Shift to commissioned model in all markets except TN, ads growth sluggish and subscriptions steady
Incorporated in 1985, Sun TV Network Limited (Sun TV), is India’s one of the largest television broadcasters. It is a leading player in South India with a bouquet of 33 channels in four Indian languages: Tamil, Telugu, Kannada and Malayalam. The company first went public in the year 2006 and raised Rs 600 crore. The flagship channel Sun TV corners more than 60 per cent market share in the Tamil GEC genre.
Apart from the television broadcasting business, the company has a strong presence in radio broadcasting and ventured into film production in the year 2009. It presently airs 46 FM radio stations across the country. The film production business is structured as a division of the company. The Sun Group runs two daily newspapers, five magazines, direct-to-home (DTH) platform and Indian Premium League (IPL) franchise. It owns the Sunrisers Hyderabad cricket franchise of the IPL.
The network has a reach of more than 95 million households in India. Sun TV Network’s channels can be viewed in 27 countries including USA, Canada, Europe, Middle East, Singapore, Malaysia, Sri Lanka, South Africa, Australia and New Zealand.
For the April-June’17 quarter, Sun TV’s revenue and profit after tax (PAT) beat was led by lower IPL losses. The break-up of revenue is as follows: the advertising and broadcasting revenue stood at Rs 326 crore followed with Rs 174 crore from DTH platform. The paid-cable channel scored Rs 96 crore, Rs 44 crore from overseas and Rs 5 crore from others. For the quarter, depreciation and amortisation was Rs 17.5 crore and Rs 86 crore, respectively. The company posted 31 per cent and 27 per cent YoY revenue growth in Telugu and Malayalammarkets, respectively.
Spurting subscriptions
The key positive is 29.7 per cent YoY surge in pay cable subscription aided by catch‐up revenue and up‐swing in digital revenue. The company reported 15 per cent YoY subscription growth without Tamil Nadu digitisation. It expects to maintain this and has guided for 15 to 16 per cent YoY growth in subscriptions in 2018, led by South markets, excluding Tamil Nadu.
With Phase III digitisation on track, the growth in subscriptions is estimated to be 15 per cent and 12 per cent YoY in fiscal 2018 and 2019, respectively. On the other hand, the DTH platform clocked 9.4 per cent YoY jump in DTH subscription. The company has 13.62 million subscribers for DTH platform.
Ad growth sluggish
The major negative for the company during the quarter was the 4.1 per cent YoY decrease in advertisements due to GST. After factoring in lower ad growth in the quarter, the estimates expected for 2018 ad growth comes down to nine per cent YoY. The ad growth for August and September is expected to be better as the GST impact fades. The ad revenue is expected to bounce back in the second half of 2018 fiscal riding strong content following improvement in Telugu and Malayalam ratings.
Investment premise
Sun TV will be a beneficiary of Phase III and IV digitisation. These phases are key long-term positives for the company. The digitisation in Chennai and Coimbatore, Tamil Nadu will be a bigger boost and a key stock catalyst. Moreover, Phase III digitisation benefits from Karnataka and Andhra Pradesh markets are expected to flow in.
The company benefits from conducive distribution environment since Sun Direct, a promoter group company, has considerable presence in South India’s distribution DTH market. At four rupees, the company’s analog revenue per month per subscriber is one‐tenth DTH revenue, which is Rs 40 and provides huge upside potential over long term. Atthe current market price of Rs 707, the stock trades at 23.1 times its expected 2018 earnings per share (EPS) and 20.7 times its 2019 EPS.
Shift to commissioned model
Except for Tamil region, the company has adopted the commissioned model in all its regions. In Tamil Nadu, it has commissioned two out of the 18 programs. The company’s direct costs are exceptionally low as it has successfully managed to run a sponsored programming model.
The company has shifted from ad slot model to commissioned model resulting in increase in market share in Kerala and Andhra Pradesh markets. The content cost jumped 37.6 per cent YoY as the company shifted to commissioned model from earlier ad slot model.
The TRAI ad-cap rule
The Telecom Regulatory Authority of India (TRAI) notified its tariff order for the broadcasting sector. The order caps the monthly cable bill of television households at Rs 130 plus taxes for the first 100 free-to-air (FTA) channels. Beyond which, the channels will be available in slabs of 25 and an amount of Rs 20 will be charged per slab. The 100 standard-definition (SD) channels will include channels to be mandatorily provided to subscribers as notified by the central government.
Another notification by TRAI in 2013 restricts the television channels from airing advertisements for more than 12 minutes per hour. These remain as risks for Sun TV and the advertisement environment continues to remain soft.
On the IPL Franchise front
The IPL franchise scored IPL losses of Rs 22.4 crore, which were stable and lower than the previous financial year even though SunTV lost the IPL series in the current financial year. In the first quarter of 2017 fiscal, the company won prize money of Rs 15 crore. Presently, 54 per cent of central pool money is split equally with the franchise. However, from the eleventh year, 45 per cent of the central pool money will be split equally with the franchise
Other mediums: movie acquisition, radio
The company is concentrating on big‐ticket banners. The pricing for movie acquisition is soft and the movie expense for the financial year 2018 will be around Rs 330 crore.
The radio broadcast channel for the company witnessed 10 per cent YoY revenue growth and the profit after tax grew 20 per cent YoY. The company has 48 stations which will increase to 70 stations after rollout of new stations.
The company has registered five million downloads till date on its Sun NXT platform.
Rating across channels
The gross rating point of Sun TV is rock steady. However, the universe has increased driven by Star Vijay. The company expects the universe to come back once the high content cost is finished by Star Vijay. Sun TV will stick to its own content strategy in Tamil Nadu which has worked very well for it. It has, on overall basis, improved its GEC market share and ex‐GEC in Malayalam and Kannada markets. Big Boss will run up to 100 episodes and end by September 24, 2017. It has attracted newer viewership.
Key Risks
The major risk for the Sun TV is the intensifying competition which can adversely impact the cost of business. The strong foothold in the competitive southern market poses tough entry barrier. The stock corrected 17.7 per cent in the last two months owing to decline in Sun TV’s market share due to intense competition from Star Vijay, which expanded market with non‐fiction content. This is temporary, as Sun TV’s viewership is intact. However, the competition from Colors is a key monitorable.
The key challenge is the regulatory overhang. The regulatory concern on Sun TV has waned as the special court has acquitted promoters resulting in re‐rating. A special court was appointed by Supreme Court which discharged all charges against the Maran brothers in the Aircel-Maxis case along with all other accused in corruption and money laundering cases. Even if the case is appealed by Central Bureau of Investigation (CBI), the apex court will look into the evidence based on which the special court discharged all the charges.