The Sun TV Network stock may have come off its all-time high of Rs 1,077 reached in January this year, but a revival in advertisement revenue growth, coupled with digitization in Tamil Nadu, points to higher growth rates for the company in the next two years.

According to analysts, given the improving business outlook and promoters, including Kalanithi Maran, managing to clear legal issues, the stock correction could be a good entry point for investors.

Profitable Q3, but below expectations

The company entered into a high-growth phase in the December 2017 quarter (Q3).

Ad revenues, digitization to drive Sun TV's earnings in next 2 years Sun TV's net profit during the reporting quarter grew 11 percent to Rs 2.66 billion from Rs 2.40 billion a year ago. It was below analysts' expectation, as the bottom line was hit by a higher movie amortization cost of around Rs 960 million, even as its earnings before interest, tax, depreciation, and amortization (EBITDA) were in line with estimates.

An increase in cost of programming and content, too, impacted profit. The cost moved north due to a transition from slot-sale to a more stable commission-based model. Sun TV indicated that the split would be 50:50 in terms of private producers and commissioned programming. The latter's share is 20 percent at present. The double-digit growth in Q3 profit comes after three consecutive quarters of single-digit increase in earnings figures.

Revenues were up 15.9 percent year-on-year (y-o-y) at Rs 6.83 billion, aided by higher-than-expected advertising revenue growth. Advertisement and broadcasting revenues grew 19 percent (core advertisement growth of 21.6 percent y-o-y). Subscription revenues grew 16.5 percent y-o-y to Rs 2.81 billion.

Ad revenue, digitization to drive growth

Of the total TV advertisement market of Rs 188 billion, the southern region constitutes Rs 40 billion. Of this, Tamil Nadu accounts for 45 percent, and Sun TV claims 45-50 percent of it. The company expects healthy growth in advertising revenues in the coming quarters. "Double-digit growth (an advertisement revenue) is fairly reasonable as big national advertisers are back.

Focus on strong fiction-led content should drive rating-led advertisement growth," an analyst said. Ad revenues, digitization to drive Sun TV's earnings in next 2 years Analysts estimate Sun's subscription revenue to grow at 16 percent, driven by an uptick in DTH (direct-to-home), higher HD (high-definition) penetration, and increase in average revenue per user per month (ARPU).

Digitization is expected to conclude in Tamil Nadu in March 2018. It would provide an incremental annual revenue potential of Rs 3.50-4 billion, the company's management said.

Competitive pressures up

Against the backdrop of increasing competition in traditional markets in the South, including Tamil Nadu, from newbies such as Colors Tamil, Zee, and Star, among others, Sun TV is taking steps to secure its market pie and expand geographically. Sun TV, the flagship channel of Sun Network, garnered over 60 percent viewership in 2016. The share has now come down to 47-48 percent.

The management said while Sun would work to maintain its leadership by tweaking strategies, including launching shows, it would also chase its competitors' markets. Sun's Gemini TV (Telugu) ratings improved to 24-25 percent in the last couple of months following a content rejig. The Kannada GEC channel, Udaya TV, too, improved its ratings to 17-18 percent from 11-12 percent.

The only weak link is the Malayalam genre where the share of Sun's movies channel has come down to 16-17 percent from 20-22 percent. There are concerns over rising competition with the launch of Colors Tamil and aggressive content strategy by Star and Zee in the Tamil genre.

However, Sun's leadership and understanding of the Tamil market offered the company a competitive edge, said ICICI Securities. Yet, this is one area the Street will watch out for. Sun, sitting on Rs 17-billion cash and cash equivalents, plans to invest in content, OTT (over the top) and in market expansion. The management said the company was looking at entering one new market in FY19.

The road ahead

Sun expects to report double-digit growth going ahead. ICICI Securities expects the company's advertisement revenues to grow at a compounded annual rate of 12.5 percent over FY17-20 due to a low base and monetization of improved ratings in non-Tamil markets.

Sun TV's shift to a commission-based model from private programming should potentially offer about 20 percent higher Ebitda and capture the potential upside from limited undercutting and better content ratings, said Aliasgar Shakir, research analyst at Motilal Oswal Securities.

Besides, Sun TV expects to benefit from its Ebitda margin from FY19 onwards, owing to the Indian Premier League licence fee, obligation being reduced to 20-25 percent and revenue nearly doubling to Rs 2.8 billion due to higher auction of media rights. Analysts expect the company's earnings to grow at over 20 percent each in FY19 and FY20. – Afaqs