Sun TV Q2: 'Advertisement growth drives upgrade'

​Elara Capital has issued a review of Sun TV’s Q2 financials. Below is the detailed analysis.

Tamil genre and channel launches prop momentum    

Sun TV’s Q2 ad revenues strongly recovered, breaching pre-Covid levels (Q2FY20) on a quarterly basis. We expect festive season to prop ad revenue momentum, though Sun TV may still post 5-7% lower ad revenue versus pre-Covid level in FY22 (annualized). Some signs indicate Sun TV reviving to industry growth on ad revenues. But excluding the impact of launches – Marathi and Bangla genres – core ad revenues are tepid. Sun TV’s Q2 ad revenues were propped by many large non-fiction launches, thus boosting: 1) realization and 2) Tamil viewership share. But sustained ad revenue growth (above industry average) may mainly trigger upgrade, medium-to-long term. Sun TV is among the few broadcasters to be immune from NTO 2.0 affect, as its discounting on bouquet versus sum of à la carte prices has been lower (33% discounting allowed now). Profitability will continue to be lower, medium term, on content investment in Sun Nxt (digital offering).

Ad revenue-led growth; low amortize, high other income prop PAT

Sun TV’s overall revenues grew 9.6% YoY (up 2.3% QoQ; up 4.2% versus pre-Covid levels) to INR 8,287mn, better than INR 7,562mn estimated. Ad revenues positively surprised, growing 39.8% YoY to INR 3,417mn (up 40% QoQ; up 1.4% versus pre-Covid levels) Non-ad revenues decelerated 5% YoY (up 6.2% versus pre-Covid levels) to INR 4,869mn. EBITDA margin declined 357bp YoY to 62.8%, on 33.8%/30% YoY rise in operational costs/other expenses. Employee cost dipped 7% YoY. PAT grew 13.7% YoY to INR 3,933mn, largely on 61% YoY depreciation dip. This was partly offset by sharp interest cost rise (income tax assessment-related one-off interest charge) and 28% YoY other income rise in Q2.

Valuations: Upgrade to Accumulate; TP INR 675

We raise FY23E/24E earnings 6%/11% on: 1) better ad revenue 2) higher revenues from IPL/movies. As per Duff & Phelps, Sun TV’s IPL team valuation has been in INR 44-46bn range in the past two years. Two teams were added recently at INR 65-70bn valuation each (average) – Potential valuation re-rating for existing teams exist. We value Sun TV’s IPL team at a base-case of INR 60bn on: 1) rising revenue expectation from IPL on rights renewal, next year and 2) new teams attracting significantly higher valuations. We value SUNTV’s business (ex-IPL) at one-year forward P/E of 16x – INR 207bn valuation. On SOTP, SUNTV is valued at INR 267bn or INR 675 TP. Upgrade to Accumulate from Reduce. We roll over to December 2022E TP of INR 675 (INR 565 earlier).