India Equity Research Media February 8, 2021 SUN TV NETWORK RESULT UPDATE KEY DATA Banking on normalcy Rating BUY Sector relative Outperformer Price (INR) 551 12 month price target (INR) 642 SUN TV Network’s (SUN TV) Q3FY21 revenue and EBITDA came in line, Market cap (INR bn/USD bn) 217/3.0 while PAT surpassed our estimates. While advertising revenue slid Free float/Foreign ownership (%) 886.5/524.1 What’s Changed 9.5% YoY, a modest growth in subscription revenue (3%), along with Target Price ⚊ presence of INR2.1bn income from IPL franchise (absent in base), led Rating/Risk Rating ⚊ to total revenue growing 19% YoY. EBITDA grew mere 3.5% owing to QUICK TAKE higher IPL expenses, with margin dipping 940bps YoY. Above In line Below Profit With the festive season behind, we will be watchful of SUN TV’s Margins channel portfolio performance to gauge the stickiness of ad revenues. Revenue Growth Overall SUN TV’s intention to ramp up its viewership in key markets and plan to launch Marathi channel are positive. Maintain ‘BUY’. FINANCIALS (INR mn) Ad revenues weak; IPL aids growth Year to March FY20A FY21E FY22E FY23E Domestic ad revenue declined 9.5% YoY in Q3FY21 despite a strong festive boom. Revenue 35,199 30,848 38,651 41,528 Local advertising, particularly from regional jewellery and retail players, remained EBITDA 22,759 20,590 25,289 27,473 Adjusted profit 13,855 13,748 15,819 17,105 soft during the quarter. Subscription revenue growth too stood a modest 3% with Diluted EPS (INR) 35.2 34.9 40.1 43.4 DTH revenue growing 8.2% YoY on a negative 11% base; digital cable dipped EPS growth (%) (3.4) (0.8) 15.1 8.1 marginally by 2.4% (on a base of 74%). SUNTV’s IPL franchise contributed RoAE (%) 24.6 23.2 25.4 26.4 incremental growth of INR2.1bn to revenue during Q3 and delivered profit of P/E (x) 15.7 15.9 13.8 12.7 INR929mn for FY21 (through Q2/Q3). Cost of revenue increased 11% YoY and, given EV/EBITDA (x) 9.3 10.3 8.3 7.5 Dividend yield (%) 4.5 3.8 5.1 5.5 SUN TV’s plans to drive viewership, is likely to be elevated over the coming years. Traction in SUN NXT remains stable–18mn users–similar to the previous quarter. PRICE PERFORMANCE Q3FY21 earnings call: Key takeaways 575 52,000 i) Launched new shows to bounce back to 50%-plus viewership share. The efforts will 510 46,600 take time to manifest into ratings. ii) Most of the new programming is on commission 445 41,200 model. Can expect 20-25% increase in content cost in FY22 against FY20. iii) Jan-Feb 380 35,800 look promising in terms of ad demand. iv) Capital allocation in terms of content – 315 30,400 250 25,000 Tamil and Telugu markets will get the lion’s share; Bengal and Marathi next; plan to Feb-20 May-20 Aug-20 Nov-20 enter Marathi market in FY22. v) Has five movies in the pipeline; expects to release SUNTV IN Equity Sensex three-four in the next fiscal. Investment around INR3.0-3.5bn. Outlook and valuations: Promising; maintain ‘BUY’ Explore: We expect SUN TV to benefit from the secular revival in ad demand given its strong presence in Southern markets. With a strong balance sheet, plans to expand to new geographies and a healthy dividend pay out ratio, we maintain ‘BUY/SO’ with TP of INR642 (at 16x FY22E EPS). The stock is trading at 13.8x FY22E EPS. Financial model Podcast Financials Year to March Q3FY21 Q3FY20 % Change Q2FY21 % Change Net Revenue 9,723 8,150 19.3 7,562 28.6 EBITDA 6,007 5,804 3.5 5,020 19.7 Adjusted Profit 4,418 3,735 18.3 3,459 27.7 Video Corporate access Diluted EPS (INR) 11.2 9.5 18.3 8.8 27.7 Abneesh Roy Prateek Barsagade +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited SUN TV NETWORK Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 35,199 30,848 38,651 41,528 Share capital 1,970 1,970 1,970 1,970 Gross profit 29,931 26,818 32,752 35,334 Reserves 55,271 59,074 61,543 64,213 Employee costs 3,232 3,168 3,389 3,525 Shareholders funds 57,241 61,044 63,513 66,183 Other expenses 463 0 800 800 Minority interest 48 48 48 48 EBITDA 22,759 20,590 25,289 27,473 Borrowings 1,289 689 569 549 Depreciation 7,002 4,616 7,129 7,322 Trade payables 3,167 1,250 2,952 1,460 Less: Interest expense 128 57 14 5 Other liabs & prov 3,281 2,781 2,581 2,381 Add: Other income 2,607 2,519 3,058 2,777 Total liabilities 65,075 65,862 69,714 70,671 Profit before tax 18,236 18,436 21,204 22,923 Net block 6,509 6,105 5,953 5,613 Prov for tax 4,340 4,646 5,343 5,777 Intangible assets 3,925 3,214 4,388 3,906 Less: Other adj (42) (42) (42) (42) Capital WIP 663 500 400 400 Reported profit 13,855 13,748 15,819 17,105 Total fixed assets 12,034 10,697 11,528 10,616 Less: Excp.item (net) 0 0 0 0 Non current inv 4,416 4,416 4,416 4,416 Adjusted profit 13,855 13,748 15,819 17,105 Cash/cash equivalent 7,032 7,344 9,470 12,749 Diluted shares o/s 394 394 394 394 Sundry debtors 13,672 15,062 15,647 13,935 Adjusted diluted EPS 35.2 34.9 40.1 43.4 Loans & advances 22,640 23,140 23,440 23,740 DPS (INR) 25.0 20.9 28.1 30.4 Other assets 2,310 2,315 2,312 2,315 Tax rate (%) 23.8 25.2 25.2 25.2 Total assets 65,075 65,862 69,714 70,671 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Ad revenue growth (%) (15.5) (20.0) 24.0 14.0 Reported profit 13,855 13,748 15,819 17,105 Subscription growth (%) 0 0 0 0 Add: Depreciation 7,002 4,616 7,129 7,322 Dom. sub growth (%) 18.3 14.0 8.6 3.4 Interest (net of tax) 128 57 14 5 EBITDA margin (%) 64.7 66.7 65.4 66.2 Others (1,936) (2,519) (3,058) (2,777) Net profit margin (%) 39.4 44.6 40.9 41.2 Less: Changes in WC (2,492) (4,516) 621 (283) Revenue growth (% YoY) (6.9) (12.4) 25.3 7.4 Operating cash flow 16,556 11,387 20,524 21,372 EBITDA growth (% YoY) (12.7) (9.5) 22.8 8.6 Less: Capex 6,509 3,387 8,050 6,500 Adj. profit growth (%) (3.4) (0.8) 15.1 8.1 Free cash flow 10,047 8,000 12,474 14,872 Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (6.0) 7.0 6.0 RoE (%) 24.6 23.2 25.4 26.4 Repo rate (%) 4.4 3.5 3.5 4.0 RoCE (%) 31.9 30.7 33.7 35.0 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 0 0 0 0 Direct cost (% of sales) 2.2 3.1 2.8 2.7 Receivable days 130 170 145 130 Employee Cost (%) 0.2 1.0 0.9 0.9 Payable days 189 200 130 130 SG&A expense (%) 7.7 5.1 4.5 4.4 Working cap (% sales) 113.8 144.8 119.5 119.8 Debtors days 129.7 170.0 145.0 130.0 Gross debt/equity (x) 0 0 0 0 Inventory days 0.2 0.2 0.2 0.2 Net debt/equity (x) (0.1) (0.1) (0.1) (0.2) Payable days 189.2 200.0 130.0 130.0 Interest coverage (x) 123.6 280.0 1,311.4 3,698.8 Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 15.7 15.9 13.8 12.7 EPS growth (%) (3.4) (0.8) 15.1 8.1 Price/BV (x) 3.8 3.6 3.4 3.3 RoE (%) 24.6 23.2 25.4 26.4 EV/EBITDA (x) 9.3 10.3 8.3 7.5 EBITDA growth (%) (12.7) (9.5) 22.8 8.6 Dividend yield (%) 4.5 3.8 5.1 5.5 Payout ratio (%) 71.1 60.0 70.0 70.0 Source: Company and Edelweiss estimates 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited SUN TV NETWORK Q3FY21 conference call: Key takeaways Local advertising remained low during the quarter. From Q2, there has been an improvement, but lower than last year as retail advertising is still low.