Result Update November 5, 2018 Rating matrix Rating : Hold Sun TV (SUNTV) | 629 Target : | 675 Target Period : 12-15 months Market share loss visible… Potential Upside : 6% Revenues came in at | 749.6 crore (up 10.9% YoY), lower than our What’s changed? estimate of | 763 crore. The miss was owing to advertisement Target Changed from | 920 to | 675 revenues, which witnessed 3.7% YoY growth vs. our estimate of 14% EPS FY19E Changed from | 35.9 to | 35.8 YoY growth). Subscription revenues came in at | 339.79 crore (21.3% EPS FY20E Changed from | 41.8 to | 37.5 YoY growth), much ahead of our estimate of 15.3% YoY growth, on Rating Changed from Buy to Hold account of continued benefits of Tamil Nadu digitisation EBITDA came in at | 554.3 crore, up 11.7% YoY, marginally below our Quarterly performance expectations of | 561.4 crore largely owing to lower topline. Margins Q2FY19 Q2FY18 YoY (%) Q1FY19 QoQ (%) at 73.9% were higher than our estimate of 73.5% Revenue 749.6 675.9 10.9 1,120.4 -33.1 The company reported profit of | 351.3 crore (vs. | 303.1 crore) on EBITDA 554.0 496.1 11.7 734.7 -24.6 account of lower depreciation and higher other income EBITDA (%) 73.9 73.4 51 bps 65.6 833 bps PAT 351.3 284.7 23.4 409.1 -14.1 The company has declared an interim dividend of | 2.5 per share, in addition to | 5 per share interim dividend declared during Q1FY19 Key financials Aims to wrest back market share loss; may result in higher content cost | Crore FY17 FY18 FY19E FY20E Sun TV’s Q2FY19 muted ad growth was reflective of its market share loss Net Sales 2,646 2,963 3,547 3,956 in the key Tamil market as it conceded that its ER was impacted owing to EBITDA 1,770 2,004 2,417 2,628 Net Profit 1,030 1,135 1,412 1,479 competitive pressure, resulting in impact on advertisements. EPS (|) 26.1 28.8 35.8 37.5 Furthermore, muted ad growth of ~3.7% was also attributable to i) Kerala floods (~| 7 crore impact), ii) Festive season shifting to Q3 this year (~| 7 Valuation summary crore impact) and iii) couple of prime slots not monetised due to FY17 FY18 FY19E FY20E dedicated live coverage of funeral of former Tamil Nadu chief minister P/E 24.1 21.8 17.6 16.8 (~| 3-4 crore impact). The company also relaunched its second Tamil Target P/E 25.8 23.5 18.9 18.0 GEC (Sun Life) with youth oriented programming to counter competition. EV / EBITDA 13.2 11.4 9.2 8.1 The company has reiterated it would launch a Bangla GEC in Q4FY19, P/BV 6.2 5.3 4.4 3.7 with anticipated spending of ~| 150 crore. The company also indicated it RoNW 25.6 24.2 25.1 22.3 would continue investing in fiction and non-fiction shows to gain RoCE 37.2 35.5 36.8 33.2 viewership and aims to wrest back ~10% of market share. Going ahead, we factor in 11% CAGR (vs. 15% earlier) in ad revenues in FY18-20E to Stock data | 1620 crore. We also build in steep ~30% CAGR in cost of revenues Particular Amount (content cost) in FY18-20, given incremental spending for content in Sun Market Capitalisation | 24783.7 Crore Total Debt (FY18) | 0 Crore Life and Bangla GEC. Cash (FY18) | 372.6 Crore Subscription growth robust on TN digitisation… EV | 23635 Crore Subscription revenue growth of 21.3% YoY was the only silver lining 52 week H/L 1097/ 652 during the quarter led by cable revenues, which were up ~28% YoY to Equity capital 197.0 | 120 crore while DTH revenues were up ~20% YoY to ~| 220 crore. Face value 5.0 With benefits of TN digitisation kicking in, we expect subscription revenue Price performance growth of 17.2% CAGR (FY18-20E) to | 1564 crore by FY20E. We also highlight that the company has now shifted focus to its digital segment 1M 3M 6M 12M (Sun NXT) and now is aiming at active spending including exclusive TV Today -1.1 -6.3 -13.7 10.8 content. Sun is also in discussion with telcos to provide access of Sun TV Sun TV 1.5 -17.0 -23.9 -22.4 to subscribers. The discussion with them is in final stages. ZEEL 0.5 -14.9 -26.0 -16.6 Market share loss & film production to weigh on financials Research Analysts Concerns over rising competitive intensity have heightened, with Bhupendra Tiwary aggressive content strategy by Star, Colors and Zee in the Tamil genre [email protected] notwithstanding Sun’s intent to counter the same. We also remain Sameer Pardikar concerned about the company’s strategy of steep spending in movie [email protected] production (~| 275-300 crore) and its intent to continue the same ahead. Given the sharp competitive intensity in the key market, and volatility on account of movie business, we downgrade the stock to HOLD recommendation. We cut our target multiple further to 18x vs. 23x earlier and value the company at | 675/share. ICICI Securities Ltd | Retail Equity Research Variance analysis Q2FY19 Q2FY19E Q2FY18 Q1FY19 YoY (%) QoQ (%) Comments Revenue 749.6 763.9 675.9 1,120.4 10.9 -33.1 Ad revenue for the quarter was impacted by market share loss and certain one offs Other Income 62.1 38.0 37.2 39.0 66.9 59.3 Raw Material Expenses 90.1 84.0 64.1 80.9 40.6 11.4 Employee Expenses 73.5 80.2 77.4 85.2 -5.1 -13.7 Marketing Expenses 0.0 0.0 0.0 0.0 NA NA Administrative Expenses 32.0 38.2 38.3 148.3 -16.5 -78.4 IPL Franchisee Fees to BCCI 0.0 0.0 0.0 71.3 NA -100.0 EBITDA 554.0 561.4 496.1 734.7 11.7 -24.6 EBITDA Margin (%) 73.9 73.5 73.4 65.6 51 bps 833 bps Depreciation 81.9 135.0 102.7 146.8 -20.3 -44.2 Interest 0.6 0.3 0.1 0.3 850.0 119.2 Total Tax 182.3 161.1 145.9 217.5 25.0 -16.2 PAT 351.3 303.1 284.7 409.1 23.4 -14.1 PAT was better despite miss in topline and EBITDA was on account lower depreciation Key Metrics Ad Revenue Growth 3.7 14.0 6.5 19.8 -279 bps -1603 bps Subscription Revenue Growth 22.4 15.3 14.3 15.1 803 bps 729 bps Subscription growth was healthy on continued benefits of Tamil Nadu digitisation Source: Company, ICICI Direct Research Change in estimates es FY19E FY20E Remarks (| Crore) Old New % Change Old New % Change Revenue 3,568.1 3,546.5 -0.6 4,095.7 3,955.5 -3.4 Lower ad growth estimates to incoporate H1FY19 performance EBITDA 2,441.1 2,417.0 -1.0 2,898.3 2,627.7 -9.3 We raise content costs estimate to incorporate company's spending on Tamil GEC market as well as Bangla GEC spending EBITDA Margin (%) 68.4 68.2 -26 bps 70.8 66.4 -433 bps PAT 1,415.2 1,411.8 -0.2 1,644.9 1,478.7 -10.1 EPS (|) 35.9 35.8 -0.2 41.8 37.5 -10.1 Source: Company, ICICI Direct Research Assumptions Current Earlier Remarks FY16 FY17E FY18E FY19E FY20E FY19E FY20E Ad Revenue Growth -11.4% -3.3% 11.7% 15.0% 15.0% 15.0% 15.0% We lower our subscription revenue estimates as we believe digitisation benefits would be back ended Subscription Revenue Growth 10.5% 18.0% 18.5% 14.6% 21.9% 14.6% 21.9% Source: Company, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 2 Ad revenues to grow at 11% CAGR over FY18-20E Exhibit 1: Ad growth trend 1800 1620 15.0 1600 1445 10.0 1400 1323 1309 12.1 1172 1200 11.7 5.0 10.4 1000 5.7 (11.4) - 800 (%) | Crore | 600 (5.0) 400 (10.0) 200 0 (15.0) FY16 FY17 FY18 FY19E FY20E Ad revenue YoY Growth (RHS) Source: Company, ICICI Direct Research Subscription CAGR of 17.2% in FY18-20 Exhibit 2: Subscription revenue trends 1,800.0 1,564.2 21 1,600.0 18.8 1,345.4 18 1,400.0 17.6 1,138.9 1,200.0 16.3 958.7 18.1 15 1,000.0 815.3 800.0 (%) | crore | 12 600.0 10.6 400.0 9 200.0 - 6 FY16 FY17 FY18 FY19E FY20E Subscription revenues YoY Growth (RHS) Source: Company, ICICI Direct Research EBITDA margins to be impacted by steep rise in content spending Exhibit 3: EBITDA margins trend 80.0 70.0 66.9 67.6 68.2 66.4 70.0 60.0 50.0 38.3 40.0 % 30.0 37.3 38.9 39.8 37.4 20.0 10.0 0.0 FY16 FY17 FY18 FY19E FY20E EBITDA Margin PAT Margin Source: Company, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 3 BARC rating trend… Sun TV continues to lose market share while peers, Exhibit 4: Tamil markets BARC weekly data for Q2FY19 especially Zee Tamil, have been gaining share 50.0 45.0 40.0 35.0 30.0 25.0 Market Share (%) Share Market 20.0 15.0 10.0 Wk 27 Wk 28 Wk 29 Wk 30 Wk 31 Wk 32 Wk 33 Wk 34 Wk 35 Wk 36 Wk 37 Wk 38 Wk 39 Sun TV STAR Vijay KTV Zee Tamil Source: Company, ICICI Direct Research Exhibit 5: Kannada markets BARC weekly data for Q2FY19 40.0 35.0 30.0 25.0 20.0 15.0 Market Share (%) Share Market 10.0 5.0 - Wk 27 Wk 28 Wk 29 Wk 30 Wk 31 Wk 32 Wk 33 Wk 34 Wk 35 Wk 36 Wk 37 Wk 38 Wk 39 Colors Kannada Zee Kannada Udaya Movies Udaya TV Source: Company, ICICI Direct Research Exhibit 6: Malayalam markets BARC weekly data for Q2FY19 50.0 45.0 40.0 35.0 30.0 25.0 20.0 15.0 Market Share (%) Share Market 10.0 5.0 - Wk 27 Wk 28 Wk 29 Wk 30 Wk 31 Wk 32 Wk 33 Wk 34 Wk 35 Wk 36 Wk 37 Wk 38 Wk 39 Asianet Surya TV Mazhavil Manorama Asianet Movies Source: BARC, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 4 Exhibit 7: Telugu markets BARC weekly data for Q2FY19 Gemini TV down to No 4 after temporary viewership gain 29.0 during the quarter 26.0 23.0 Market Share (%) Share Market 20.0 17.0 Wk 27 Wk 28 Wk 29 Wk 30 Wk 31 Wk 32 Wk 33 Wk 34 Wk 35 Wk 36 Wk 37 Wk 38 Wk 39 STAR Maa ETV Telugu Gemini TV Zee Telugu Source: BARC, ICICI Direct Research ICICI Securities Ltd | Retail Equity Research Page 5 Conference Call Highlights Ad growth impacted by one-offs & ER decline; guided for early teen ad revenue growth in H2FY19: The management indicated that apart from hit on ER due to competition, the muted ad revenue growth for the quarter was attributed to i) Kerala floods (~| 7 crore impact) ii) festive season shifting to Q3 this year (~| 7 crore impact) iii) couple of prime slots on Sun TV dedicated live coverage of funeral of former Tamil Nadu chief minister (~| 3-4 crore impact).