Regional shows attract higher TV advertising: Elara Capital

Regional genre may not see a rapid decline in consumption and cord-cutting vs the Hindi genre, due to 1) limited adoption of regional content on digital, and 2) higher time spent on linear TV within south vs pan India averages, according to a report from Elara Capital.

The overall India TV industry posted an ad revenue CAGR of 16.7% (Source: Madison) in the post-COVID era (FY21-23), whereas Sun TV Network (SUNTV IN) outperformed with a 19.0% advertising revenue CAGR in the same period, shared Karan Taurani from Elara Capital.

“SUNTV continues to command market leadership in the Tamil genre (~17% of overall regional TV advertising in India is led by SUNTV group), with a total viewership share of 53.6% (of which 40.3% is SUNTV flagship). SUNTV will also launch its Hindi GEC offering – Sun Neo in the free-to-air (FTA) segment (45mn households currently), which is the only growth driver for linear TV households (163mn currently), as pay TV households have declined 3.2% in the past three years, he explained.

Here's what the report says further:

Focused approach: strategic intent drives profitability The company’s EBITDA margin remains in the range of 64-66%, well ahead of peers, given 1) its focus on regional content, which entails lower content cost, 2) production of exclusive fictional content with higher return on investment, 3) the absence of involvement in sports properties, and 4) no investment in originals for SUN NXT. SUNTV is strategically focused on making two films a year, which can drive additional consumption on its TV channel and SUN NXT over-the-top (OTT) platform, apart from healthy theatrical revenue, if the film does well. SUN NXT possesses a large library of 7,000 films and TV shows, which is its clout in the regional genre, and with little or no fresh investments. SUNTV is the only company that has a profitable digital business; our assessment is its digital revenue, which is subscription-led, could be ~ INR 2.0bn, which is 5.5% of total revenue in FY23.

Valuation: revise to Buy with a higher TP of INR 800: SUNTV has a cash balance of INR 65bn in 9MFY24 and generates a FCF of INR 10.6bn every year (average of the past three years), which can be paid out either as dividend or buyback; the company last paid a big dividend of INR 25 in FY20 implying a dividend yield of 5.2%; the IPL franchise also could be valued at INR 68bn based on: 1) a surge in revenue post renewal of media rights in FY23, and 2) valuation of new teams added (USD 700mn for Gujarat Titans in FY22). Hence, we believe excluding the IPL and cash balance, the core broadcasting segment is trading at an inexpensive valuation of 7.0x FY26E PER, despite outperformance in TV advertising and healthy profitability; we expect a re-rating towards 12.0x one-year forward P/E for the core TV segment, which is at a 30% discount vs pre-COVID average P/E of 18.0x (core TV), factoring negative impact of lower revenue growth for linear TV in the post-COVID era. We revise our rating to Buy from Accumulate with a higher March 2025E TP of INR 800 from INR 720. Our TP is based on a 50:50 blend of P/E and DCF models since it captures near-term as well long-term perspectives.