Sun TV Network - Q1FY14 Result Update - Sushil Finance

Sun TV Network Ltd. (Sun) has reported decent set of numbers for Q1FY14 with Revenue & PAT (Excl. IPL) growth of 18.2% & 12.5% YoY respectively. The key highlights of the quarter are summarized as below:

- For Q1FY14, Sun's revenues grew by a robust 41.4% YoY due to inclusion of IPL revenues of Rs.985 mn for the first time. Excluding the impact of IPL, its revenues grew by 18.2% YoY to Rs.5033 mn driven by 15% ad revenue growth, 38% cable revenue growth & 20% growth in DTH subscription income. Sun has increased its prime time (6 out of 9 half hour slots) ad rates by 19% in the flagship channel w.e.f. July 15, 2013 and is likely to follow suit in the other channels. The increase in the ad rates will help the company to mitigate the loss from potential ad inventory reduction post TRAI's cap on advertisement per hour. The company maintains its FY14E guidance of 12% ad revenue growth & 25% subscription income growth with broadcasting margin of ~76%.

- Post successful completion of phase 2 digitization, billing in Bangalore has already started. Billing in Hyderabad & Vishakhapatnam is expected to start in Q2FY14E. However, a large number of deals are still based on fixed-fee model & a shift towards per-sub billing would take time. We believe that the true benefit of digitization would only flow towards FY15E once the KYC of phase 2 cities is complete so that addressability can be established.

- Sun has reported an EBITDA loss of Rs.308 mn for its IPL division resulting in total EBITDA growth of just 9.5% YoY with margin erosion of 1710 bps to 58.8%. However, excluding IPL loss, EBITDA grew by 19% YoY to Rs.3844 mn with margin expansion of 52 bps to 76.4%. The management expects to breakeven its IPL division in FY15E with reasonable profit from FY16E onwards.

- PAT excl. IPL has increased by 12% YoY to Rs.1848 mn on account of higher depreciation & tax rate. The company's depreciation & amortization for Q1FY14 stood at Rs.210 mn (Rs.220 mn) & Rs.970 mn (Rs.710 mn) respectively. Of the incremental amortization of Rs.260 mn, Rs.80 mn was due to amortization of a movie Kutti Pulli (which generated revenues of Rs.95 mn with net margin of 13%) distributed by Sun TV. The company has indicated a capex of Rs. 4,000 mn in FY14E towards movie acquisition & ~Rs.400 mn for movie distribution business.

- Sun's radio business reported a revenue growth of 5% YoY at Rs.290 mn with EBITDA & PAT of Rs.90 mn & Rs.45 mn respectively.

OUTLOOK & VALUATION

Sun has reported decent set of numbers for Q1FY14 driven by better than expected ad revenue & subscription income growth. Though the management expects its advertisement revenue to moderate led by TRAI's cap on advertisement time per hour leading to ad inventory reduction; it continues to remain upbeat on the subscription income growth of 25%. A potential shift from fixed deals to per-sub model post completion of KYC formalities would be a big game changer for the industry. Sun has presence in five cities of phase II, which is believed to have a potential subscriber base of 4mn. We expect the benefits of Phase 2 digitization to start accruing towards end of FY14E which will significantly drive the subscription revenues of the company. However, considering significant delay in Chennai digitization, lower advertisement growth (impact of TRAI mandate) and factoring in the impact of IPL, we are downward revising our FY14E & FY15E earnings estimate by 8.3% & 9.5% to Rs.20.6 (Rs.22.4) & Rs.24.3 (Rs.26.8) respectively. We thus recommend ACCUMULATE on the stock with a revised target of Rs.485 (based on 20x FY15E EPS).

Source : Equity Bulls

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