Sun TV Network’s Q4FY18 revenue and EBITDA surpassed our estimates due to higher-than-expected ad and subscription growth. Key positives: (i) 26% YoY spurt in advertising—atleast six years’ high—due to yield improvement & better inventory utilisation; and (ii) 28% YoY jump in overall subscription—atleast six years’ high—led by subscription surge in Tamil market. Though programming cost jumped 18% YoY, it was due to sustained efforts to shift from ad slot to commissioned model in Tamil Nadu.
Management believes, Sun TV can easily earn extra Rs 300-500 crore subscription revenue post Tamil Nadu’s digitisation. Second GEC in Tamil Nadu, entry in other regional markets like Marathi & Bengali and competition from Colors (Colors Tamil launched in Feb) and ZEE Tamil are key monitorables. We estimate double digit ad revenue spurt to sustain over FY19 and FY20. Hence, maintain ‘BUY’.
Ad revenue hit atleast six years’ high clocking 26% YoY growth in Q4FY18 on a low base of 7.5% YoY ad decline. Management estimates double digit ad growth in FY19. Subscription grew ~28% YoY. Sun TV has shifted entirely to the commissioned model in all its markets, except Tamil Nadu, where it is in the process of shifting. Sun TV is evaluating other regional markets like Marathi and Bengali; ii) depreciation: R17.8 crore; amortisation: Rs 960 crore; iii) The company will continue to charge subscription for its OTT platform. iv) The additional IPL and subscription revenues will have positive impact on EBITDA margin and v) The company can easily garner extra subscription revenue of Rs 300-500 crore post the Tamil Nadu digitisation.
We anticipate strong re-rating in the near term due to robust beat in Q4FY18 on all fronts, ad growth at par with ZEE and Sun TV trading at a significant valuation discount to ZEE. IPL is an additional trigger in H1FY19 aided by new revenue share and blockbuster show of its IPL team. Digitisation in Tamil Nadu is a key stock catalyst. Also, with ratings improvement in key markets, ad growth is expected to improve. We retain target multiple of 28x FY20E EPS to arrive at TP of R1,064. At CMP, the stock trades at 25.3x FY19E and 22.8x FY20E EPS. We maintain ‘BUY/SO’.