Sun TV Network's Q2FY19 results (Downgrade to Neutral) - Improvement in TN market-share is the only trigger…

Q2FY19 result highlights

• Revenue grew by 10.9% yoy to Rs7.5bn (in line), EBITDA grew by 11.7% yoy to Rs5.5bn (1% beat), EBIT grew by 20% yoy to Rs4.7bn (8.6% beat driven by lower than exp. amortization of film satellite rights). PAT grew by 23% yoy to Rs3.5bn (12% beat driven by lower D&A and higher than exp other income on tax refund of Rs130m).
• Earnings quality was poor as it was driven by lower D&A and higher other income. Ad revenue (including broadcast fee) grew by just 1.8% yoy versus exp. of 9.4% yoy as management attributed the weakness to certain one-offs (Rs70m impact of shift in festive season, Rs70m impact of Kerala floods and another Rs40m on loss of ad inventory for couple of days on Sun TV prime-time) and some impact of loss in market-share in TN. Due to fall in market-share there has been pressure on effective yields. Management said that they should be able to grow ad rev. in ‘low teens’ in H2FY19E.
• Domestic subs. rev. grew by strong 21% yoy (vs exp. of 15%); largely led by digitization in TN and Phase III digitization in other markets. Subs revenue trajectory is on track and management is hopeful of TN digitization completing by FY19E with monetization improving considerably in FY20E.
• D&A fell by 20% yoy on lower film satellite rights amortization as Sun TV is increasing fiction/non-fiction programming over the weekends.

Key positives: Strong subscription revenue growth.

Key negatives: Weak ad rev. growth, falling market-share in TN.

Impact on financials: We build the film production business in our estimates and lower our ad (incl. broadcast fee) rev CAGR est. to 11% for FY18-20E vs 15% earlier (growth is also driven by new channel launches).

Valuations & view

We were keeping the faith, all this while, and hoping for Sun TV’s market-share to improve (or the fall to get arrested) in Tamil Nadu. However, management has not been able to turn it around yet. We note that Sun TV’s effective ad yields are significantly higher than that of competition and any further loss of market-share would worsen the ad revenue growth outlook causing significant earnings and valuation multiple downgrades as Sun TV is entering an investment phase (new channels, new markets, digital and film production). As a result we downgrade Sun TV to Neutral with a revised PT to Rs687 (18x FY20E EPS versus earlier multiple of 25x as we lower its ad rev. growth outlook). Management’s commentary on its willingness to invest in digital is welcome and we would appreciate an aggressive stance here (await more clarity on strategy). Key trigger for the stock would be improvement of market-share in TN.