13 November 2020 2QFY21 Results Update | Sector: Media Sun TV Network Estimate changes CMP: INR443 TP: INR530(+20% ) Buy TP change Rating change EBITDA supported by lower opex; Subscription Bloomberg SUNTV IN revenues trend higher Equity Shares (m) 394 Sun TV’s 2QFY21 revenue recovered with 2% YoY decline (in-line) v/s 45% M.Cap.(INRb)/(USDb) 174.6 / 2.3 decline in 1QFY21. This was attributed to stronger ad revenues and resilient 52-Week Range (INR) 520 / 260 1, 6, 12 Rel. Per (%) -8/-30/-24 subscription revenues. EBITDA grew 7% (5% above est.) with cost 12M Avg Val (INR M) 1124 rationalization. We have revised up our FY21E EBITDA by 7% on lower-than-estimated cost Financials & Valuations (INR b) in 2QFY21. Our FY22E revenue/EBITDA estimates are largely maintained; we Y/E March FY20 FY21E FY22E factor in 11%/14% growth over FY20. Revival in earnings and a low Sales 34.0 32.0 37.7 valuation make it attractive. Maintain Buy. EBITDA 22.4 21.4 25.5 Adj. PAT 13.7 14.0 16.2 Revenue down 2.3% YoY (in-line); EBITDA up 7% YoY (5% beat) EBITDA Margin (%) 65.7 66.9 67.7 SUN TV’s 2QFY21 revenues declined 2.3% YoY to INR7.6b (in-line), v/s 45% Adj. EPS (INR) 34.8 35.5 41.1 decline in 1QFY21. Advertisement revenue recovered – down 29% v/s 67% EPS Gr. (%) -1.7 2.0 15.8 in 1QFY21; subscription revenue grew 14%. BV/Sh. (INR) 142.7 149.3 161.6 Production costs / Employee expenses were down 35%/3% YoY, while SG&A Ratios Net D:E -0.6 -0.7 -0.8 was up 8% YoY. This led to an overall 17% drop in opex v/s est. opex decline RoE (%) 24.8 24.3 26.4 of 13%. RoCE (%) 24.9 24.4 26.5 Thus, EBITDA grew 7% YoY to INR5b (5% beat), supported by a reduction in Payout (%) 82.9 81.3 70.2 operating costs and marginally better-than-expected revenue; EBITDA Valuations margins stood at 66.4% (up 580bps YoY). P/E (x) 12.7 12.5 10.8 Other income came in at INR516m (down 29% YoY). Subsequently, net P/B (x) 3.1 3.0 2.7 EV/EBITDA (x) 6.6 6.5 6.4 profit fell 6% YoY to INR3.5b (20% beat). Div. Yield (%) 5.6 5.6 5.6 Sun TV generated strong INR8b cash from operations in 1HFY21. Furthermore, its liquidity position remains strong as the company has net Shareholding pattern (%) cash of INR35.9b. As On Sep-20 Jun-20 Sep-19 Highlights from management commentary Promoter 75.0 75.0 75.0 DII 5.3 5.6 8.1 Revenue: Advertisement revenue has picked up to 80% of pre-COVID levels FII 10.9 10.3 8.5 in Oct’20. However, de-growth is expected in FY21 given weak recovery Others 8.9 9.1 8.4 from regional customers. Subscription revenue should grow in the double FII Includes depository receipts digits even excluding contribution from OTT subscriptions. IPL: Profit from the event should be significantly lower YoY due to a change in the title sponsor (INR125m loss), lost ticket revenue (INR250–300m), and higher operational expense as the tournament took place in the UAE. Content focus: The current focus remains on the pipeline of eight blockbusters (INR3–4b cost), scheduled to be released over the next 12 months, along with the revamping of TV content. After this, the management would focus on Sun Next original content. OTT: Original content production has been delayed due to movie line-ups. However, the target is to annually invest INR2b in OTT from FY22. The platform is expected to clock higher revenues given strong subscriber traction and demand on telco/other OTT platforms. Research Analyst: Aliasgar Shakir ([email protected]) Suhel Shaikh ([email protected]) | Anshul Aggarwal ([email protected]) Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Sun TV Network Valuation and view Subscription growth has remained steady in the last few quarters despite the lockdown, while ad revenues are recovering gradually. We expect subscription revenue to grow in the double digits in FY22E, while ad revenues should revive as the market recovers. Sun TV has a strong liquidity position, with INR35.9b net cash. This should help the company maintain a stronger position in the current lockdown crisis and aid strong investments in the Sun NXT platform. The valuation has shrunk significantly from >25x two years back v/s prevailing P/E of 11x. This is due to weak earnings on the back of dilution in viewership and limited focus on the digital platform Sun NXT. However, recent strong commentary on a TV content revamp and a strong funnel of movie content could aid earnings revival. We expect FY22 revenue/EBITDA to grow 11%/14% over FY20 on the back of an improving macro environment, coupled with a revamp in content addition. Sun TV trades at FY21E/FY22E P/E of 12.5x/10.8x. We value Sun TV at FY22E P/E of 13x to arrive at TP of INR530. Maintain Buy. Standalone – Quarterly Earnings Model (INR m) Y/E March FY20 FY21 FY20 FY21E FY21E Est Var 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE 2Q (%) Revenue 10,804 7,739 8,150 7,352 6,061 7,562 9,717 8,670 34,044 32,009 7,425 2 YoY Change (%) -3.6 3.3 -9.9 -17.3 -43.9 -2.3 19.2 17.9 -7.1 -6.0 -4.1 Total Expenditure 3,975 3,052 2,346 2,317 1,896 2,541 3,620 2,528 11,684 10,586 2,646 -4 EBITDA 6,829 4,687 5,804 5,035 4,165 5,020 6,097 6,141 22,361 21,423 4,778 5 YoY Change (%) -7.1 -15.4 -13.0 -17.2 -39.0 7.1 5.0 22.0 -12.8 -4.2 1.9 516 Depreciation 1,585 1,444 1,436 2,328 1,455 913 1,207 1,313 6,793 4,888 1,394 -35 Interest 21 20 19 19 18 16 19 25 78 78 19 -20 Other Income 567 721 636 570 1,086 516 317 301 2,489 2,220 488 6 PBT 5,791 3,945 4,985 3,259 3,779 4,607 5,187 5,104 17,979 18,678 3,852 20 Tax 1,972 280 1,250 759 951 1,148 1,305 1,284 4,261 4,688 969 Rate (%) 34.1 7.1 25.1 23.3 25.2 24.9 25.2 25.2 23.7 25.1 25.2 Reported PAT 3,819 3,665 3,735 2,500 2,828 3,459 3,882 3,820 13,718 13,989 2,883 20 YoY Change (%) -6.7 4.3 6.3 -11.7 -25.9 -5.6 4.0 52.8 -1.7 2.0 -21.3 E: MOFSL Estimates Key Performance Indicators Y/E March FY20 FY21 FY20 FY21E 1Q 2Q 3Q 4Q 1Q 2Q 3QE 4QE Revenue Breakup Advertising 3,682 3,370 3,410 2,910 1,210 2,400 3,069 3,348 13,369 10,027 Broadcasting 100 80 50 40 50 50 53 50 270 203 Total Advertising & Broadcasting 3,782 3,450 3,460 2,950 1,260 2,450 3,122 3,397 13,639 10,229 International subscription 410 410 410 410 378 370 373 371 1,640 1,492 Domestic Subscription 3,969 3,973 4,119 3,988 4,423 4,270 4,472 4,673 15,622 17,838 - Domestic Cable 1,690 1,680 2,050 1,930 2,260 1,950 2,050 2,193 7,350 8,453 - DTH 2,280 2,290 2,070 2,050 2,160 2,320 2,422 2,483 8,690 9,385 Total Subscription revenue 4,379 4,383 4,529 4,398 4,801 4,640 4,845 5,044 17,262 19,330 Films, IPL and Others 2,643 -94 161 8 1 471 1,750 228 2,719 2,450 Total 10,804 7,739 8,150 7,356 6,061 7,562 9,717 8,670 33,620 32,009 Production Costs (%) 13 20 14 13 11 13 11 12 16 12 EBITDA Margin (%) 63.2 60.6 71.2 68.5 68.7 66.4 62.7 70.8 65.7 66.9 EBIT Margins (%) 53.8 51.2 61.4 44.6 62.6 61.1 53.6 59.2 53.0 58.6 PAT Margins (%) 35.3 47.4 45.8 34.0 46.7 45.7 40.0 44.1 40.3 43.7 E: MOFSL Estimates 13 November 2020 2 Sun TV Network Exhibit 1: Valuation based on FY22 EPS Particulars FY22 EPS (INR) 41 PE multiple (x) 13 Target Price (INR) 530 CMP (INR) 443 Upside (%) 20% Source: Company, MOFSL Exhibit 2: SUNTV: 1-year forward P/E band P/E (x) Avg (x) Max (x) Min (x) +1SD -1SD 35.0 32.5 30.0 25.0 24.0 20.0 19.2 15.0 14.3 10.0 9.0 11.2 5.0 0.0 Jul-14 Jul-19 Jan-12 Jan-17 Oct-10 Oct-15 Oct-20 Apr-13 Apr-18 Source: Company, MOFSL 2QFY21 earnings call highlights OTT and content Current focus on blockbuster pipeline: The current focus remains on the pipeline of eight blockbusters, scheduled to be released over the next 12 months.