Sun TV Network’s (Sun TV’s) Q1FY19 revenue and Ebitda surpassed our estimates led by higher-than-expected IPL revenue. Key positives: (i) ~20% y-o-y spurt in advertising, albeit on a negative base of -4.1%; and (ii) ~15% y-o-y jump in overall subscription—subscription revenue growth would have been higher but for catch-up revenue, which made the base higher. Management’s decision to cap their salary at last-year levels and a likely increase in dividend payout are major positives. Management believes an addition of 8-8.5 million subscribers is possible after the completion of digitisation in Tamil Nadu (TN; end-FY19). The second GEC in TN and entry into other regional markets such as Marathi and Bengali are key monitorables. We are raising FY19/20e EPS by 7.9/13.5% factoring in speedy digitisation in Tamil Nadu and a good performance by Sun TV’s IPL team. Maintain Buy with a revised TP of Rs 1,208 (earlier Rs 1,064).
All round surge in revenue streams — 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 one market. Management estimates double-digit ad growth in FY19. Sun TV has signed a deal with Jio for its content on SUN NXT.
Q1FY19 conference call: Key takeaways — (i) Sun TV is planning to re-position Sun Life channel as its second GEC in Tamil; (ii) the company expects to enter the Bengali market by the end of FY19 and break even soon in the new channels; (iii) it expects a lot of sponsorship opportunities as its IPL team is becoming popular; (iv) management believes it can earn extra Rs 3 bn to Rs 5 bn due to digitisation in the Tamil Nadu market.
Outlook and valuation: Gathering steam—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 target price of Rs 1,208. We maintain ‘BUY/SO’. At CMP, the stock is trading at 19.2X FY20e EPS.