Sun TV Network's Q3FY20 results (Outperformer) - Lower costs led EBIT beat; special dividend trigger in the near-term…

Q3FY20 result highlights

• Std. rev. fell ~10% yoy to ~Rs8.2bn (2% miss).
• Ad (inc. Broadcast) rev. fell ~14% yoy to ~Rs3.5bn (4% miss) given weak macroeconomic trends. Domestic subscription revenue grew ~18% yoy to ~Rs4.1bn (2% beat), while International subscription revenue fell ~15% yoy to ~Rs410m (in-line).
• Total costs fell ~1% yoy mainly driven by sharp ~10% yoy fall in operating expenses. The fall was ~21% qoq due to one-off expenses booked in Q2. This led to EBITDA decline of ~13% yoy to ~Rs5.8bn, ahead of our expectations by ~16%. EBIT fell ~11% yoy to ~Rs4.4bn (20% beat) while margins fell ~70 bps yoy to 53.6% (IDFCe: 43.6%).
• PAT grew ~6% yoy to ~Rs3.7bn (15% beat) due to lower tax rate.
• Rs7.5/share dividend declared in Q3 (Rs5/share in H1FY20). SUNTV would pay-out an additional special dividend in March as it looks to right-size its cash on books.
• SunNXT has turned profitable in Q3 due to income coming in from its recent telecom partner deal. However, no original content investments have been made so far.

Key positives: Lower cost of revenues

Key negatives: Weak ad revenue performance.

Impact on financials: 12% cut in FY21E EPS; half of this driven by lower domestic subs rev guidance and rest by lower other income.

 Valuations & view

SUNTV (as the rest of the media industry) continues to grapple with the weak ad environment and the recent NTO amendments could put subscription revenue under the cloud as well in the near-term. The company has also toned down its subscription growth guidance to ~10-12% (vs 20% earlier). However, improved market-share of its premier flagship property – Sun TV – in the lucrative TN market, and improving market share in Kannada and Bengali markets are positive and could lead to better ad yields in the future as and when the ad spending environment improves. The recent withdrawal of DDT on dividends has also created a new trigger as SUNTV would look to payout excess cash on its books as dividend in Q4. Nevertheless, we maintain our OP rating on the stock given inexpensive valuations (TP Rs587 / 15x FY22E EPS – rolled-forward 1-year), and improving RoE.