Sun TV Network - DTH revenue and cost of revenues key monitorables - Motilal Oswal

Improved radio performance and lower capital advances positives

Weak business momentum for the group DTH arm Sun Direct

Subscription revenue from Sun Direct DTH declined 3% YoY to INR1.78b implying fall in its contribution to 48% of Sun TV's DTH revenue in FY13 vs 55% in FY12. Overall DTH revenue for Sun TV grew 12% YoY indicating a strong 30% YoY growth from other DTH operators. Business momentum for Sun Direct likely remains weak as indicated by decline in revenue contribution as well as lower advertising on Sun TV Network (down from INR264m in FY11 to INR97m in FY12 and INR2m in FY13). Receivable days for revenue from Sun Direct has increased from 118 days in FY11 to 200 days in FY12 and 205 days in FY13.

Cost of revenue up 280bp YoY on lower mix of broadcast slot model

Cost of revenue increased 54% YoY to INR1.55b led by higher costs related to program production and program rights. Contribution of programming based on traditional model (vs the slot model used by Sun TV) has increased as indicated by decline in broadcast fee and increase in contribution of advertising revenue to the overall Ad & broadcast revenue.

Increase in provision for doubtful debts on advertising revenue; contingent liability up due to tax cases

Provision for doubtful debts increased ~11x YoY to INR244m (1.3% of revenue) largely on advertising revenues. Contingent liabilities increased 78% YoY largely due to disputes related to income-tax. Our interactions with the management indicate that the company has subsequently won some of these cases making it eligible for refunds with interest.

INR1.05b net cash outgo towards replacement of aircraft

Sun TV sold its existing aircraft for ~INR1.9b (~INR50m profit on sale) and replaced it with another aircraft for a consideration of INR2.95b resulting in a net cash outgo of ~INR1.05b. Sun TV depreciates the costs incurred towards purchase of aircraft using the straight-line method based on estimate of useful life of 15 years. This implies ~20m additional depreciation cost per year due to aircraft replacement.

Improved performance in radio subsidiaries; decline in capital advances likely reflecting lower movie advances

Performance of radio subsidiaries – Kal Radio and South Asia FM - improved significantly with combined revenue growing ~25% YoY to INR1.13b and post-minorities PAT of INR108.5m vs loss of INR65.4m in FY12. Capital advances declined ~45% YoY to INR2.08b (vs 3x increase in FY12) likely reflecting lower advances towards movie acquisition.

18% earnings CAGR; maintain Buy with a price target of INR515

The stock trades at P/E of 20.3x FY14E/16.4x FY15E and offers an FY14E dividend yield of 2.7%. Maintain Buy with target price of INR515 based on 18x FY15E EPS plus INR80/sh to incorporate 50% of potential digitization upside.

Source : Equity Bulls

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