We have reduced our medium-term forecasts, based on likely slower pick up in subscription revenue growth (slow progress in Phase-III digitization). Further, we have lowered ad-growth outlook to 8% CAGR vs. 10% previously, on back of weaker non-Tamil channel ratings (per BARC data).
Nonetheless, we expect double-digit EBITDA growth to continue (low teens in FY17E/18E, 15-20% thereafter], as also robust free cash generation (c. R10 billion in FY17E). Despite intermittent news-flow around 2G/CBI investigations, we do not see significant likelihood of business disruption. At 7.6x FY17E EV/EBITDA, Sun is undervalued, and trades at 60% discount to Zee.
With 7.5% underlying FCFE yield in FY17E and strong cash position, Sun can easily boost dividend yield to well above our FY17 forecast of 4.3%. Our revised Mar-17 target price of R450 is at a 10% discount to underlying DCF [R500 vs R480 previously], as we conservatively incorporate the risk of 12-minute ad-cap reinstatement. Removal of judicial stay on digitization in AP/TN is a re-rating trigger. Downside risks are lower pace of digitization, key person dependency.
Although standalone ad revenue growth recovered to 11% y-o-y in 9MFY16 from 2%/6% in FY14/15, near-to-medium term outlook has weakened in our view, led by fall in viewership share and rankings of all non-Tamil GECs. Based on BARC data for last 18 weeks, ranks of
Telugu/Kannada/Malaylam GECs have fallen to 4/3/3 from 2/1/2 (based on TAM data previously); management has attributed it to higher weightage of rural audience in BARC (50% vs 25% in TAM).