Sun TV Network - Q2FY14 Update, CMP Rs.400, Maintain Accumulate, Revised Target of Rs.460 - Sushil Finance

Sun TV Network Ltd. (Sun) has reported decent set of numbers for Q2FY14 with Revenue & PAT growth of 7.6% & 11.5% YoY respectively. The key highlights of the quarter are summarized as below:

- For Q2FY14, Sun's revenues grew by 7.6% YoY to Rs. 4664.1 mn driven by 27.2% YoY subscription revenue growth (45.1% YoY cable revenue growth & 20.5% YoY growth in DTH subscription income). During Q2FY14, Ads revenue de-grew 4.5% YoY despite the company has increased its prime time (6 out of 9 half hour slots) ad rates by 19% in its flagship channel w.e.f. July 15, 2013. The company maintains its FY14E guidance of 12% ad revenue growth & 25% subscription income growth. We believe that the company may find it difficult to achieve its ads revenue growth guidance for FY14 on two accounts: a) Sun is already adhering to Trai's ad cap of 12 mins/hr from 01st Oct 2013 vis-à-vis 16 mins/hr ad cap during Q2FY14 b) ads revenue grew by only 5.2% YoY in H1FY14 and the company's ads revenue will have to grow by 18% YoY in H2FY14 on higher base of last year's H2FY13.

- During Q2FY14, phase 1 & 2 digitization benefits has not being fully accrued to the company as Hyderabad went complete digital towards the end of Q2FY14 (Sept 18th 2013) and cities like Vizag, Chennai & Coimbatore (Largest catchment markets for Sun) still not gone completely digital due to various legal actions and other issues. The management expects all this issues to be sorted out by the end of FY14. However, a large number of deals are still based on fixed-fee model & a shift towards per-sub billing would take time. Hence, 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.

- EBITDA grew by just 2.6% to Rs.3376.8 mn with EBITDA margins of 72.4% which contracted by 352 bps YoY. PAT has increased by 11.5% YoY to Rs.1691.6 mn on account of higher other income with PAT margins of 36.3%. Sun's depreciation & amortization for Q2FY14 stood at Rs.220 mn & Rs.960 mn respectively.

- Sun plans to distribute two movies (one in H2FY14 & another in Q1FY15). For H2FY14, it has indicated a capex of Rs.100-150 mn for movie distribution business.

- For H1FY14, Sun's radio business reported revenue & PAT of Rs.600 mn & Rs.110 mn respectively.

- Highlighted that negotiations is still going on with Arasu cable for revision of rates.

OUTLOOK & VALUATION

Sun has reported decent set of numbers for Q2FY14 driven by better than expected subscription income growth. Management expects its advertisement revenue to back to normal from Q4FY14 which will be under transition phase during Q3FY14 due to ad price hikes taken across the networks to offset ad inventory reduction (Trai's 10+2 cap); it continues to remain upbeat on 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 phase 2 complete digitization and lower advertisement growth (impact of TRAI mandate), we are downward revising our FY14E & FY15E earnings estimate by 3.5% & 6.0% to Rs.19.9 (Rs.20.6) & Rs.22.8 (Rs.24.3) respectively. We maintain our ACCUMULATE rating on the stock with a revised target of Rs.460 (based on 20x FY15E EPS).

Source : Equity Bulls

Keywords