Our meeting with Sun TV management suggests gradual revival in ad growth as national advertisers’ ad spends have improved – expected to improve further with the upcoming festive season, subscription revenue growth intact on benefits of digitization and turnaround in IPL profitability given sharp rise in revenue, sponsorship as well as TV/Digital rights, and lower royalty payout FY19 onwards. In line with its strategy, Sun TV will scale up commissioned content investments, especially fiction in Tamil, 2 of 18 shows on commissioned model currently, while non-Tamil content is already on commissioned basis.
This will augment audience stickiness and address rising competitive intensity in its core market. While we maintain our Ad/Subscription revenue growth, we factor in higher IPL revenues, resulting in 5% upward revision in FY19E EPS.
Reiterate BUY with revised TP of Rs 1,050, 27x FY19E EPS of Rs 39; Rs 1,002 earlier, as uptick in domestic subscription and improvement in ad growth will drive ~20% earnings CAGR over FY17-20E.
Net Working Capital, ex-short term advances, declined to 20 days in FY17 vs. 31 days in FY16 on increase in payables and improvement in receivable days; Sun Direct receivables remain elevated at 227 days.
Investments (non-current) grew on payout for Radio licenses, won in phase III auctions – this will increase Sun TV’s presence from 48 stations currently to 70 stations by FY19.
Content investment grew 27% y-o-y in FY17 as all its non-Tamil content is on commissioned basis now; Tamil to see gradual increase in commissioned content. Movie investment to remain calibrated given management focus on higher fiction content spends, offering sticky audience.
Free cash flows/PAT declined to ~73% in FY17 (vs. ~100% in FY16) due to capex for aircraft purchase, Rs 370 crore; Operating Cash Flows, OCF/ EBITDA was largely stable at 73% (75% in FY16). Absolute OCF was flat y-o-y at Rs 1,300 crore, while FCF declined y-o-y to Rs 750 crore. While phase IV digitization is still under progress, we expect benefits from phase III digitization, much bigger market for Sun TV, to be visible in higher subscription revenues going ahead.