Sun TV Network: Attractive risk-reward

8 Mar 2023 , 10:56 AM

Recommendation: Buy

Target Price: Rs 535

 

In their recent interaction with analysts at IIFL Capital Services, Sun TV management stated that FY23 should see 8-10% ad revenue growth, while FY24 could see some tailwinds from the elections. Although NTO 3.0 implementation may initially witness some disruption, Sun expects 6-8% subscription revenue growth in FY24. The company would spend Rs2-2.5 billion p.a., on in-house movie production. However, the reduced supply of movies would result in lower satellite rights acquisition. The company has not changed course in its OTT strategy, which is mainly limited to movies and the episodes of TV shows.

Analysts at IIFL Capital Services have largely maintained their estimates. While FY24 should see 18% EPS growth led by IPL gains, core EPS growth would be in mid-single digits. After removing IPL and cash, the core business trades at an attractive ~3.6x 1YF PE. There is scope for an increase in the dividend payout ratio (~40% in 9MFY23), considering Rs50 billion+ cash balance. 

Ad spend on a mend; 6-8% subscription revenue growth seen in FY24

Key takeaways from management interaction include: 

1) Ad revenue may grow 8-10% in FY23 (mostly led by favorable base in Q1), as improved spending by local advertisers partly offsets the sluggish FMCG spends. 

2) Some disruptions around NTO 3.0 implementation may persist in the near term, but FY24 should see 6-8% subscription revenue growth.

3) There are two in-house movies slated for FY24 (Rajinikanth-starrer Jailer in April 2023 and a Dhanush movie in H2FY24). 

4) Spending on satellite rights would be Rs3-3.5 billion p.a. versus the Rs5 billion indicated earlier, due to fewer movies.

Maintain estimates

Analysts at IIFL Capital Services have marginally tweaked their estimates, as lower costs offset the cut in movie revenue and subscription revenue. They expect 5%, 18% and 6% EPS growth in FY23/24/25, with the renewed IPL deal contributing to most of the FY24 EPS growth.

Modest core EPS growth; attractive valuation

At a time when global media companies are under investor scrutiny for diminishing returns on OTT and Zee witnessing rising ZEE5 EBITDA loss, Sun’s strategy of keeping original OTT content investments to a minimum has resulted in healthy FCF generation. However, the company’s conservative approach on content spending, even in core TV business, has kept the viewership share flattish and limited revenue growth. Analysts at IIFL Capital Services expect mid-single-digit revenue and EPS growth for the core business.