02 NOV 2018 Quarterly Update

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MEDIA Target Price: Rs 860

Ad disappoints, subscription accelerates

Q2 ad revenue (including broadcast fee) grew paltry 2% (our est: 16%) CMP : Rs 663
– 80% hit from one-offs (shift in festive season, Kerala floods, no prime Potential Upside : 30%
time ads on DMK president funeral telecast; adjusted ad growth at 10%)
and the balance from strategy to increase inventory utilization for non-
prime time channels/slots by packaging it with prime time resulting in MARKET DATA
lower effective yield. Management expects H2 ad growth in early teens No. of Shares : 394 mn
on festive season and continued uptick in regional ad spends. Free Float : 25%
Market Cap : Rs 261 bn
Domestic subscription growth surprised positively (+22% YoY; Q1 at 52-week High / Low : Rs 1,097 / Rs 567
15%) on digitization-led benefits; management expects complete Avg. Daily vol. (6mth) : 1.8 mn shares
digitization by Mar’19, which will aid subscription growth. We tweak Bloomberg Code : SUNTV IB Equity
Promoters Holding : 75%
our earnings by 3-4% to factor in slower ad growth (10% CAGR now
FII / DII : 12% / 5%
vs. 13% earlier) and maintain subscription revenue CAGR at 20% over
FY18-21E. Maintain BUY with revised TP of Rs 860 (20x Sept’20E EPS).

Key highlights
♦ Sun Life to aid recoup market share loss as management targets to address youth audience with its commissioned
content (mix of fiction and premium non-fiction content, along with movies); current ratings are in sync with Colors
Tamil – expects current monthly ad revenue run-rate of Rs 10 mn to grow to Rs 40-50 mn in next 2-3 quarters.
♦ Sun NXT – strategic rejig: Unlike earlier, SUNTV now plans to scale up original content investments (target youth) as
it received healthy response from its experimental original content and ~8,000 movie library; plans to scale up
content gradually (no guidance on exp. Investments yet). Current subs are fair mix of domestic and international.
♦ Management is in talks with telecom players to enhance Sun NXT distribution. While current offering continues to be
subscription based (Rs 50 per month), management will evaluate ad potential as well.
♦ Q2 revenue grew 11% YoY to Rs 7.5bn, EBIT grew 20% to Rs 4.7 bn (on 24% dip in amortization; EBIT margin at
63% vs. 58.3% YoY; FY18 at 52.4%), while PAT grew 23% YoY to Rs 3.5 bn.
♦ Management reiterated amortization guidance of Rs 4-4.3bn (H1 at Rs ~2 bn) and expects to spend Rs 2.8-3 bn on
production of 3 movies in FY19 (2 with Rajnikanth and 1 with Vijay)

Financial summary (Consolidated) Key drivers

Y/E March FY18 FY19E FY20E FY21E (% YoY growth) FY18 FY19E FY20E FY21E
Sales (Rs mn) 29,630 35,932 40,719 45,862 Ad rev^ 9.7% 10% 11% 10%
Adj PAT (Rs mn) 11,354 14,131 15,961 17,854 Dom Sub rev 19% 20% 23% 18%
Con. EPS* (Rs) - 36.5 42.0 47.5 Content Cost* 41% 54% 30% 32%
EPS (Rs) 28.8 35.9 40.5 45.3 ^including Broadcast fee; *excluding amortization
Change YOY (%) 10.2 24.5 12.9 11.9
Price performance
P/E (x) 23.0 18.5 16.4 14.6
160
RoE (%) 26.1 28.7 29.5 29.9 Sensex Sun Tv Network
140
RoCE (%) 38.2 42.4 43.5 44.3 120
EV/E (x) 12.1 9.7 8.5 7.6 100
80
DPS (Rs) 10.0 20.0 22.6 25.3
60
Source: *Consensus broker estimates, Company, Axis Capital Oct-17 Jan-18 Apr-18 Jul-18 Oct-18

Ankur Periwal Sr. Vice President – Media & Logistics

ankur.periwal@axiscap.in 91 22 4325 1149

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(…Continued from Page 1)

♦ Digitization benefits to be fully visible in FY20 as management expects

digitization in Tamil Nadu to be complete by FY19 end. Implementation of
TRAI’s content pricing regulations to further help improve per sub realization.
♦ Movie production: Management highlighted it had purposefully gone slow in
acquisition of movie satellite rights (for Tamil and Telugu) as high competitive
intensity had made movie acquisition business uneconomical. This led to
strategy of scaling up movie production business (mix of high and mid budget
movies), which offers better economics.
♦ Sun TV will maintain focus on fiction content and develop high-impact
properties across languages (higher shelf life, offering audience stickiness).
Invest in youth-oriented/ urban content for its flanking channels.
♦ Other highlights: (a) Bangla GEC to be launched in Q4FY19 – no content
investments yet, (b) Q2 content cost increased 41% YoY/ 11% QoQ on thrust
on commissioned content – expects Q2 run-rate to continue, (c) Employee cost
declined 5% QoQ given promoters decision to cap their FY19 salary at
FY18 level, and (c) other income increased as it included interest on Income
tax refund.
♦ Sun TV declared an interim dividend of Rs 2.5/ share (vs. Rs 5/ share in Q1).

Exhibit 1: Result Update

Quarter ended - Standalone Half Year ended
(Rs mn) Sep-18 Sep-17 % Chg Jun-18 % Chg H1FY19 H1FY18 % Chg
Net sales 7,496 6,759 10.9 11,204 (33.1) 18,699 14,622 27.9
Prog. & operating cost 901 641 40.6 809 11.4 1,710 1,324 29.2
Staff Cost 735 774 (5.1) 852 (13.7) 1,586 1,458 8.8
Other overheads 320 378 (15.2) 330 (2.9) 650 735 (11.6)
EBITDA 5,540 4,967 11.5 7,347 (24.6) 12,887 9,450 36.4
EBIDTA margin (%) 73.9 73.5 - 65.6 - 68.9 64.6 -
Depreciation 170 175 (2.9) 160 6.3 330 350 (5.7)
Amortization 649 852 (23.8) 1,308 (50.4) 1,957 1,712 14.3
EBIT 4,721 3,940 19.8 5,879 (19.7) 10,600 7,389 43.5
EBIT margin (%) 63.0 58.3 - 52.5 56.7 50.5 -
Other income 621 372 66.9 390 59.3 1,011 743 36.1
Interest 6 1 850.0 3 119.2 8 1 654.5
PBT 5,336 4,312 23.8 6,267 (14.8) 11,603 8,130 42.7
PBT margin (%) 71.2 63.8 - 55.9 - 62.1 55.6
Tax 1,823 1,459 24.9 2,176 (16.2) 3,999 2,762 44.8
Reported PAT 3,513 2,853 23.2 4,091 (14.1) 7,831 5,369 45.9
No. of shares (mn) 399 399 - 399 - 399 399 -
Adj. EPS (Rs.)^ 8.8 7.1 23.2 10.3 (14.1) 19.6 13.5 45.9
Source: Company, Axis Capital

Exhibit 2: Common sized P&L

as % of Revenues Q2FY17 Q3FY17 Q4FY17 Q1FY18 Q2FY18 Q3FY18 Q4FY18 Q1FY19 Q2FY19
Cost of Revenue 8.2% 9.1% 10.6% 10.6% 9.5% 11.9% 10.1% 11.0% 12.0%
Employee cost 11.5% 10.2% 11.0% 10.6% 11.4% 10.6% 10.6% 11.5% 9.8%
Other overheads 5.8% 6.1% 10.8% 5.5% 5.6% 5.6% 6.4% 4.5% 4.3%
Amortization 14.4% 16.6% 10.6% 13.3% 12.6% 14.1% 14.2% 17.7% 8.7%

Source: Company, Axis Capital

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Key performance in charts

Exhibit 3: Ad revenue growth

(Rs bn) Ad revenue YoY growth (RHS) (%)
23
4.0 25
19
18 17
3.8 20
14
3.6 15
3.4 10
3 4
3.2 2 2 5
3.0 (4) 0
(6) (6) (7)
(7)
2.8 (5)
2.6 (10)
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY16 FY17 FY18 FY19

Source: Company; Axis Capital

Exhibit 4: Subscription revenue growth trend – full benefits from Arasu yet to come in

Cable/ Digital DTH International

5
(Rs bn)
4
0.5
0.4 0.4
3 0.4 0.4 0.4
0.4 0.4 0.4 0.4
0.4 0.4 2.2
2 0.3 0.4 2.1 2.1
1.7 1.8 1.9
1.6 1.6 1.7 1.7
1.4 1.4 1.5 1.6
1
1.0 0.9 1.0 1.0 1.0 1.2
0.5 0.6 0.6 0.6 0.7 0.7 0.8 0.7
0
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2

FY16 FY17 FY18 FY19

Source: Company; Axis Capital

Exhibit 5: Ad revenue – to grow at 10% CAGR over FY18-21E

Ad revenues % YoY growth (RHS)

20 (%) 25
(Rs bn)

18
9.7 10.0 15
5.6 11.0
16
5
14 (3.7)
(5)
12 17.0
12.7 14.0 15.3 18.7
10 (15)
FY17 FY18 FY19E FY20E FY21E

Source: Company; Axis Capital

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Exhibit 6: Dom subscription revenue – to grow at 20% CAGR over FY18-21E

Dom Subscription rev % growth (RHS)

22 (Rs bn) 28%
20 23%
24%
18
20%
16 19%
18% 20%
14 18%
12 16%

10
12%
8
9.6 11.4 13.7 16.8 19.9
6 8%
FY17 FY18 FY19E FY20E FY21E

Source: Company; Axis Capital

Exhibit 7: Core content cost to grow at 38% CAGR; movie content at 7% CAGR

Movie Amortization % growth in core content cost (RHS)

5.0 54% 60%

(Rs bn)
41%
4.5 30% 32% 40%
27%

4.0 20%

3.5 0%

3.4 3.8 4.3 4.8 4.7

3.0 -20%
FY17 FY18 FY19E FY20E FY21E

Source: Company; Axis Capital

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Financial summary (Consolidated)
Profit & loss (Rs mn) Cash flow (Rs mn)
Y/E March FY18 FY19E FY20E FY21E Y/E March FY18 FY19E FY20E FY21E
Net sales 29,630 35,932 40,719 45,862 Profit before tax 16,950 21,255 23,972 26,868
Other operating income - - - - Depreciation & Amortisation 4,500 5,001 5,474 5,291
Total operating income 29,630 35,932 40,719 45,862 Chg in working capital (1,100) (1,894) (1,154) (1,163)
Cost of goods sold (3,883) (4,886) (5,814) (7,236) Cash flow from operations 13,712 15,755 18,723 20,345
Gross profit 25,747 31,047 34,905 38,626 Capital expenditure (5,152) (4,700) (4,900) (5,100)
Gross margin (%) 86.9 86.4 85.7 84.2 Cash flow from investing (12,776) (4,321) (4,079) (4,413)
Total operating expenses (5,709) (6,274) (7,017) (8,103) Equity raised/ (repaid) - - - -
EBITDA 20,038 24,772 27,888 30,523 Debt raised/ (repaid) - - - -
EBITDA margin (%) 67.6 68.9 68.5 66.6 Dividend paid (4,743) (9,486) (10,714) (11,985)
Depreciation (4,500) (5,001) (5,474) (5,291) Cash flow from financing (4,749) (9,497) (10,725) (11,996)
EBIT 15,538 19,771 22,414 25,232 Net chg in cash (3,813) 1,936 3,919 3,936
Net interest (11) (11) (11) (11)
Other income 1,423 1,494 1,569 1,647 Key ratios
Profit before tax 16,950 21,255 23,972 26,868 Y/E March FY18 FY19E FY20E FY21E
Total taxation (5,823) (7,365) (8,306) (9,310) OPERATIONAL
Tax rate (%) 34.4 34.7 34.7 34.7 FDEPS (Rs) 28.8 35.9 40.5 45.3
Profit after tax 11,127 13,890 15,665 17,558 CEPS (Rs) 40.2 48.5 54.4 58.7
Minorities - - - - DPS (Rs) 10.0 20.0 22.6 25.3
Profit/ Loss associate co(s) 228 241 295 295 Dividend payout ratio (%) 34.7 55.8 55.8 55.8
Adjusted net profit 11,354 14,131 15,961 17,854 GROWTH
Adj. PAT margin (%) 38.3 39.3 39.2 38.9 Net sales (%) 12.0 21.3 13.3 12.6
Net non-recurring items - - - - EBITDA (%) 13.2 23.6 12.6 9.4
Reported net profit 11,354 14,131 15,961 17,854 Adj net profit (%) 10.2 24.5 12.9 11.9
FDEPS (%) 10.2 24.5 12.9 11.9
Balance sheet (Rs mn) PERFORMANCE
Y/E March FY18 FY19E FY20E FY21E RoE (%) 26.1 28.7 29.5 29.9
Paid-up capital 1,970 1,970 1,970 1,970 RoCE (%) 38.2 42.4 43.5 44.3
Reserves & surplus 44,914 49,559 54,805 60,674 EFFICIENCY
Net worth 46,884 51,529 56,775 62,644 Asset turnover (x) 1.1 1.2 1.3 1.4
Borrowing - - - - Sales/ total assets (x) 0.6 0.7 0.7 0.7
Other non-current liabilities 900 900 900 900 Working capital/ sales (x) 0.2 0.2 0.2 0.2
Total liabilities 47,824 52,469 57,716 63,584 Receivable days 131.1 107.0 107.0 107.0
Gross fixed assets 24,143 28,843 33,743 38,843 Inventory days 0.1 0.1 0.1 0.1
Less: Depreciation (12,776) (17,777) (23,251) (28,542) Payable days 31.9 24.1 27.2 30.5
Net fixed assets 11,367 11,066 10,492 10,301 FINANCIAL STABILITY
Add: Capital WIP 474 474 474 474 Total debt/ equity (x) - - - -
Total fixed assets 11,841 11,540 10,966 10,774 Net debt/ equity (x) (0.4) (0.4) (0.5) (0.5)
Total Investment 21,801 23,301 23,801 24,301 Current ratio (x) 3.2 5.3 6.0 6.4
Inventory 3 3 3 3 Interest cover (x) 1,438.7 1,830.7 2,075.4 2,336.3
Debtors 10,639 10,534 11,937 13,445 VALUATION
Cash & bank 3,726 5,662 9,581 13,518 PE (x) 23.0 18.5 16.4 14.6
Loans & advances 106 216 244 275 EV/ EBITDA (x) 12.1 9.7 8.5 7.6
Current liabilities 4,932 3,452 3,969 4,602 EV/ Net sales (x) 8.2 6.7 5.8 5.1
Net current assets 10,976 14,806 19,879 24,979 PB (x) 5.6 5.1 4.6 4.2
Other non-current assets 3,207 2,822 3,069 3,529 Dividend yield (%) 1.5 3.0 3.4 3.8
Total assets 47,824 52,469 57,716 63,584 Free cash flow yield (%) 3.3 4.2 5.3 5.8
Source: Company, Axis Capital Source: Company, Axis Capital

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Axis Capital Limited

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Tel:- Board +91-22 4325 2525; Dealing +91-22 2438 8861-69;
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Ratings Expected absolute returns over 12 months
BUY More than 10%
HOLD Between 10% and -10%
SELL Less than -10%

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Sun TV Network (SUTV.BO, SUNTV IN) Price Chart and Recommendation History

Source: Axis Capital

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