Sun TV Network - Result Update - Ad revenues to bounce back - Centrum

Rating: Buy; Target Price: Rs495; CMP: Rs363; Upside: 36%

Ad revenues to bounce back

We maintain BUY rating on Sun TV Network and expect the company to post positive ad growth from Q4FY14 following measures taken in the last couple of months despite slippages in the last 2 quarters. Subscription revenue traction continued at a healthy pace as seen in Q3FY14 where domestic subscription growth was 27% YoY led by cable revenues (up 45% YoY) due to digitization and DTH revenues (up 20%) on the back of growth in subscribers. Change in programming mix, focus on niche and smaller channels coupled with market share gain could further add fillip to growth along with ARPU increase from DTH subscribers.

- Q3FY14 results below expectation: The company posted 6.9%YoY decline (against 4% expected) in advertising revenues while domestic subscription revenues grew 27% YoY against 22.4% expected. Operating profit decline was 1.1% at Rs3720mn (5% below expectation) on the back of higher programming cost led by non-fiction programming. Amortization cost remained flat on the back of change in movie mix across genres and languages. Hence PAT was at Rs1858mn (4% below expectations).

- Ad revenue to bounce back: Despite 6.9% YoY decline in ad revenue on the back of TRAI 10+2 rule and high base of Q3FY13, we expect growth in Q4FY14. Measures such as i) reducing ad inventory sharing with content providers to 3min from 4min earlier; ii) extending weekday programming to Saturday; iii) not strictly implementing the TRAI (10+2)min ad rule and iv) bundling and package selling of channels to advertisers, are expected to yield results as some of these measure were implemented only from December. Focus on niche and smaller channels coupled with rating improvement will be an added benefit.

- Subscription revenues ahead of expectations: 45% YoY growth in domestic cable revenues was ahead of expectations on the back of digitization benefits from Phase-II markets of Bangalore, Mysore and Hyderabad. Renegotiation of contract with Arasu (expired in September 2013) coupled with digitization in TN could add further fillip. DTH subscription revenue growth of 20% was on the back of 9.46mn subscribers. We expect ARPU increase in a couple of quarters on the back of renewal of contracts at higher rates. International subscription revenue growth was 29% on the back of Rupee depreciation.

- Estimates cut; Maintain BUY: We cut our earnings by 2.6%/1.1% for FY14/FY15 on the back of lower advertising growth and broadcast fees while marginally increasing subscription revenues. We maintain Buy on the stock with a target price of Rs495 (20x Dec 2015E), giving 20% discount to our ZEEL target multiple and in-line with 5 year mean trading multiple. We believe the bounce back in ad revenue growth, strong traction in subscription revenues, focus on niche channels and market share gain in flagship channels will aid growth going forward. Key risk could be pressure on ad yield, delay in Phase-III/IV of digitization and high programming cost.

Source : Equity Bulls

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