Sun TV Network: Steady performance to continue

28 Aug 2023 , 10:45 AM

Recommendation: Buy; Target Price: Rs 678

In analysts of IIFL Capital Services recent interaction, Sun TV management reiterated that FY24 should see mid-to-high single-digit growth in ad and subscription revenue. Content costs may normalise from the elevated level seen in Q1. There is no change in the company’s strategy of refraining from large investments on the OTT platform SunNXT. Q1 IPL PBT of Rs2.8bn is well below the earlier guidance of Rs3.5bn, though the franchise’s lacklustre performance in the tournament may have partly contributed to this. Analysts of IIFL Capital Services cut FY24/25 EPS by 1%/3%. While FY24 should see 15% EPS growth led by IPL gains, they expect ~5% PAT growth in subsequent years. After removing IPL and cash, the core business trades at an attractive ~7.2x 1YF PE. Dividend payout ratio of 42% in Q1FY24 marks an increase from 35% in FY23; there could be some re-rating if Sun further steps up payout. Analysts of IIFL Capital Services new Sep’24 TP is Rs678, on higher target multiple and roll-forward. Maintain BUY. 

Core business steady: Key takeaways from management interaction: 1) Ad revenue should witness mid-to-high single-digit growth in FY24, though festive season holds the key. 2) Domestic subscription revenue may grow in high-single digits in FY24 (6% in Q1). 3) Content costs jumped 21% YoY in Q1 due to one-off programmes, and should normalise going forward. 4) Satellite rights purchase will be Rs3-4bn (similar to recent years). 5) It remains to be seen whether BCCI makes further payouts related to IPL 2023 (another 10-15% from Q1 levels cannot be ruled out). 

Marginally prune estimates: During FY24, analysts of IIFL Capital Services do not assume any incremental revenue from IPL and trim IPL PBT for subsequent years to ~Rs2.8bn. In FY24, this is partly offset by the strong performance of Sun’s in-house production movie Jailer, limiting EPS cut to 1%. However, FY25 EPS sees 3% cut.

Reasonable valuation largely factors in potential risk of lagging in the OTT game: Sun has not spent meaningfully on OTT. This is due to lack of visibility on monetisation prospects and its view that there is a large enough market for its current content genre. While the company states to take the plunge into OTT only in case of a solid business case, analysts of IIFL Capital Services believe this entails the risk of Sun’s entry being too late. That said, the current valuation (~7.2x 1YF core PE) largely factors in this risk, making the riskreward attractive.