to value the company at 23x FTY14E earnings at Rs 490. Considering the significant upside we maintain our Buy recommendation on the stock.

Source : Equity Bulls

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