Sun TV Network: EPS growth to moderate in FY25, after FY24 IPL boost

22 Nov 2023 , 11:25 AM

Recommendation: Add; Target price: Rs 731

 

In analysts of IIFL Capital Services recent interaction, Sun TV management reiterated that FY24 should see mid-to-high single-digit subscription revenue growth. Also, ad revenue may see low-single-digit growth due to market share gains by the Sports genre, where Sun is not present. While Q2 saw an ad spend spurt from FMCG, most of this went to Digital and Sports, where Sun has a limited or negligible presence. Higher NTO 3.0-related payouts to DPO seen in Q2FY24 may continue in the next one to two quarters. Analysts of IIFL Capital Services cut EPS estimates by 1-3%. They downgrade Sun to ADD from BUY, post its ~60% rally in the recent months vs 27% increase in Nifty Midcap Index even as its core EPS growth remains modest (5% p.a.). After removing IPL and cash, the core business trades at ~8.5x 1YF PE (vs. 3.5x in early June). 43% dividend payout ratio in H1FY24 marks an increase from 35% in FY23; there could be some re-rating if Sun further steps up payout. A demerger/listing of the IPL franchise could also unlock value. Analysts of IIFL Capital Services new Dec’24 TP rises to Rs731 vs Rs678. 

Cautiously optimistic management commentary: 

Key takeaways from the management meeting: 1) Ad revenue may only grow at 2-3% YoY, due to disproportionate ad spends in sporting events. 2) Local advertisers remain buoyant and 2024 elections should boost ad revenue. 3) Satellite rights purchase is likely to be Rs4-5bn. 4) Capex on in-house movies is likely to be Rs2-3bn, with a focus on two movies in a year. 5) IPL PBT may undershoot Rs3.5bn estimate at the beginning of FY24. 

Analysts of IIFL Capital Services estimate marginal ad revenue decline in FY24: 

After witnessing ~2% revenue decline in H1, management expects 2-3% YoY ad revenue growth vs 8-10% envisaged at the start of FY24. While Q3 will see some benefit from the delayed festive season, the incidence of CWC 2023 for over a month is likely to weigh on Sun’s ad revenue. For 2-3% ad revenue growth in FY24, the asking rate for H2 is ~7%; which looks stiff. Analysts of IIFL Capital Services build in only 1% YoY growth in H2, which translates into 1% decline for FY24. 

Downgrade stock to ADD from BUY: 

Analysts of IIFL Capital Services prune ad revenue for FY24 and beyond. Consequently, they cut FY24/FY25/FY26 EPS by 2.7%/1.4%/1.8%. Sun’s core business trades at 8.5x 1YF PE, after assigning Rs80bn valuation to Sunrisers Hyderabad and removing Rs60bn cash. With IPL-related tailwinds until the next cycle already in the numbers, analysts of IIFL Capital Services see no near-term triggers.