Strong advertising outlook, launch of channels positives for Sun TV Network

The decision to cap management compensation and incremental subscription growth are other triggers

Strong advertising growth, additional subscription revenue, launch of channels and entry into new markets could stem the tide for Sun TV Network, which has been impacted by stiff competition in its core markets.

The company, which expects double-digit growth in advertising in FY19, is planning to reposition Sun Life as its second general entertainment channel and enter the markets in West Bengal and Maharashtra. 

Further, with complete digitisation of the Tamil Nadu market by end-FY19, it expects an additional 8-8.5 million subscribers and incremental revenue opportunity of Rs3-5 billion. 

What will be perceived as a positive step by the Street is the decision by promoter directors to cap their compensation at FY18 levels of about Rs1.75 billion, implying margin upsides. 

Given the developments, Abneesh Roy and Monit Vyas of Edelweiss Research expect the stock to re-rate, due to the robust show in the June quarter on all fronts, management salary being capped and likely increase in dividend payouts. The brokerage has raised earnings estimates over the next couple of financial years by 8-13 per cent, on faster digitisation in Tamil Nadu and performance of Sunrisers Hyderabad, its Indian Premier League (IPL) cricket team. The firm booked sales of Rs3.8 billion for FY19 in the June quarter itself (given the yearly event), and expects the franchise to become more popular, improving gate collection and, more importantly, sponsorship revenue. In fact, it was the higher IPL revenue that helped beat revenue and operating profit estimates in the June quarter. 
 

Advertising revenue grew a strong 20 per cent over a year on a low base and subscription revenue increased 15 per cent. What should help diversify its dependence on the Tamil Nadu market is the high growth in advertising revenue in the Malayalam and Kannada markets. 

The share of TN market in the overall advertising market has come down, from over two-thirds to about 60 per cent. This should help Sun de-risk its revenue. Sun also expects its new channels to break-even over the next couple of years.

Analysts at Citi Research believe the risk-reward on the stock is favourable, given the healthy advertising and subscription outlook, with upsides coming from IPL investment. They add that the valuation at 20 times its FY20 estimated earnings is attractive and see a 25 per cent-plus upside from the current level.

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