Sun TV Network's Q3FY18 results (Outperformer) - Growth is back; look out for increasing competition…

Q3FY18 result highlights

• Standalone rev. grew by 16% yoy to Rs6.83bn (2% beat led by Ad + Broadcast rev.), EBIT (excl. other income), grew by 15% yoy to Rs3.78bn (3% miss on higher than exp. op. expenses). PAT grew by 11% yoy to Rs2.67bn (5% miss on EBIT miss and lower other income).
• Ad + Broadcast rev. grew by ~18.9% yoy (IDFCe: 14.2%) led by higher inventory utilization on a weaker base and strong ad spends by FMCG; growth could have been better but for some festivals shifting to Q2. Management said that next fiscal ad growth would be in double digit.
• Domestic subs. rev. grew by 16.5% yoy (in line) led by 27% yoy growth in cable subs. rev. and 12% yoy growth in DTH. Management said that deal with Arasu for digital subscribers would be etched soon and TN digitization can add Rs3.5-4bn to domestic subs. rev. over time.
• Cost of rev. increased by 51% yoy as it continues to move more slots to commissioned programming from private producers model (four new slots were moved yoy); there were expenses related to one-off high cost events as well. Management highlighted that investments in content will continue as competition in core markets is increasing.
• D&A increased by 3% yoy and EBIT margin fell by 50bp yoy to 55.3% on higher operating expenses.

Key positives: Revival in ad rev. growth.

Key negatives: Higher cost table.

Impact on financials: Cut FY18E/19E estimates by 1.7%/3.4% as we build in higher costs. Introduce FY20E financials.

Valuations & view

Sun has finally entered a high-growth phase, driven by revival in ad revenue growth, improving trajectory of subs. rev. growth with TN digitizing and IPL turning greatly positively with change in cost structure/higher central pool. SUNTV has better return ratios and better FCF to EBIT ratio than Zee Entertainment, but is trading at a ~22% discount (FY20E) because of lower and inconsistent growth. Once ad growth revives and TN starts to digitize, valuation multiples would warrant a re-rating. However, key risk to this thesis is any major loss in market-share in TN due to the launch of Colors Tamil and high investments made while entering non-South markets (currently not built in our financials). We maintain our OP with a revised target price of Rs1,138 (27x FY20E EPS as we roll-forward).