Sun TV Network's Q3FY19 results (Upgrade to Outperformer) - Growth is back; inexpensive valuations…

Q3FY19 result highlights

• Rev. grew by strong 32% yoy to Rs9bn, a 5% beat driven by ad rev beat (at 13% yoy vs exp. of 8%) and higher than exp. film production rev. (at Rs1.1bn vs exp. of Rs0.85bn). EBIT (excl. OI) grew by robust 30% yoy, a 13% beat driven by higher ad rev and better profitability in film production (5% EBIT beat driven by this). PAT grew by 32% yoy to Rs3.5bn, a 14% beat driven by EBIT beat and higher than exp. OI.
• Beat in earnings was driven by higher than exp. ad rev growth and management exuded confidence in its ability to maintain double digit growth in Q4FY19E and also in FY20E (9MFY19 stood at 11%). Ad rev. growth was driven by shift is festive season and overall strength in FMCG space; Karnataka & AP markets grew higher at 17-18% yoy. There could be some short-term impact of implementation of TRAI tariff order but that will be an industry wide phenomenon.
• Domestic subs. rev. grew by strong 24% yoy (vs exp. of 22%); led by digitization in TN and Phase III digitization in other markets. Subs revenue trajectory is on track and it is hopeful of TN digitization completing by Q2CY19E with monetization improving considerably in FY20E. While the implementation of TRAI’s new tariff order could have some near-term impact, management is confident of this being positive overall.
• EBIT margin fell by 100bp yoy to 54.3% as film production segment is a lower margin business vs core TV operation.
• Management is extremely confident that they will be able to gain market-share in TN. While Sun TV is stepping up investments (in Sun TV commissioned programming, Sun Life, Sun Bangla, to be launched Marathi channel, digital investments), SUNTV believes they will be able to broadly maintain margin as subs. rev. trajectory will be strong.

Key positives: Strong Ad/subscription revenue growth.

Impact on financials: Broadly unchanged.

Valuations & view

Since our downgrade to Neutral rating, the stock has fallen by 22% and at the CMP it is trading at 13.6x FY20E EPS, pricing in most of the risks associated with weak market-share. Management is extremely confident of a double digit ad growth in existing markets and this coupled with our assumption of 380bp fall in EBIT margin in FY20E (despite management commentary of otherwise) gives us confidence in our earnings estimates. Management’s willingness to invest in digital is welcome and we would appreciate an aggressive stance here (await more clarity on strategy). Given inexpensive valuations, high return ratios and finally investing for the future makes us upgrade the stock to an Outperformer with a price target of Rs691 (18x FY20E EPS, maintained). Key trigger for the stock would be improvement of market-share in TN.