Subscriptions likely to brighten Sun TV's prospects amid economic slowdown

Investors should await ad revenue growth revival before tuning in

The Sun TV stock has constantly declined for the major part of FY20, shedding 31 per cent to date. Like its peers, the company has been struggling to improve advertising revenue growth, as firms cut back on spending amid the slowdown.
 
After 13 per cent growth in the December 2018 quarter, sales from this segment have changed a little over the last three quarters.
 
Sales in the September 2019 quarter dropped for the first time in nine quarters.
 
While ad revenue growth is pegged at flat-to-negative for FY20, it is expected to improve to 5-8 per cent in FY21. Besides expectations of economic recovery, a rise in viewership share of its flagship channel (Sun TV) to over 41 per cent, from a low of 35 per cent in April, should help keep growth strong. Other factors are investments in new content (Sun Bangla), and stable market share for Gemini TV (Telugu).
 
The ad revenue segment has accounted for 40 per cent of revenues in FY20 so far.
 

Subscriber revenues overtook ad revenues to become the single-largest contributor in the June 2019 quarter, which was a positive. Subscriber revenues had been increasing since FY17, given the digitisation of the Tamil Nadu market, as well as phase III and phase IV implementation in other southern states.
 
In addition to the amended new tariff order, the ongoing digitisation in Tamil Nadu is expected to add 4-5 million households to the direct-to-home market.
 
The company is also looking to grow digital revenues by integrating its TV content with over-the-top platforms.
 
It has tied up with Jio Cinema and MX Player, and is in talks with telcos/broadband players to port its content to their platforms.
 
While calibrated investments in original content should help maintain profitability, new movie launches and the upcoming IPL season will be important revenue contributors.
 
Analysts at B&K Securities are positive on long-term prospects, given the healthy free cash flows and return ratios, steady contributions from subscriptions and IPL, and the undemanding valuations of 12x its FY20 earnings per share estimates.
 
Investors should, however, await a meaningful improvement in advertising revenue growth before considering the stock.