We note that SUN’s 2-year ad revenue CAGR for Q3FY18 at 5% is significantly lower than Zee’s (Z IN) at 15% CAGR
SUN (SUNTV IN) reported 16% y-o-y growth in Q3FY18 revenues (on a low base), while Ebitda was up ~12% to Rs 4.9 bn (in line). Ebitda margin at 72% was below our estimate of 73.1%. Advertisement revenue was 22% y-o-y (excluding telecast fee), while subscription revenue was up 17% y-o-y. We note that SUN’s 2-year ad revenue CAGR for Q3FY18 at 5% is significantly lower than Zee’s (Z IN) at 15% CAGR. Going ahead, competitive intensity is likely to rise sharply with the launch of Viacom18 in Tamil on 19 February with ~22 hours of original content per week. Also, Sun is yet to diversify into other regional genres, or launch a second Tamil GEC. Thus, we expect Sun’s ad growth to remain slower at 9%/11% in FY19/20F. Progress of digitisation in Tamil Nadu and digital deals at Rs 10-15 ARPU improve visibility on subscription growth in the near term. Thus, we raise our subscription growth to 23/15% from 19/15% earlier in FY19/20F. We expect Ebitda margins at 67/67.7/67.9% in FY18-20F. We expect higher content cost pressures due to a shift to commissioned content to lower ex-IPL Ebitda margins to 71% in FY19/20F from 72.5% in FY18F. Overall, our EPS is revised up by 3% in FY19F/20F.
Valuation – target price of Rs 1,091 based on 27x FY20F EPS
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We maintain our target P/E at 27x FY20F EPS (current P/E at ~24.1x FY20F) to arrive at our TP of Rs 1,091 (Rs 1,022 earlier). This is driven by 20% EPS CAGR FY18-20F due to benefits from digitisation. Catalysts which can drive further re-rating are double-digit ad revenue growth, stable dividend policy (37% in 9MFY18 vs FY18F estimate of 60%) and lower management remuneration (currently at ~10% of net profits). Our TP implies only 12% upside from current levels and, thus, we downgrade our recommendation to Neutral. Zee remains our Buy in the sector.
Key takeaways from the conference call
Advertisements: The company indicated that big national advertisers have come back and should lead to double-digit advertisement growth continuing in FY19F. Sun TV has seen significant revenue growth in Malayalam (45% y-o-y) and Kannada (27% y-o-y), on a low base. The company expects the trend to sustain going ahead. In FY18, Q2 had more number of festive days compared to last year. Content cost has jumped sharply in Q3 as the company is spending more on commissioned content and impact properties. Commissioned content slots in Tamil have increased from 1 in prime time earlier to 2 slots in after noon time and 2 slots in prime time. This implies 2 hours in commissioned content out of 8-9 hours per day of original programming in Tamil. The share of commissioned content will eventually increase to 50% over a period of time.
Subscription: Management expects 12-13 mn analog subscribers who should digitise over next few months. This can add Rs 3.5 bn of subscription revenues from Tamil Nadu (TN). Arasu will switch off analog signals by 31st March-18. Thus, the entire digitisation should be complete in the next few months. Total number of boxes seeded in TN by all cable players including Arasu is 3 mn. The ramp-up should continue in the next few months and Q1FY19 should be a strong quarter post which it would normalise. Sun Direct has witnessed strong growth in DTH subscribers over the past few months. This should be for other DTH players as well and should be positive for subscription revenue for Sun. DTH subscribers were 14.3 mn in Q2FY18 and has increased to 14.45 mn by Q3FY18-end.
Others: Dividend payout for 9MFY18 stands at 37%. Management indicated that it will maintain the dividend payout at 60% for the year. The company has Rs 17 bn cash and cash equivalents. In FY17, CSR expenditure was entirely there in Q4; however, in FY18 it has been spread out across quarters. So, lumpy impact should not be there in Q4. Depreciation expense was Rs 177 mn.
Raise FY18-20F estimates
We raise our revenue estimates by 2-3% over FY18-20F led by improved traction in advertisement revenues in the current quarter and ongoing digitisation in Tamil Nadu. We maintain that, structurally, advertisement revenue growth will tend to remain lower at 9/11% in FY19F/20F due to rising competitive intensity in Tamil region and inability of Sun to expand into other regional genres. However, given the traction in digitisation in TN, we expect ~6mn analog subscribers will get digitised in FY19F. Most of this will be in cable where we expect ARPU to inch up to Rs 14.4. This will generate Rs 1.5/1.1 bn incremental revenues in TN over FY19/20F. Overall, subscription revenue growth should grow at 23/15%, compared to earlier estimate of 19/15%, in FY19/20F.