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SUN TV EQUITY RESEARCH REPORT

(10MBI0039, 10MBI0002)

INDUSTRY PROFILE

Media and Entertainment:
The Indian Media and Entertainment industry experienced a modest growth of 6
per cent in 2009 reaching a size of around Rs 613 billion. The industry went
through a tough phase in 2009 due to the economic slowdown which resulted in a
decline in ad spends. With improvement in macroeconomic environment and
advertising budgets coming back on track, the Media & Entertainment industry has
recovered reasonably. Subscription revenues, which maintained healthy growth
during the slowdown period as well are also in growth trajectory, driven by the
growing subscriber base for DTH and digital cable players and the increased
penetration of print in regional markets.

TV broadcasting:
TV broadcasting refers to the uplinking of TV content for viewing. The content
beamed into Indian homes belong to different genres. Entertainment content aimed
at the general audience in Hindi and regional languages attract maximum
viewership. The rest of the viewership is targeted at specific audience and split
across news (general and business news), films, music, children`s entertainment,
education, spirituality etc. While news and movie channels enjoy larger viewership
than other channels, niche channels have significant viewership across specific
socio-economic groups. TV broadcasters have two main sources of revenue -
advertising revenues and subscription revenues. Pay channels earn revenues from
advertising as well as subscription charges, whereas the entire revenue of free-to-
air channels comes from advertising. With the turnaround in the macroeconomic
environment, growth in ad spends is fairly buoyant. Subscription revenues
continue to remain healthy as the growth in TV audience and increasing adoption
of addressable distribution platforms has been rapidly transforming the distribution
scenario. The increased proliferation of digital platforms, primarily DTH, is
expected to increase the flow of subscription revenues further through the value
chain.

Company Profile:
Sun TV Network is the leader in South market with a strong network of channels
having presence across all genres. South market constitutes 70% of the regional
advertising market. Sun TV offers 33 channels to viewers in four states - Tamil
Nadu, Andhra Pradesh, Karnataka and Kerala.

Sun TV's (Sun) Q4FY14 results surprised positively as ad revenue grew faster than
estimates and cost control resulted in better than expected profitability. Without
quantifying, the company mentioned that the ad revenue could see an improved
trajectory while subscription gains will likely continue. Considering the improving
outlook for the company we factor in stronger revenue growth and revise our
estimates upwards.

Ad revenue surpasses modest expectations:
Sun TV’s ad revenue grew by 4.7% YoY after two successive quarters of YoY ad
revenue decline. This was aided by ad‐inventory now being maintained at 14
minutes (12+2) as against Q2/Q3FY14 when inventory was lowered to 12 minutes
(10+2) in response to a regulatory change. The company mentioned that inventory
of its GECs’ prime‐time band is full while it has ample room to improve fill rates
in niche channels (viz. movies, comedy etc). While management refused to
comment on the ad growth outlook for FY15, it has certainly guided for improved
sentiments on the back of the favourable political outcome (stable government
formation). We now estimate ad revenue growth of 8% & 10% in FY15 & FY16
for the company.

In‐line subscription revenue growth:
Domestic subscription revenue continued to see rapid growth of 25% YoY as DTH
revenue saw a sharp 6% QoQ growth while cable income was down 1% QoQ.
Management believes that there is more juice in phases I & II and has guided for
robust growth in FY15/16 as well. Added growth triggers could be the eventual
digitization of Chennai and Coimbatore & phase III/IV analog sunset.

EBIT margins ahead of estimates led by cost control:
Sun’s EBIT was ahead of estimates due to cost control. EBIT margin stood at a
healthy 55.3%, much ahead of estimates. The company managed to curtail
operating costs and maintained that the current margin was not due to any
significant one‐offs. The company managed EBIT margins of 50.4% in FY14,
which we believe can improve in FY15 and FY16 led by increased ad revenue
growth.

Change of estimates (Rs mn)
____Earlier estimates ___ ___Revised
estimates___
Upgrade/(downgrade) (%)
FY15E FY16E FY15E FY16E FY15E FY16E
Revenue 25,140 27,852 25,675 28,431 2.1 2.1
EBIT 13,280 14,840 13,533 15,297 1.9 3.1
EBIT margin (%) 52.8 53.3 52.7 53.8 ‐12 bps 52 bps
PBT 12,447 14,322 13,280 15,104 6.7 5.5
PAT 8,293 9,522 8,898 10,120 7.3 6.3
PAT margin (%) 33.0 34.2 34.7 35.6 167 bps 140 bps
EPS (Rs) 21.0 24.2 22.5 25.5 6.7 5.5

Key investment argument:

 With an estimated 2m cable homes in Chennai likely to be digitized by June
2012, there is a significant upside to subscription income
 Lean cost structure and an extensive movie library offers strong
competitive advantage to Sun TV.
 Sun TV continues to remain the market leader in the Tamil, Telugu and
Kannada GECs.



Key investment risks:

 Continued inflation in cost of movie acquisition. Ad growth outlook remains
sluggish as there is no improvement in the operating environment.

Recent developments:

 Sun TV has announced a final dividend of INR2.5 per share. Sun TV has
secured subscription agreement with the Tamil Nadu state-owned Arasu
cable.


Comparative valuations:



Important highlights of the results conference call:

Ad revenue
Outlook is improving. The company is getting better acceptance of increase in
rates.



Subscription revenue
While the Arasu renewal deal hasn't yet been signed by Sun TV (was due for
renewal in Sep 2013), the company remains positive on digitisation prospects. The
company is working to affect the two phase 27.5% tariff increase permitted by the
TRAI. The company believes that its subscription income will likely reflect the
increased tariff in H2FY15.

Broadcast income
The company saw a dip in broadcast income due to discontinuation of certain
private producer slots. However, since mid‐Feb 2014, it has restored some of the
slots and we are likely to see improved broadcast income in the coming quarters.

Movie capex:
The company has guided for Rs 1‐1.05bn quarterly movie amortization in FY15
Sun mentioned that it continues to face challenges in the
Telugu GEC on account of aggression by competitors (Maa Telugu in particular)
and is taking steps to mitigate competition.

AP market:
The company says that the business/consumer sentiment has now improved after
the bifurcation of Andhra Pradhesh as the state is now emerging from an extended
logjam.

Sun TV Q4FY14 results (In Rs mn)
Q4FY14 Q3FY14 QoQ (%) Q4FY13 YoY (%)
Total revenue 5,202 5,083 2% 4,727 10%
O/w: Advertising 2,820 2,720 4% 2,694 4.7%
O/w: Domestic subs. 1,720 1,680 2% 1,380 25%
Cable 510 540 ‐6% 380 34%
DTH 1,210 1,140 6% 1,000 21%
O/w: International subs. 310 330 ‐6% 260 19%
O/w: Slot fee income 260 310 ‐16% 360 ‐28%
O/w: IPL income 4 11
O/w: Others 87 32 172%
Income ex‐IPL 5,197 5,072 2% 4,727 10%
Cost of revenue 435 527 ‐17% 475 ‐8%
IPL franchise fee ‐ ‐
Employee expenses 506 494 2% 445 14%
Other expenses 260 342 ‐24% 322 ‐19%
Other expenses (ex‐IPL) 254 306 ‐17% 322 ‐21%
EBITDA 4,000 3,720
O/w: broadcasting EBITDA 4,002 3,745 7% 3,486 15%
O/w: IPL EBITDA (2) (25)
EBITDA margin (%) 76.9% 73.2% 73.7%

Long Term Debt to Equity Ratio
Companies operating with high debt to equity on their balance sheets are
vulnerable to economic cycles. In times of slowdown in economy, companies with
high levels of debt find it increasingly difficult to service the interest on their
borrowings as profit margins decline. We believe that long term debt to equity
ratio higher than 0.6 - 0.8 could affect the business of a company and its results of
operations.
Sun TV’s average long term debt to equity ratio over the last 5 financial years has
been 0.04 which indicate that the Company is operating with a low level of debt.
Interest Coverage ratio:
Interest coverage ratio indicates the comfort with which the company may be able
to service the interest expense (i.e. finance charges) on its outstanding debt. Higher
interest coverage ratio indicates that the company can easily meet the interest
expense pertaining to its debt obligations. In our view, interest coverage ratio of
below 1.5 should raise doubts about the company’s ability to meet the expenses on
its borrowings. Interest coverage ratio below 1 indicates that the company is just
not generating enough to service its debt obligations.
Broadcast EBITDA margin (%) 77.0% 73.8% 316 bps 73.7% 325 bps
Depreciation & amortisation 1,123 1,061 6% 1,017 10%
Depreciation 220 220 0% 230 ‐4%
Amortisation 900 840 7% 787 14%
EBIT 2,877 2,660 8% 2,469 17%
EBIT margin (%) 55.3% 52.3% 52.2%
EBIT ex‐IPL 2,879 2,685 7% 2,469 17%
EBIT margin ex‐IPL (%) 55.3% 52.8% 52.2%
PAT 1,976 1,858 6% 1,775 11%
PAT margin (%) 38.0% 36.5% 37.6%
EPS (Rs) 5.0 4.7 6% 4.5 11%
Sun TV’s average interest coverage ratio over the last 5 financial years has been
304.63 times which indicates that the Company has been generating enough for the
shareholders after servicing its debt obligations.
Suggestions:
• Assuming 360 trading day’s horizon, and your typical level of risk aversion
(avg risk taker) our recommendation regarding Sun TV Network Ltd is
'Cautious Hold'.
• Volatility not too risky
• In the long run the return on investment will be considerably high.