Sun TV Network's Q1FY20 results (Outperformer) - Finally investing in Digital…

Q1FY20 result highlights

• Std. rev. fell ~2% yoy to ~Rs11bn (4% miss), entirely driven by lower than est. IPL revenue. Subs revenue was better than exp. while ad/broadcast rev. was in-line. EBIT (excl. OI) fell 11% yoy to ~Rs5.2bn (9% miss), while PAT fell ~7% yoy to ~Rs3.8bn (6% miss).
• Core TV: Ad+Broadcast rev. fell ~1% yoy to ~Rs3.8bn (in-line) due to weak spends from FMCG players in core markets. Overall domestic subscription revenue grew strongly by 27.5% yoy led by disruptions from NTO implementation waning off and some catch-up rev. pertaining to previous qtr. Cable subs rev. jumped ~69% yoy, DTH rev. up ~8% yoy, while international subs rev. fell ~5% yoy.
• IPL: Rev. came in at ~Rs2.4bn (yoy not comparable as this IPL season was split between March/June quarter). However, this was lower than expected due to ~Rs700m yoy lower Central rights payout. EBITDA came in at ~Rs1.1bn (43.4% margin vs 51.6% yoy, miss of 29%).
• P&L Core TV: Rev. grew by a healthy ~16% yoy to ~Rs8.6bn (11% beat) on account of better than expected subscription performance. EBIT (ex. IPL) came in at ~Rs4.2bn (+7% yoy; 12% beat) with margins coming in at 48.8% (~430 bps yoy decline due to film production amortization). Movie revenue stood at ~Rs410m (1 low-budget movie released in April) while EBIT came in at ~Rs110m.
• FY20E Guidance: Mid-single digit ad/broadcast growth expected over balance FY20E/20%+ domestic subs growth expected over the year.

Key positives: Strong subscription revenue performance.

Key negatives: Lower than expected IPL revenue.

Impact on financials: Cut FY20E/21E EPS by 6.5%/5%.

Valuations & view

While the post NTO dust begins to settle down, stabilizing market-share of Sun TV (with recent weekly uptick) are encouraging signs but need to consistently deliver on the same for ad growth profile to improve (once macro headwinds settle over the next few quarters). More encouraging are signs that SUNTV is finally getting serious about its digital presence (two deals expected to be announced soon; ~Rs1.5bn digital content investments lined up over the next 18 months) which would help the company shore-up its reach amongst younger audiences and create a hedge for its traditional TV business. Subscription revenue outlook remains healthy too but earnings will decline in FY20E before returning to growth in FY21E; we expect SUNTV to come back on investors’ radars (inexpensive valuations of 12x FY21E EPS) and high return ratios, FCF generation would be another pull factor. Maintain OP with a revised TP of Rs564 (15x FY21E EPS).