Sun TV Network - Continued ad revenue disappointment - Phillip Capital

Sun TV's (Sun) Q3FY14 results surprised negatively for the second successive quarter owing to a sharp 7% YoY decline in ad revenue. The company continued to suffer inventory adjustment pangs as it curtailed inventory to 12 mins from 16mins for ~75 days in this quarter. Consequently, EBITDA and PAT were also lower than estimates. Considering that the implementation of ad cap guidelines is sub judice, the company has increased its inventory in certain prime time GEC slots. This could bring in temporary respite in ad revenue growth. Nonetheless, we cut our estimates factoring in lower ad revenue growth resulting in a lower earnings estimate and a reduced target price. However we maintain our constructive stance on the company owing to reasonable valuations (17x FY15 and 15x FY16 EPS) and tailwinds of subscription revenue growth potential. Below are key highlights of the results conference call.

Ad revenue continues to disappoint; not yet out of the woods: Sun TV's ad revenue declined sharply for the second successive quarter. The company's ad revenue for 9MFY14 is now flat on a YoY basis while inventory levels had been brought down to 12 minutes. However, from mid-Dec 2013, as the implementation of the ad cap guidelines became sub judice, the company increased its inventory in some of the prime time GEC slots. Management refused to comment on the ad growth outlook for FY15 but sought to reassure that most of the pricing adjustments are now done. In keeping with management commentary, we expect Sun TV's ad revenue growth to return from Q4FY14 considering that it has undergone a rather painful inventory recalibration. We revise our FY14 and FY15 ad revenue growth assumptions to 1% and 8% respectively, implying 2% YoY growth in Q4FY14.

Subscription continues to outpace expectations: Subscription revenue saw rapid growth of 28% YoY driving by domestic subscription revenue, which grew at a healthy pace of 27% YoY and 6% QoQ as cable revenue continued to improve. 9MFY14 subscription revenue growth has surpassed management guidance of 25% growth and the company says that robust growth trends can continue. Notwithstanding the delays in implementation of digitization, we believe that a similar subscription revenue growth can be witnessed in FY15 too.

EBIT margins below estimates due to revenue miss: Sun's EBIT disappointed on account of revenue miss. EBIT margin at 52.3% though was better than estimates as the company saw a very low movie amortisation cost in a festive quarter. Increase in cost of revenue was in accordance with management guidance as there was a temporary substitution of certain private producer slots (which saw weak ratings) with reality shows.

Estimates cut, rating maintained: We incorporate the ad revenue disappointment lowering our revenue, EBITDA and PAT estimates. Continue to value the company at 21x FY15 EPS resulting in a target price of Rs 440/share. Maintain BUY

Source : Equity Bulls

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