The launch of ARASU’s digital cable with commercially viable subscription price and renewal of IPL media rights at about 3X price improve earnings visibility and presents upside risks to our estimates for Sun. Valuations can move up if Sun’s ad revenue growth converges with that of the industry in FY2019 (not our base case given recent loss of viewership share of Sun TV and expected increase in competition). We tweak our earnings to incorporate better than expected outcome on the IPL front and revise TP to Rs 820 (Rs 800 earlier). Add
ARASU kicks off digitisation; commercially viable subscription price is a landmark move
The Tamil Nadu (TN) government owned ARASU has launched digital cable in the state and announced distribution of free STBs in line with its election promise. The pricing of subscription packs (Rs 125-275/sub/month + 18% GST) is pleasantly surprising— price band is significantly higher than its prevailing analog cable tariff of Rs 70/sub/month and just marginally below DTH prices. ARASU plans to digitise its reported subscriber base of 7 million by Dec-17. Expect delays as its underlying subs could be 30-50% higher due to under-reporting and ARASU may need more time to procure STBs. This event is positive as it ensures digitisation in TN within 6-9 months.
Quantum of upside from digitisation for Sun hinges on ARASU’s ability/willingness to pay
ARASU’s subscription price is broadly similar to DTH. This is a landmark move by the state that has kept media extremely affordable so far (movie ticket price capped at Rs 120 and cable offered at Rs 70/month for years). Upside for Sun depends on (i) shift of subs to DTH from cable which benefits Sun (Sun receives Rs 42/sub/month from DTH as against Rs 2 from ARASU). ARASU’s free STB scheme may limit churn, but we do not rule out aggressive customer acquisition by DTH especially Sun Direct. Likely scarcity of STB at ARASU may benefit DTH, (ii) content deal with ARASU for digital cable: ARASU’s ability to pay for content should improve with an increase in subscription price. It is difficult to predict if its willingness to pay for content goes up proportionately. TRAI’s new tariff regulation (subjudice), if implemented, may compel ARASU to pay Sun broadly at par with other distributors. We have modeled 22% CAGR in Sun’s domestic subscription revenues over FY2018-20e which implies 40% CAGR in subscription revenue from TN. Theoretically, there is upside risk to these estimates but we will wait and watch given practical challenges.
Sun is in a sweet spot; its ability to defend viewership share in TN holds key to valuations
ARASU’s launch of digital cable somewhat ensures completion of TN digitisation in 6-9 months. Financial benefits should accrue starting FY2019. This event improves confidence on realisation of ours and the Street’s steep expectations on the subscription front and presents upside risks. Re-rating is contingent on (i) convergence of ad growth with industry (not our base case); it depends on Sun’s ability to defend viewership share in Tamil market, thwarting expected increase in competition, and (ii) any moderation in promoter remuneration to nominal levels.
Renewal of IPL media rights at about 3X price would potentially swing Sun’s EPS by Rs 2-2.5/share
Star India has been awarded media rights for the next five seasons of IPL starting CY2018 for Rs 165 bn. Further, earlier this year, Chinese smartphone player Vivo retained title sponsorship for five years for Rs 22 bn. We expect about 2-2.5X increase in revenues of Sun’s IPL franchise (all IPL franchises receive a revenue share from BCCI’s revenue pool comprising IPL media rights and sponsorships). Net impact — Sun’s IPL business can report Ebitda of about Rs 1.1 bn in FY2019e from Ebitda loss of Rs 224m in FY2018. It would translate into a swing of about Rs 2/share in EPS.
TN digitisation—evaluating subscription revenue opportunity
At present, Tamil Nadu contributes (i) 11% to India’s 183m TV households, (ii) 12-13% to India’s 155m Pay-TV households, and (iii) only 5% to broadcasting industry’s domestic subscription revenues of about Rs 80 bn (FY2017; net of carriage costs). Key reasons for this disconnect are (i) suppressed ARPU in analog regime, (ii) negligible payment for content by ARASU that commands close to 70%+ market share in subscribers in TN.