Sun TV Network Limited - Strong ad growth; subscription to kick in now - Antique

Sun TV 4Q results were broadly in line. Ad revenues grew by 15% YoY, 2% ahead of our estimates. While EBIT margins were lower than expected during the quarter, on full year basis margins were flattish YoY despite a muted growth in subscription revenues. With subscription revenues now likely to see uptick led by cable TV digitalization in Chennai and Phase II locations, we see scope for margin expansion. Consequently we expect earnings to grow at CAGR of 20% (FY13-FY15E) vs decline reported over last two years. See scope for re-rating. We roll forward earning FY15E and raise target prices to INR550, for an upside of 30%.

Ad revenues... Strong 2H, trend likely to continue

Ad revenues during the quarter grew by 15% YoY, contributing 57% to revenues. Management highlighted that it has increased ad rates by 19% for weekday prime slots, effective 15th July. Rate hike would be currently implemented for its flagship channel Sun TV and would gradually be rolled out to other channels as well. We have assumed ad revenues to grow by 14% over the next two years for the company.

Subscription revenues...likely strong growth led by Phase I/ II digitalization

Subscription revenues during the quarter increased by 21% YoY largely led by DTH revenues. On QoQ basis DTH revenues increased by 2% QoQ while analogue was flattish. For the year subscription growth was flattish as growth in DTH was offset by impact from loss in revenues from Tamil Nadu in the early part of the year. With deal with Arasu now signed and potential revenues from Phase II (4-5mn subs) and Chennai market (~1mn subs), Subscription revenues are likely to trend up. We forecast subscription revenues to grow at CAGR of20% over FY13-15E vs flattish growth reported in previous two years.

Margins... Should expand led by subscription

EBIT margins during the quarter stood at 52% vs our estimate of 55% led by higher content cost. On full year basis margins down marginally and was impacted by higher content cost and near flattish growth in subscription revenues. With subscription revenues (higher margin ) now likely to see uptick, margin expansion should set in. Also management announced rate hikes of 19% for ad slots and broadcast fees which should help expand margins.

Valuations and Outlook

Stock trades at 19.5x FY14E and 16x FY15e vs historical band of 13-24x. It is trading at discount of 20% to peer ZEE. We forecast EPS CAGR of 20% over FY13-15e vs flattish growth during last two years given our view that uptick in subscription revenues should help expand margins. Expect stock to re-rate. Reiterate BUY with target price of INR550 for an upside of 30%.

Source : Equity Bulls

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