Brighter days ahead for Sun TV

Revival in ad growth and digitisation-led subscription revenue to drive earnings

The Sun TV Network stock may have come off its all-time high of ~1,077 reached in January this year, but a revival in advertisement revenue growth, coupled with digitisation in Tamil Nadu, points to higher growth rates for the company in the next two years.

According to analysts, given the improving business outlook and promoters, including Kalanithi Maran, managing to clear legal issues, the stock correction could be a good entry point for investors.

Profitable Q3, but below expectations

The company entered into a high-growth phase in the December 2017 quarter (Q3).

Sun TV’s net profit during the reporting quarter grew 11 per cent to ~2.66 billion from ~2.40 billion a year ago. It was below analysts’ expectation, as the bottom line was hit by a higher movie amortisation cost of around ~960 million, even as its earnings before interest, tax, depreciation, and amortisation (Ebitda) were in line with estimates.

An increase in cost of programming and content, too, impacted profit. The cost moved north due to a transition from slot-sale to a more stable commission-based model. Sun TV indicated that the split would be 50:50 in terms of private producers and commissioned programming. The latter’s share is 20 per cent at present. The double-digit growth in Q3 profit comes after three consecutive quarters of single-digit increase in earnings figures.

Revenues were up 15.9 per cent year-on-year (y-o-y) at ~6.83 billion, aided by higher-thanexpected advertising revenue growth. Advertisement and broadcasting revenues grew 19 per cent (core advertisement growth of 21.6 per cent y-o-y). Subscription revenues grew 16.5 per cent y-o-y to ~2.81 billion.

Ad revenue, digitisation to drive growth

Of the total TV advertisement market of ~188 billion, the southern region constitutes ~40 billion. Of this, Tamil Nadu accounts for 45 per cent, and Sun TV claims 45-50 per cent of it. The company expects healthy growth in advertising revenues in the coming quarters. “Doubledigit growth (an advertisement revenue) is fairly reasonable as big national advertisers are back. Focus on strong fictionled content should drive ratingled advertisement growth,” an analyst said.

Analysts estimate Sun’s subscription revenue to grow

at 16 per cent, driven by an uptick in DTH (direct-tohome), higher HD (high-definition) penetration, and increase in average revenue per user per month (ARPU). Digitisation is expected to conclude in Tamil Nadu in March 2018. It would provide an incremental annual revenue potential of ~3.50-4 billion, the company’s management said.

Competitive pressures up

Against the backdrop of increasing competition in traditional

markets in the South, including Tamil Nadu, from newbies such as Colors Tamil, Zee, and Star, among others, Sun TV is taking steps to secure its market pie and expand geographically.

Sun TV, the flagship channel of Sun Network, garnered over 60 per cent viewership in 2016. The share has now come down to 47-48 per cent. The management said while Sun would work to maintain its leadership by tweaking strategies, including launching shows, it would also chase its competitors’ markets.

Sun’s Gemini TV (Telugu) ratings improved to 24-25 per cent in the last couple of months following a content rejig. The Kannada GEC channel, Udaya TV, too, improved its ratings to 17-18 per cent from 1112 per cent. The only weak link is the Malayalam genre where the share of Sun’s movies channel has come down to 16-17 per cent from 20-22 per cent.

There are concerns over rising competition with the launch of Colors Tamil and aggressive content strategy by Star and Zee in the Tamil genre. However, Sun’s leadership and understanding of the Tamil market offered the company a competitive edge, said ICICI Securities. Yet, this is one area the Street will watch out for.

Sun, sitting on ~17-billion cash and cash equivalents, plans to invest in content, OTT (over the top) and in market expansion. The management said the company was looking at entering one new market in FY19.

The road ahead

Sun expects to report doubledigit growth going ahead. ICICI Securities expects the company’s advertisement revenues to grow at a compounded annual rate of 12.5 per cent over FY17-20 due to a low base and monetisation of improved ratings in non-Tamil markets.

Sun TV’s shift to a commission-based model from private programming should potentially offer about 20 per cent higher Ebitda and capture the potential upside from limited undercutting and better content ratings, said Aliasgar Shakir, research analyst at Motilal Oswal Securities.

Besides, Sun TV expects to benefit from its Ebitda margin from FY19 onwards, owing to the Indian Premier League licence fee, obligation being reduced to 20-25 per cent and revenue nearly doubling to ~2.8 billion due to higher auction of media rights. Analysts expect the company’s earnings to grow at over 20 per cent each in FY19 and FY20.