Sun TV Network's Q2FY20 results (Outperformer) - Poor show led by higher costs; investing for a brighter future...

Q2FY20 result highlights

• Std. rev. grew 6% yoy (3% miss). Ad+Broadcast rev fell 4% yoy (in line) while domestic subs. rev grew by 17% yoy (marginally lower than exp of 19%). EBIT (excl. other income) fell 29% yoy to ~Rs3.4bn (20% miss), while PAT grew 8% yoy to ~Rs3.8bn (8% miss) due to tax rate cuts.
• Ad+Broadcast rev. fell ~4% yoy given weak spends by advertisers driven by poor economic activity. Festive season saw some growth but near-term outlook is poor given decelerating GDP growth. Within domestic subs rev, cable grew by 40% yoy and DTH grew by 4% yoy helped by better monetisation of analog market under NTO. However, under the NTO, SUNTV also has to share upto 15% with the distributors as connectivity fee (or carriage fee) which led to sharp increase in cost of doing business and drove the miss in this qtr across profitability parameters. This got aggravated by a one-off Rs180m spend in CSR pertaining to previous years. Connectivity rev. is a recurring expense and would be ~15% of domestic subs rev (6-7% of total revenue). Our estimates largely factored this and hence won’t be impacted much.
• EBITDA fell by 15% yoy to Rs4.7bn driven by 96% increase in cost of rev. (higher programming cost & connectivity fee booked here) and 135% increase in other expenses (one-off, CSR, bad-debt provision booked here). Margin fell by 1,500bps to 58.9%. EBIT fell by 28% yoy led by fall in EBITDA and 60% yoy increase in D&A (driven by higher satellite amortisation). EBIT margin fell by 2,060bps yoy to 42.4%. Other income increased by 16% yoy on higher cash balance (Rs28bn as of Q2 end) while tax rate came in at 6.9% on tax rate cuts.

Key positives: Strong subscription revenue performance.

Key negatives: Sharp margin miss.

Impact on financials: Cut FY20E/21E EBIT by 5.3%/3.8% but increase EPS by 8%/9.6% due to cut in tax rate.

 Valuations & view

The NTO implementation has led to improvement in subs. rev. profile but has also led to SUNTV starting to pay carriage fee which is a big –ve impact on margins. However, this is leading to better connectivity and coupled with content investments, we have seen ~500bps improvement in market-share for Sun TV (in TN) which should help in improving its ad growth profile (once macro headwinds settle). Moreover, SUNTV is finally getting serious about its digital presence (~Rs1.5bn investments over the next 18 months) which would help the company create a hedge for its traditional TV business. Earnings will be flat in FY20E before returning to growth in FY21E; we expect SUNTV to come back on investors’ radars (inexpensive at 12.5x FY21E EPS) and high return ratios/ FCF generation. Maintain OP with a revised TP of Rs619 (15x FY21E EPS).