RESULT UPDATE SUN TV NETWORK All -round performance; management salary capped India Equity Research| Media COMPANYNAME Sun TV Network’s (Sun TV) Q1FY19 revenue and EBITDA surpassed our EDELWEISS 4D RATINGS estimates led by higher-than-expected IPL revenue. Key positives: (i) Absolute Rating BUY ~20% YoY spurt in advertising, albeit on a negative base of -4.1%; and (ii) Rating Relative to Sector Outperform ~15% YoY jump in overall subscription—subscription revenue growth Risk Rating Relative to Sector High would have been higher but for catch-up revenue, which made the base Sector Relative to Market Overweight higher. Management’s decision to cap their salary at last-year levels and a likely increase in dividend payout are major positives. Management MARKET DATA (R: SUTV.BO, B: SUNTV IN) believes an addition of 8–8.5mn subscribers is possible after the CMP : INR 826 completion digitisation in Tamil Nadu (TN; end-FY19). The second GEC in Target Price : INR 1,208 TN and entry into other regional markets such as Marathi and Bengali are 52-week range (INR) : 1,098 / 652 key monitorables. We are raising FY19/20E EPS by 7.9%/13.5% factoring Share in issue (mn) : 394.1 in speedy digitisation in Tamil Nadu and a good performance by Sun TV’s M cap (INR bn/USD mn) : 326 / 4,678 IPL team. Maintain ‘BUY’ with a revised TP of INR1,208 (earlier INR1,064). Avg. Daily Vol.BSE/NSE(‘000) : 1,526.8 All round surge in revenue streams SHARE HOLDING PATTERN (%) Ad revenue clocked 20% YoY growth in Q1FY19, albeit on a negative base of 4.1% Current Q4FY18 Q3FY18 Promoters * 75.0 75.0 75.0 YoY. Share of Tamil market to the total ad revenues fell from the earlier 67% to 60% which in fact helps in reducing concentration risk from 1 market. Management MF's, FI's & BK’s 3.8 3.8 3.1 estimates double digit ad growth in FY19. Subscription income grew ~15% YoY. Sun TV FII's 13.0 13.0 13.8 Others 8.1 8.1 8.0 has signed a deal with Jio for its content on SUN NXT. * Promoters pledged shares : 12.5 (% of share in issue) Q1FY19 conference call: Key takeaways i) Sun TV is planning to re-position Sun Life channel as its second GEC in Tamil; ii) the PRICE PERFORMANCE (%) company expects to enter the Bengali market by the end of FY19 and break even soon EW Media Stock Nifty in the new channels; iii) it expects a lot of sponsorship opportunities as its IPL team is Index becoming popular; iv) Management believes it can earn extra INR3bn to 5bn due to 1 month 2.4 5.7 (2.7) digitization in the Tamil Nadu market and v) Sun Nxt is in its early days and the 3 months (7.9) 6.3 (13.6) company will share numbers once it becomes substantial part of the business. 12 months 7.8 13.2 (5.2) Outlook and valuation: Gathering steam; maintain ‘BUY’ We anticipate re-rating due to the robust beat in Q1FY19 on all fronts, management salary being capped at FY18 levels and likely increase in dividend payout. Digitisation in Tamil Nadu is a key positive trigger. We retain the target multiple of 28x FY20E EPS that yields our TP of INR1,208. We maintain ’BUY/SO’. At CMP, the stock is trading at 19.2X FY20E EPS. Financials (INR mn) Abneesh Roy Year to March Q1FY19 Q1FY18 % Change Q4FY18 % Change FY18 FY19E FY20E +91 22 6620 3141 Revenues 11,204 7,863 42.5 7,170 56.3 29,630 35,241 40,326 [email protected] EBITDA 7,347 4,484 63.9 5,224 40.6 20,038 25,214 29,265 Monit Vyas Adjusted Profit 4,091 2,517 62.6 2,898 41.2 11,354 14,597 16,996 +91 (22) 6623 3463 Adj. Diluted EPS 10.4 6.4 62.6 7.4 41.2 28.8 37.0 43.1 [email protected] Dil. P/E (x) 28.7 22.3 19.2 ROAE (%) 26.0 28.6 28.5 August 13, 2018 Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited Media Table 1: Trends at a glance INR mn Q4FY16 Q1FY17 Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Ad + Broadcast 3,130 3,400 3,390 3,010 2,920 3,018 3,530 3,580 3,679 3,625 DTH 1,560 1,590 1,610 1,670 1,710 1,740 1,840 1,870 2,050 2,120 Cable 600 740 820 750 710 960 940 950 1,038 1,000 International 360 380 400 390 370 440 400 410 272 430 Movies/Others 56 70 35 80 100 50 50 30 130 130 Total revenue (ex - IPL) 5,706 6,180 6,254 5,900 5,810 6,208 6,760 6,840 7,170 7,298 Cost of Revenues 463 497 513 538 617 683 641 811 727 809 Staff cost 630 603 718 599 643 684 774 722 761 852 Growth rate Ad + Broadcast (5.7) (3.7) 2.8 (7.5) (6.7) (11.2) 4.1 18.9 26.0 20.1 DTH revenue 15.6 16.0 15.1 10.7 9.6 9.4 14.3 12.0 19.9 21.8 Cable 5.3 37.0 42.4 29.3 18.3 29.7 14.6 26.7 46.3 4.2 International 5.9 2.7 13.0 11.4 2.8 15.8 - 5.1 (26.5) (2.3) Cost of revenues 3.1 (2.1) 14.2 35.2 33.3 37.6 24.8 50.7 17.8 18.4 Staff cost 20.8 10.6 20.5 1.9 2.0 13.5 7.7 20.6 18.4 24.5 % of revenues Cost of revenues 8.1 6.5 8.2 9.1 10.6 8.7 9.5 11.9 10.1 7.2 Staff cost 11.0 7.9 11.5 10.2 11.0 8.7 11.4 10.6 10.6 7.6 Other expenditure 6.1 16.9 5.8 6.1 10.8 14.7 5.7 5.6 6.4 13.2 EBITDA margin 74.7 57.4 74.6 74.6 67.6 57.0 73.4 72.0 72.9 65.6 EBITDA margin (ex IPL) 74.7 75.9 74.6 74.6 67.6 73.2 73.4 72.0 72.9 65.6 Source: Company, Edelweiss research Q1FY19 conference call | Key takeaways Salary & Balance sheet: The Chairman and joint managing director have decided to cap their salaries at the same level in FY19 as last year in spite of higher profits. INR 22bn of cash on the balance sheet. The company is likely to step up the dividend pay out ratio. IPL Sales booked is INR3.8bn in FY19 (all booked in Q1FY19) from IPL. Extra income attributed to runners up prize is very minuscule part of the total IPL revenue. Gate collections are improving due to increased popularity of its IPL team. The company believes that its IPL team will become more valuable in the coming years. It expects IPL revenue to continue to grow over ensuing years. The company expects lot of sponsorship opportunities, as its IPL team becomes more popular. Advertising Advertising revenue growth stood at ~20% YoY. Sun TV is seeing high growth in ad revenues in Malayalam and Kannada markets. Share of Tamil market to the total advertising income is coming down from the earlier 67% to 60%. 2 Edelweiss Securities Limited Sun TV Network There was a temporary dip in Sun TV’s viewership due to IPL and other external factors. Colors Tamil market share - 4%. Depreciation & Amortisation There was a one-off increase in depreciation cost due to the showing of blockbuster movie on the 25th anniversary Sun TV. Depreciation stood at INR160mn and amortisation at INR1310mn. The company expects depreciation cost to stabilise in coming quarters. Depreciation expense is expected to be INR4.2bn for FY19. Subscription Subscription growth for the quarter stood at ~15%, largely led by volume. Management believes it can earn extra INR3-5bn due to additional digitisation of 8- 8.5mn connections, which it expects to be completed in next few months. Subscription revenue increased by NR400mn during the quarter – DTH INR370mn and cable INR30mn. DTH subscription stood at INR2,120mn and analog at INR1,000mn. Content Cost The company launched back-to-back four new shows. Content cost will increase due to launch of new channels. New channels The company plans to reposition Sun Life as its second GEC channel in Tamil. The second GEC in the Tamil market will cater to the youth and not cannabalise the existing market share of Sun TV. The company is also evaluating to enter the Marathi and Bengali markets. It expects to enter the Bengali market by end of FY19. The company expects to break even very soon for the new channels.. Sun Nxt Sun Nxt is in its early days and the company will share numbers once it becomes substantial part of the business. The company has signed a deal with Jio for its content on Sun Nxt. The company is focused to enhance the reach of Sun Nxt by being available across various platforms. Outlook and valuations: Gathering steam; maintain ‘BUY’ The regulatory concern on Sun TV has waned as the special court has acquitted the promoters, resulting in re-rating.