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Sun TV Network 3QFY2014 performance highlights and results update

February 10, 2014, Monday, 07:49 GMT | 03:49 EST | 13:19 IST | 15:49 SGT
Contributed by Angel Broking

For 3QFY2014, Sun TV Network Ltd (STNL)’s top-line performance was lower than our expectations as well as street estimates, as it grew by only 4.6% yoy to Rs.508cr, primarily on account of a 7.2% yoy decline in advertising revenue to Rs.272cr. Advertising revenue was hit due to transition to new TRAI dispensation which limits ad time to 12 minutes/hour. Sun TV has hiked its advertising rates and reduced private producers advertising inventory from 4 minutes to 3 minutes to compensate for reduction in ad inventory.
Decline in ad revenue & higher content cost led to OPM pressure: Decline in advertising revenue (by 7.2% yoy to Rs.272cr) and higher cost of content (up 56% yoy to Rs.53cr mainly due to multiple non-fiction shows telecasted during the quarter) led to a 428bp yoy contraction in operating margin to 73.6%. Consequently, the net profit declined by 2.2% yoy to Rs.186cr (compared to our estimate of 195cr).The Management expects content cost to go down in the next quarter as no non-fiction shows are planned to be telecasted in the next quarter.
Impressive Subscription revenue growth continues: STNL reported a 27.0% yoy growth in subscription revenue to Rs.167cr, driven by a robust 45.9% yoy growth in analogue subscription revenue to Rs.54cr and 19.6% yoy growth in DTH subscription revenue to Rs.113cr. The company expects robust growth in subscription revenue to continue as the full benefits of phase 1 and phase 2 digitalization are yet to be reflected (as Chennai and Coimbatore are yet to be fully digitalized). Among other segments, international revenue grew by 26.9% yoy to Rs.33cr while broadcast fee declined 8.8% yoy to Rs.31cr.
Outlook and valuation: STNL is expected to be among the key beneficiaries of mandatory digitization due to its strong presence in South India. At the current market price, STNL is trading at 15.6x FY2015E consolidated EPS of Rs.23.2. We recommend an Accumulate rating on the stock, assigning a multiple of 17x FY2015E EPS to arrive at a target price of Rs.400.