We upgrade Sun TV to ‘add’ (earlier ‘reduce’) with a target of R430 (unchanged) with modest impact in FY14e. We believe H2FY14 will be challenging, but we see likely improvement in advertising and continued traction in subscription thereafter.
We cut our FY14e EPS estimate for Sun TV by 5%, led by reduced ad growth of 3% y-o-y (8% previously); however, lost ad growth in FY14e will be compensated for in FY15e (rate hikes or higher ad volumes in case the court strikes down implementation of the ad cap). Our FY15-16 EPS estimates are largely unchanged, led by increased ad growth of 15% y-o-y (10% previously).
Sun TV’s stock has under-performed the benchmark Sensex by over 11.1% over the past three months, led by weak Q2 FY14 financials. Factors behind weak advertising — compliance with the Trai ad cap of 12 minutes per hour (from 17-18 minutes), resistance to price hike (dual pricing in the market given ad inventory shared with content partners), and market share loss are moderating. We expect ad recovery by FY15 coupled with DAS-led robust growth in subscription revenue.
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