Sun TV Network's Q4FY18 results (Outperformer) - And the Sun rises…

Q4FY18 result highlights

• Standalone rev. grew by strong 23% yoy to Rs7.2bn (7% beat led by both Ad + Broadcast rev. and Subscription rev), EBIT (excl. other income) grew by strong 27% yoy to Rs4bn (11% beat led by rev. beat). PAT grew by 23% yoy to Rs2.9bn (10% beat on EBIT beat).
• Ad + Broadcast rev. grew by ~22% yoy (IDFCe: 16%), two-third of the growth was led by higher inventory utilization on a weaker base and rest by better yields. Management reiterated that next fiscal ad growth would be in double digits and they appeared very confident of maintaining or even improving market-share in Tamil Nadu (TN).
• Domestic subs. rev. grew by strong 28% yoy (IDFCe: 18%) as SUNTV was able to sign a deal with Arasu for its digital TV subscribers and renegotiating better deals with DTH players. We believe 4-5% of this growth was on account of catch-up revenue from Arasu. Management maintained that TN digitization can add Rs3.5-4bn to subs. rev. over time and FY19E subs. rev. growth can be in the range of 20-25%.
• Cost of rev. increased by 18% yoy as it continues to move more slots to commissioned programming (3 new slots moved yoy). SUNTV will continue to invest in content as competition is high in core markets.
• D&A increased by 55% yoy (IDFCe: +40%) and EBIT margin improved by 180bp yoy to 55.6% (IDFCe: 54.2%) on strong rev. beat.

Key positives: Revival in ad rev. growth, Arasu led subs rev. growth.

Key negatives: Market-share fall in TN.

Impact on financials: Marginally tweak estimates.

Valuations & view

Sun has finally entered a high-growth phase, driven by revival in ad revenue growth, improving trajectory of subs. rev. growth with TN digitizing and IPL turning greatly positive with change in cost structure/higher central pool rev. We highly appreciate management’s strategy of launching a flanking channel in TN to capture youth viewership base and this might arrest fall in network market-share. SUNTV has better return ratios and better FCF to EBIT ratio than Zee Entertainment, but is trading at a ~30% discount (FY20E) because of lower and inconsistent growth. With revival in ad growth and TN beginning to digitize, we believe it is ripe for valuation multiples re-rating. However, key risk to this thesis is any further loss in market-share in TN. We maintain our OP with a target price of Rs1,124 (27x FY20E EPS). Investments made while entering non-South markets or launching flanking channels is currently not built in our estimates.