Sun TV Network - Brightness to intensify! - LKP Research

Digitization implementation to trigger significant upside in ensuing years

Riding on the digitization wave, subscription revenues of Sun TV Network (Sun) is expected to witness a significant uptick of close to Rs5.5bn from hereon. We expect this growth to be largely driven by: a) improving subscriber reporting, b) increase in broadcasters' ARPU share, c) Sun's dominant position in South, d) healthy DTH subscriber additions, and e) gradual rise in consumer ARPU. Since Chennai is yet to be digitized among the metros and Phase II is still on, we expect the quarter on quarter increase in Subscription revenues to be the real driver for the stock. Upcoming implementation of Phase III and Phase IV will offer even higher quantum of revenues than the previous two phases with huge rural subscriber potential and ARPU share of Sun moving up. We expect domestic subscription revenues to grow upto Rs 13.6 bn by FY 16E and at a CAGR (FY13-16E) of 24%.

Market leadership to continue commanding higher ad rates

Increasing demand for regional advertising in the last few years has resulted in robust ad growth for Sun. This has been on the back of maintaining a consistent leadership share in Tamil Nadu (70%), Andhra Pradesh (40%) and Karnataka (37%). Increase in content in AP and Karnataka will take care of the rising competition and maintain the ad rate premium which Sun enjoys as compared to its rivals. Going forward, ad and broadcast revenues would register decent growth on the back of rising ad spends by FMCG companies (which account for 60% of Sun's ad revenue). Ad spends by FMCG firms would continue to rise due to deceleration in volume growth. New launches in the auto sector, jewellery sector in South India and consumer durables will trigger the growth in ad revenues. We estimate ad revenues of Rs10bn at a CAGR (FY13-16E) of 9%.

Margins to improve going forward on subscription revenue boost

Sun's margins are expected to move up steadily on surge in subscription revenues which will come with zero cost. Improvement in ARPU along with spread of DTH will support the cause. Increased ad rates will offset the hike in content cost in AP and Karnataka and ensure margins to move northwards. Sun's unique business model of charging the serial makers with fixed broadcasting fees provides a good fillip to the topline as well as margins. Going forward, only IPL may act as a dampener for margins due to its variable nature. However, the surge in subscription business will offset losses from IPL.

Robust balance sheet, FCF and a good dividend policy makes the stock even more attractive

Sun's robust zero debt balance coupled with strong return ratios, free cash flows and robust dividend policy provides an icing on the cake. The company has a history of paying hefty dividends (>50% payout) to its investors which is an additional positive. Not so heavy capex plans, strong FCF generation and working capital cycle are the salient features of Sun's balance sheet.

Outlook and valuations

The broadcasting industry is poised for promising revenue growth, thanks to the annuity model of subscription revenue unlike ad revenue (which is cyclical due to the direct linkage to macroeconomic factors). Sun with its sheer dominance in South poses a strong investment opportunity factoring the risks of delay in digitization and court cases in which the company is involved. We value the stock at 20x FY 16E earnings of Rs 27 and arrive at a target of Rs 541, which is an upside of 41% from current levels. BUY.

Source : Equity Bulls

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