Sun TV Network: Favorable risk-reward for a steady franchise

2 Jun 2023 , 10:57 AM

Recommendation: Buy

Target Price: Rs. 547

Management believes content costs may see some modest uptick led by investments in Bangla and Marathi GECs. The company reiterated that OTT investments would be limited due to lack of visibility on monetization prospects. Although Sun’s revenue growth in the core business has been modest, its EPS has grown in 9 out of the past 10 years and its FY23 FCF was at an all-time high. Analysts at IIFL Securities have largely maintained their estimates. While FY24 should see 17% EPS growth led by IPL gains, they expect ~7% PAT growth in subsequent years. After removing IPL and cash, the core business trades at an attractive ~3.5x 1YF PE. If Sun raises its payout ratio (35% in FY23), there could be some re-rating.

Core business steady; IPL to boost FY24

Key takeaways from management interaction: 1) Notwithstanding a subdued Q1, ad revenue should witness mid-to-high single-digit growth in FY24. 2) Domestic subscription revenue may grow in high single digits in FY24. 3) Content investments will see a modest increase and there will be no near-term step up on OTT. 4) Capex on in-house movie production will be Rs. 1 billion; satellite rights purchase will be Rs. 3-4 billion (similar to recent years). 5) Sun maintained Rs. 3.5 billion IPL PBT expectation in FY24 (versus ~Rs. 1 billion in FY23).

Maintain estimates

Analysts at IIFL Securities have marginally tweaked their estimates. They expect 17% EPS growth in FY24 followed by 7% each in FY25 and FY26, with renewed IPL deal contributing to a significant part of the FY24 EPS growth.

Attractive valuation lends comfort, despite risk of falling behind in the OTT game

In stark contrast to global and other Indian broadcasters, Sun has not spent meaningfully on OTT due to lack of visibility on monetization prospects. While the company states it would take the plunge into OTT only in case of a solid business case, analysts at IIFL Securities believe that this entails a risk of Sun’s entry being too late. That said, the current valuation (~3.5x 1YF core PE) largely factors in this risk, making the risk-reward attractive. With rising cash balance (Rs. 56 billion as of end-FY23), analysts at IIFL Securities believe dividend should be stepped up, especially with ROE dropping below 20% for the first time.