November 12, 2020 Result Update

Sun TV Network | Media New movie releases, strong subscriber revenues to drive growth

Q2 results in line with expectations Sun TV’s Q2 FY21 numbers came in line with our expectations as Ad revenues almost doubled Rating Buy sequentially while falling 29% yoy. The sequential growth was on the back of opening of economy, Current Market Price (₹) 444 normalcy coming back and advertisers increasing their Ad spend. This was also a slower dip as 12 M Price Target (₹) 532 compared to 66% fall witnessed in Q1. On the other hand, subscription revenues maintained momentum as they grew by 7.5% yoy driven by Cable TV business which went up by 15.4% yoy. Potential upside (%) 20 IPL recorded small amount of revenues at ₹450 mn as only 3 matches of Sun Risers Hyderabad (SRH) were played in the quarter. Total revenues were hence just 2% down. EBITDA margins were at 66.4%, lower by 230 bps qoq as content costs moved up to 13.3% from 11.1% with resumption Stock Data of fresh content, while they were up 580 bps yoy from 60.6%. Bottom-line was supported by lower FV (₹) : 5 amortization expenses with absence of any theatrical releases. Within subscription revenues, DTH revenues were up by 1.3% yoy, while pay channel revenues went up by 15.4%. Lower other income Market Cap Full (₹ bn) : 175 along with 25% tax rates however suppressed the earnings, which fell by 5.6% yoy at ₹3.46 bn. Market Cap Free Float (₹ bn) : 44 However this was 22% higher sequentially. 52-Week High / Low (₹) : 260 / 521

Ad revenues not yet out of the woods, but at 80% of pre-Covid levels BSE Code / NSE Symbol : 532733 / SUNTV The Ad revenues which were hit badly in Q1 due to lockdown recovered sharply as they almost doubled sequentially. But they were still 29% lower yoy. Management mentioned that they Bloomberg : SUTV. IN were 80% of pre-Covid levels in the quarter, while that number further improved in October and November. Ad spends from FMCG (now at 65% v/s 55% of total Ad revenues in Q1), e-commerce, auto, consumer durables, pharma are seeing a pickup. Sun had reduced ad minutes to 12 min/hour Shareholding Pattern (%) from 16 min/hour due to low volumes and to keep the ad rates intact in Q1, which have now been Sep-20 Jun-20 Mar-20 Dec-19 increased again up to 14 min/hour considering recovery in ad spends from advertisers. However, Promoter 75.00 75.00 75.00 75.00 the company had witnessed dip in GRPs in Q2 in all of its markets except Bangla, due to IPL. In its flagship Tamil markets, its prime time viewership share had slipped down below 38%, which has FPIs 10.89 10.32 8.96 8.68 now revived to 50% again due to launch of 3 new shows in the last couple of weeks. Management MFs 5.24 5.47 6.89 8.04 targets 45% viewership share in the Tamil markets in short term. Also in other markets they are Insurance 1.14 1.14 1.16 1.05 planning to launch new content in Q3. However, in Bangla markets, it has marched past ahead well with gaining #3 spot and a GRP 0f 130 v/s 30 in Q1. Ad revenues are likely to grow with pent Others 7.73 7.92 7.67 7.11 up demand and with start of festive season. Although advertisers have resumed ad spends at full Source: BSE strength Sun TV is cautiously optimistic about this business despite management witnessing a robust festive season and expects this trend to continue in the ensuing quarters. We expect this business to post 25% decline in FY 21E and bounce back with a20% growth in FY 22E. Price Performance (%) Subscription revenues growth momentum continues (%) 1M 3M 6M 1YR Subscription revenue posted a growth of 7.5% in Q2FY21 and provided a major boost tothe Sun TV -2% 10% 8% -16% topline. Consequently, cable revenues were up 16% yoy to ₹1.95 bn (including SunNXT revenues) Nifty 50 6% 12% 38% 7% while DTH revenues were up 1.3% at ₹2.32bn after a dip of 5.4% in Q1. Lockdown affected the DTH revenues in some areas of Tamil market, which will pick up with normalised scenario. Management * To date / current date : November 12, 2020

YE Mar FY 19 FY 20 FY 21E FY 22E Revenues (₹ mn) 37,825 35,199 32,375 39,315 Sun TV vs Nifty 50 EBITDA margins(%) 68.9% 64.7% 65.7% 65.8% 140 PAT margins (%) 37.5% 39.5% 41.9% 41.1% 120 EPS (₹) 36.2 35.4 34.4 40.9 EPS growth (%) 27.5% -2.0% -2.5% 19.2% 100 P/E (x) 12.2 12.5 12.9 10.8 80 P/B (x) 3.1 3.0 2.8 2.5 60 EV/EBITDA (x) 6.5 7.4 7.9 6.4 40 Sun TV Network NIFTY 50 ROCE (%) 34.4% 26.7% 23.7% 26.4% 20

ROE (%) 25.6% 24.3% 21.4% 23.3% 0 Dividend payout (%) 34.7% 70.9% 45.0% 50.0% Nov-18 May-19 Nov-19 May-20 Nov-20

Ashwin Patil | [email protected] LKP Research +91 22 6635 1271 Sun TV Network | Result Update

remained fairly optimistic on DTH as its observing rising demand for this business. Due tothis, management expects DTH business to expand at double digit in the coming quarters. Subscription revenue contribution is ~40% of revenues in normal scenario, which has gone up to 56.5% in Q2 as Ad revenues were weak. The company is not too worried about NTO 2.0.The company maintained guidance for healthy double digit growth in subscription in FY21E. We expect subscription revenue growth of 15% in FY21E and 12% in FY22E which will also be supported by OTT revenues. Digital segment expanding at a slow pace, may pick up with original content launch in FY 22E The management said SunNXT, OTT arm of the company, is growing at a slower pace, as current subscriber count is 18 million, which is a slight growth from 17.5 million in Q1. Majority of customers present on the platform are through partnership arrangements with telecom companies. The company is launching a low budget movie dubbed in Tamil over the next two days on Sun Nxt on account of Diwali, while original Tamil and Telugu web series launches will be initiated from January. The management also indicated that with focused approach on SunNXT, content spends could be higher than anticipated as it gets ramped up. Management has assigned ₹2 bn for Sun Nxt business for FY 22E and expects to breakeven by the same time. We expect Sun Nxt to contribute meaningfully to Sun TV’s numbers from Q4 FY21 and increase substantially in FY 22E. Movies business to get a boost in FY 22E With gradual opening of theatres in the short term, Sun TV is planning to go full on in the movies business. They have planned 8 big budget movie releases starting from January 2021 till next Diwali. These movies will star the big names like Rajanikanth, Dhanush, Suriya and Vijay among others. Management is investing ₹3-4 bn in this business. We believe this to add serious amount of revenues and boost profits in the coming year. IPL business to add numbers lower than last year IPL which just concluded is expected to add on in Q3. Although their team SRH featured among top 3, the revenues will be still impacted due to change in sponsorship from Vivo to Dream11 (a hit of ₹120 mn to be witnessed due to this), absence of gate revenues led by lack of audience and travel costs as the event was hosted abroad. In Q2 the business posted revenues of ₹450 mn as just 3 matches were held in the quarter. We expect its IPL franchise SRH to earn at least ₹1.2 bn of revenues this year. This would be a significant drop as compared to ₹2.4 bn in FY 20. However, on the positive side, it at least assured some earnings addition.

Quarterly Financial Snapshot All fig in ₹ mn Q2 FY21 Q1 FY21 % qoq Q2 FY20 % yoy Net sales 7561 6061 25% 7739 -2% Operating expenses 1002 671 49% 1551 -35% IPL 97 0 N/A 0 N/A Employee costs 724 731 -1% 748 -3% Other expenses 718 495 45% 753 -5% EBITDA 5,020 4,165 21% 4,687 7% % margins 66.4% 68.7% (230 bps) 60.6% 580 bps Depreciation 913 1,455 -37% 1,444 -37% EBIT 4,107 2,710 52% 3,243 27% Other income 516 1,086 -53% 721 -29% Interest 15.6 12.7 23% 19.8 -21% Exceptional items 0.0 0.0 N/A 0.0 N/A PBT 4,607 3,784 22% 3,945 17% Tax 1,148 951 21% 280 310% PAT 3,459 2,833 22% 3,665 -6% Adjusted PAT 3,459 2,833 22% 3,665 -6% Source: Company, LKP Research

LKP Research 2 Sun TV Network | Result Update

Outlook & Valuation The Covid-19 outbreak badly affected the ad scenario and creation of fresh content in Q1. However, Ad flow has witnessed a meaningful recovery in Q2. We believe it to continue its recovery quarter on quarter. We believe FMCG and pharma sectors will continue to be the main drivers, while e-commerce and auto sectors (with its festive launches and rural recovery) will make a comeback. Among key positives, fresh content is being telecast across all channels with gains in viewership. We expect Sun TV to capitalize on the viewership gains once ad scenario normalises. IPL, though not successful as earlier, will still add a good amount of revenues. Focus on ramping up SunNXT is also a step in the right direction. Subscription revenues will continue to be strong driven by recovery in DTH business once complete revival happens and also on the back of ongoing Cable TV business resilience. The main kicker for the business in FY 2E will be the movies business as 8 new star studded theatrical releases are in the pipeline. Margins will be slightly impacted with the higher content costs related with TV content, movies and Sun Nxt. But higher subscription numbers will take care of these and we expect them to be in 65-66% range in the coming quarters. On the balance sheet side as well the company is managing it NWC well with a good control on receivables. Since the company has a healthy cash balance, we expect it to maintain a healthy dividend payout. We maintain our BUY recommendation with a target price of ₹532 per share (13x FY22E EPS).

LKP Research 3 Sun TV Network | Result Update

Consolidated Financial

Income Statement Balance Sheet YE Mar (₹ mn) FY 19 FY 20 FY 21E FY 22E YE Mar (₹ mn) FY 19 FY 20 FY 21E FY 22E Total Revenues 37,825 35,199 32,375 39,315 EQUITY AND LIABILITIES Cost of revenue 4,483 5,267 4,209 5,426 Shareholder's funds Employee Cost 3,299 3,232 3,497 3,735 Share capital 1,970 1,970 1,970 1,970 Other Exp 3,127 3,477 2,914 3,538 Reserves and surplus 53,339 55,318 61,397 67,469 EBITDA 26,067 22,759 21,256 25,867 Total networth 55,309 57,289 63,367 69,439 EBITDA Margin(%) 68.9% 64.7% 65.7% 65.8% Non current liabilities Other income 2271 2607 2700 2800 Long term borrowings & provisions 0 0 0 0 Depreciation 6,628 7,002 5,828 7,077 Deferred tax liabilities 1,056 851 851 851 Interest 17 128 60 50 Other long term liabilities 121 825 825 825 PBT 21,693 18,236 18,069 21,540 Current liabilities PBT Margin(%) 57.4% 51.8% 55.8% 54.8% Current liabilities and provisions 2,471 3,378 2,961 3,120 Tax 7,511 4,340 4,517 5,385 Other current liabilities 3,021 2,732 2,732 2,732 Adj PAT 14,183 13,897 13,551 16,155 Total equity and liabilities 61,978 65,076 70,737 76,968 Adj PAT Margins (%) 37.5% 39.5% 41.9% 41.1% ASSETS Exceptional items 0.0 0.0 0.0 0.0 Net block 6,842 6,509 6,681 4,605 PAT 14183 13897 13551 16155 Capital work in progress 134 663 1,863 2,863 PAT Margin (%) 37.5% 39.5% 41.9% 41.1% Long term investments 7,070 7,191 7,191 7,191 Long term loans and advances 135 135 135 135 Other non current assets 3,182 3,908 3,908 3,908 Total non current assets 21,529 22,332 23,704 22,627 Key Ratios Current assets YE Mar FY 19 FY 20 FY 21E FY 22E Inventories 2 0 10 10 Per Share Data (₹) Trade receivables 11,339 13,672 11,531 12,926 Adj. EPS 36.2 35.4 34.4 40.9 Cash and cash equivalents 3,789 4,058 5,479 7,392 CEPS 53.1 53.2 49.2 58.8 Investments 20,935 19,729 24,729 28,729 BVPS 141.1 145.8 160.8 175.8 Short term loans and advances 1,700 1,871 1,871 1,871 DPS 15.1 30.2 18.7 24.7 Other current assets 2,681 3,413 3,413 3,413 Growth Ratios(%) Total current assets 40,446 42,744 47,034 54,341 Total revenues 27.7% -6.9% -8.0% 21.4% Total Assets 61,978 65,076 70,737 76,968 EBITDA 30.1% -12.7% -6.6% 21.7% PAT 27.5% -2.0% -2.5% 19.2% Cash Flow EPS Growth 27.5% -2.0% -2.5% 19.2% YE Mar (₹ mn) FY 19 FY 20 FY 21E FY 22E Valuation Ratios (x) PBT 21,693 18,236 18,069 21,540 PE 12.2 12.5 12.9 10.8 Depreciation 6,628 7,002 5,828 7,077 P/CEPS 8.3 8.3 9.0 7.5 Interest 13 128 60 50 P/BV 3.1 3.0 2.8 2.5 Chng in working capital (662) (2,492) 1,620 (1,545) EV/Sales 3.1 3.0 2.8 2.5 Tax paid (7,371) (4,334) (4,517) (5,385) EV/EBITDA 6.5 7.4 7.9 6.4 Other operating activities (2,059) (1,984) 0 0 Operating Ratios (Days) Cash flow from operations (a) 18,242 16,556 21,059 21,736 Recievable Days 109.4 141.8 130.0 120.0 Capital expenditure (257) (298) (7,200) (6,000) Payables day 22.1 32.8 31.0 27.0 Chng in investments (5,689) 1,007 (5,000) (4,000) Net Debt/Equity (x) (0.07) (0.07) (0.09) (0.11) Other investing activities (5,185) (4,789) 0 0 Profitability Ratios (%) Cash flow from investing (b) (11,131) (4,080) (12,200) (10,000) ROCE 34.4% 26.7% 23.7% 26.4% Free cash flow (a+b) 7,111 12,475 8,859 11,736 ROE 25.6% 24.3% 21.4% 23.3% Inc/dec in borrowings 0 (340) 0 0 Dividend payout 34.7% 70.9% 45.0% 50.0% Dividend paid (incl. tax) (5,939) (11,877) (7,379) (9,774) Dividend yield 3.4% 6.8% 4.2% 5.6% Other financing activities 2 17 0 0 Interest paid (17) (7) (60) (50) Source: Company, LKP Research Cash flow from financing (c) (5,953) (12,207) (7,439) (9,824) Net chng in cash (a+b+c) 1,158 268 1,421 1,913 Closing cash & cash equivalents 3,790 4,058 5,479 7,392

LKP Research 4 Sun TV Network | Result Update

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