MOSL: SUN TV (Upgrade to Buy)-Improving growth outlook

​Sun TV: Improving growth outlook

(SUNTV IN, Mkt Cap USD5.3b, CMP INR872, TP INR1005, 15% Upside, Upgrade to Buy)

• Revenue, EBITDA in-line: Standalone revenue increased 8% YoY to INR6.8b (in-line), led by healthy domestic subscription revenue growth. EBITDA rose 6% YoY to INR5b (4% beat), with the margin contracting 120bp YoY to 73.4% (est. of 71.4%) due to a 25% YoY rise in production cost. Decline in other income by 24% YoY to INR0.4b (2% beat) further restricted PAT (+5% YoY to INR2.8b; in-line).
  
• Domestic subscription growth steady; ad growth recovers: Domestic subscription revenue grew 14% YoY to INR2.8b (6% beat), driven by ~14% YoY rise in both domestic digital cable and DTH revenue. Despite flattish revenue growth in July 2017, a rebound with double-digit growth in Aug-Sept'17 led to a 4% YoY increase in ad & broadcasting revenue (2% beat). International subscription revenue was flat YoY at INR0.4b, while films and others business grew 10% YoY to INR0.5b.
  
• Expect 19% EPS CAGR over FY17-20 on improving ad/subscription growth: With a higher focus on content, SUNTV has seen a healthy improvement in Malayalam/Kannada channel ratings over the last few months; it expects a sharp improvement in Telugu as well in a few weeks. Management indicated doubling of subscription revenue growth by FY20, helped by improving pace of digitization and ARPU growth by DTH/cable operators. Thus, we expect healthy revenue/PAT CAGR of 14%/19% over FY17-20, keeping estimates broadly intact.