Pick up in ad revenues to brighten Sun TV's prospects

Attractive valuations a positive, but overhang due to promoters' legal issues might cap gains

Sun TV Network’s stock has rallied 10 per cent in the past two trading sessions versus Sensex’s one per cent decline. While a strong beat on the net profit number for the December quarter is one reason for this rally, cheaper valuations vis-a-vis peers is another. For the quarter under review, net profit came in at Rs 214 crore (up 15.3 per cent), ahead of the Bloomberg consensus estimate of Rs 196 crore, and was boosted by lower depreciation (movie amortisation costs) and strong gains in earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins. An 8.8 per cent fall in total expenses to Rs 124 crore saw Ebitda margin expand by 430 basis points (bps) over a year to 77.5 per cent. Notably, margin gains are likely to continue as advertisement and cable revenue growth steps up. Analysts expect Sun TV’s Ebitda margin to expand 85-90 bps over the next two years.

Net sales at Rs 552 crore were up 8.7 per cent over the year and in line with the estimates of Rs 553 crore. Top line growth could have been higher but for ad revenues, grew seven per cent to Rs 292 crore, lagged the industry growth of 12 per cent. DTH revenues grew 18 per cent to Rs 133 crore, in line with the growth witnessed in the recent few quarters.

Analysts expect ad revenues to grow in line with the industry growth at 11-12 per cent. Sun might also be a key beneficiary of Phase-3 and 4 of digitisation, which will reflect from FY16 onwards. Currently, the average revenue per user (Arpu) of cable customers is a 10th (at Rs 4 a month) of DTH customers, say Edelweiss analysts. With digitisation, cable revenues should grow fast. Management expects FY16 cable subscription revenues to grow 8-10 per cent; once digitisation of the two phases kick in, cable revenues could grow at 20 per cent plus levels.

Sun TV is market leader in three out of the four south Indian states it operates in and is at second position in Kerala. Intensifying competition though is a concern given that it has lost market share in Telugu market.

While uptick in ad revenues and continued momentum in core business is a key positive for the stock, corporate governance issues (ongoing cases on promoters) remains an overhang. At Tuesday's closing of Rs 421, Sun TV trades at 18.9 times the FY16 estimated earnings, below its historical average of 22 times and at a 50 per cent discount to its peer-Zee Entertainment. Analysts believe this discount appears unjustified and could reduce as Sun TV's ad revenues and digitisation gather momentum.