The Sun May Continue To Shine

The Indian Media and Entertainment (M&E) industry is a sunrise sector for the economy and is making high growth strides. Maintaining its resilience in the face of cut-throat competition, the Indian M&E industry is on a strong phase of growth, backed by rising consumer demand and improving advertising revenues. The industry has been largely driven by increasing digitisation and higher internet usage over the last decade. Internet has almost become a mainstream media for entertainment for most of the people.

In consideration of this strong growth, the Indian government has been at the forefront of several initiatives such as digitising the cable distribution sector to attract greater institutional funding, increasing FDI limit from 74 per cent to 100 per cent in cable and DTH satellite platforms, the granting of industry status to the film industry for easy access to institutional finance

ABOUT COMPANY 

Sun TV Network is one of India's largest media and entertainment conglomerate offering an array of services to its consumers. Sun Direct, a direct-to-home arm of Sun TV Networks, uses the latest technology to increase broadcast capacity. The company also operates country’s largest radio station network. It also has a presence in the print media with its newspaper and magazine. Sun Pictures, the films division of Sun TV Networks, is one of the leading production houses in the industry. Lastly, it has an IPL cricket team that makes it a perfect blend of sports and entertainment.

ADVERTISEMENT REVENUE

The company earns advertisement revenue through display of commercial ads over its multi-media platforms, be it television channels, radio network, print media, etc. Sun TV Networks earns close to 50 per cent of its total revenue through advertisements. The size of the advertisement revenue is directly linked to various factors such as the state of the economy, business climate, popularity of the channel and the contents being showcased on it. Seasonality plays an important role too. The advertisement revenue in the second quarter grew 2.7 per cent on a yearly basis.

However, broadcasting revenue saw an uptick of 5.6 per cent year-on-year, primarily driven by new launches in Tamil language. The recent currency demonetisation move by the government is likely to have a negative impact in the Q3 advertisement revenue as many large advertisers are cutting down on ad spends. This is true especially with FMCG and white goods makers and automobile manufacturers who are drastically cutting down on their ad spends on the back of slump in demand.

This is going to negatively affect the advertisement revenue of the company. In its recent Q2 earnings call, the management sounded quite optimistic going into the second half of the fiscal. The management expects that an uptick in market share in non-Tamil genres would start reflecting in advertisement revenue from Q3FY17 and the jump in viewership market share in non-Tamil is seen further aiding the advertisement revenue going forward. 

SUBSCRIPTION REVENUE 

A subscription revenue model or flat rate is based on a fixed payment for a specific period of time. This model is adopted in case of the subscription of direct-tohome (DTH) service, specific channels, etc. In this model, the subscriber pays to receive services for a specified period of time. Sun TV Networks earns close to 36 per cent of its total revenue via the subscription model which consists of analog and digital services, DTH and international. The company’s subscription revenue for the second quarter grew strongly at 16 per cent on a yearly basis, led by strong performance of analog+digital vertical which increased by 18 per cent. The DTH subscription revenue registered a growth of 15.1 per cent on a yearly basis in Q2FY16.

The company has been successfully able to tap into revenue opportunities from the South Indian diaspora in overseas markets, which was evident from the International subscription revenue registering double-digit growth of 13 per cent in Q2 on a year-on-year basis. According to the management, domestic subscription revenue growth would be robust in H2FY17, with favourable court ruling for Phase III digitization.

While revenues from cable are still dependent on the progress of digitisation, the management indicated that revenue opportunity could double once digitisation materialises in the four southern states.

RADIO, IPL TEAM, FILM PRODUCTION BUSINESS

Sun TV Network operates largest network of radio stations. It has 49 operational stations, out of which 7 stations are under the brand Suryan FM in Tamil Nadu and 42 stations are under the brand Red FM in the rest of India. Its radio business posted revenue growth of 21 per cent in the first half of this fiscal and is only likely to grow further post the launch of new phase-III stations. The company generates around 50 per cent of its total radio revenues from the metro stations. 

FINANCIALS 

On the financial front, Sun TV has been performing well with revenues growing at a CAGR of 8.15 per cent over the last five years, led by strong performance from the company’s broadcasting and subscription business. During the same period, the company’s EBITDA CAGR grew by a stable 5.10 per cent due to operational efficiency achieved by the firm and a cost rationalisation approach. Even after maintaining a stable operational performance, Sun TV has witnessed a declining trend in its margin performance as it decreased from a high of 79 per cent in FY12 to 71 per cent in FY16, indicating competitive pressure from other players. However, when it comes to profitability, company’s CAGR of PAT has also remained steady at 5.70 per cent over the last five years.

Nevertheless, Sun TV is likely to remain on a strong footing when it comes to profitability given the business prospects and future outlook. On a quarterly basis, Sun TV reported a rise in income from operations of 10.10 per cent in Q2FY17 toRs.625.49 crore, as againstRs.568.09 crore in the corresponding quarter of the previous fiscal. The consolidated EBITDA for the quarter ending September 30 grew by a strong 34.80 per cent atRs.466.32 crore vis-a-viaRs.345.96 crore achieved in the same quarter of the last fiscal. The margin for the quarter showed buoyancy as it jumped to 74.55 per cent, which was an increase of 150 basis points on a yearly basis.

Profits after tax and exceptional item saw a good increase of 23.80 per cent in Q2FY17 atRs.270.35 crore, as compared toRs.218. 38 crore in the corresponding quarter of the previous fiscal. The EBITDA margin of Sun TV is not comparable with other media and broadcasting companies operating in this space as a different business model has been adopted by the Sun TV Network wherein broadcast fee is net of content cost, leading to less revenue and a higher EBITDA margin. As for revenue break-up, the advertisement revenue contributed close to 50 per cent of the total revenue earned in Q2FY17. 

For the quarter ending September 30, 2016 the advertisement revenue was up by about 2 per cent atRs.309.43 crore, as againstRs.302.93 crore for the corresponding quarter ended September 30, 2015. The subscription revenue accounted for 36.50 per cent of the total revenues earned for the second quarter. The subscription revenue for the quarter in review increased 17 per cent atRs.228.55 crore, as againstRs.195.32 crore in the same period of the previous fiscal. Slow advertisement growth can be a dampener for the company going forward post demonetisation as ad spends by companies decrease, which directly impacts the company’s revenue.However, smart subscription growth is likely to offset the impact.

CONCLUSIONS 

Sun Network has a presence across genres and a dominant market share in the four southern states of India. A steady flow of highly popular programmes and a dominant share of audience viewership have given the network tremendous pricing power vis-a-vis competitors. The drive initiated by the Indian government towards digitalisation and addressability for cable television would help Sun TV Network as this would ultimately translate into revenues for the company. More reliance on fiction and less on TV and movies will help the channel.

The pending issues of the promoter group and any negative outcome on the CBI case remain key risks associated with the company. The broadcast and media companies will see an impact of demonetisation in Q3. We advise all our readers and client to HOLD on to Sun TV Network.
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KEY INVESTMENT HIGHLIGHTS 

 Ad revenue growth to pick up gradually post waning of the impact demonetization: With GDP growth likely to pick up over the next 2-3 years, ad revenue growth should pick up in our view. In the last few quarters, the company reported lower ad growth due to the following reasons: 

 H1FY17: During this time, Sun TV lost market share in the Telugu and Kannada regions, resulting in lower ad growth.

 H2FY17E: Initially Sun TV was expected to see strong ad growth in H2FY17 as the ratings in Telugu region improved considerably. However, on 8 November, the Indian government announced demonetization of Rs.500 and Rs.1000 currency note which resulted in cash crunch and impacted demand on a temporary basis. Local advertisers (jewellers and retailers) postponed their advertisements due to cash crunch while the national advertisers (FMCG companies) postponed their advertisements due to lower consumer demand.

 Going ahead: So why are we positive on ad growth? As stated earlier, Telugu ratings have improved considerably. The company shifted from ad slot model to commissioned model which resulted in ratings improvement. Further, the company is focusing on GECs rather than movies. Ad rates in GECs are higher as compared to movie ad rates. We believe that demonetization has just postponed the ad growth for the company. We expect the company to post solid double digit ad growth in FY18.

 Strong growth in subscription over the next 2-3 years: Subscription revenues increased by 10.5 per cent YoY in FY13. However, it was muted given that Phase I and II digitisation benefits did not flow in. We expect Phase III-IV digitisation to flow in the next 2-3 years due to digitisation in Kerala and Karnataka market. This will likely increase the number of paying subscribers. Nearly 40 per cent of households reside in the South where Sun TV has a dominant market share.

 Margin expansion likely: EBIT margins in FY16 stood at 49.4 per cent. With subscription revenues (higher margin) now likely to see an uptick, margin expansion should set in. Further, lower amortization due to lower movie costs (the company is guiding forRs.400 crore amortization as compared to ~Rs.500 crore amortization in FY15). We expect EBITDA margins to improve to 54.8 per cent in FY18.

 Valuations: It is one of the clear beneficiaries of digitization. The EPS for SUN stood at Rs.20 in FY15 and Rs.23 in FY16 which is expected to go up to Rs.31.6 in FY18 driven by lower amortization and higher advertisement and subscription growth. The stock trades at ~50 per cent discount to ZEE

The Sun TV stock has been one of the better performing media stocks after the demonetization event in early November. The advantages and disadvantages are mentioned below

Pluses 

1. The stock has done well on the government thrust on digitization with increasing market share in regional channels.

2. Ad revenue to do well after present hiatus of slowdown due to demonetization. 

3. Gain in market share due to the sad demise of Chief Minister Jayalalitha would bode well for company. Also, the increasing focus on movies will see good TRPs as recession-like conditions will see more demand in elastic consumption like TV channels with movies.

4. The stock trades at 20 times one-year forward and has almost 3.5 per cent dividend yield, hence the valuations are attractive. 

Minuses 

1. Direct competition with Jaya TV as Sasikala assuming charge could impose regulatory problems.

2. Zee has crept up its presence in regional languages and has gained market share 

3. Economic recovery from demonetisation shock will take couple of quarters, which could see earnings impacted in the short term.