Sun TV Network - In-line 2QFY11 results; near-term on track:: Kotak Sec

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Sun TV Network (SUNTV)
Media
In-line 2QFY11 results; near-term performance on track but factored in. Sun TV
reported largely in-line 2QFY11 EBIT of Rs2.42 bn versus our expectation of Rs2.5 bn;
the variance was on account of (1) advertising revenues pushed to 3QFY11 (festival
season), (2) higher-than-expected SG&A expenses and (3) only one Sun Pictures movie
in 2QFY11. Near-term performance is on track but factored into valuations at 15X
FY2012E EV/EBIT; Sun TV deserves some premium given its dominant position in the
Tamil market but (1) other markets are susceptible to competition/ advertising
fragmentation and (2) subscription revenues from sister company Sun Direct are
unsustainable, in our view. Retain REDUCE for now.


Largely in-line 2QFY11 results; modest deviation in certain line items
􀁠 Sun TV reported largely in-line 2QFY11 EBIT at Rs2.42 bn (+30% yoy; -1% qoq). The modest
negative variance was on account of (1) seasonal variation in advertising (festival season pushed
out to 3QFY11), (2) higher-than-expected overhead expenses and (3) only one movie in Sun
Pictures (Endhiraan/Robot pushed to 3QFY11).
􀁠 However, we highlight that we still have trouble reconciling (1) the structural shift in Sun’s
advertising revenues in FY2010 (no rate hikes, on the back of double-digit decline in market
share across markets except Tamil) and (2) sustainability of Sun’s subscription realizations from
Sun Direct (sister DTH concern), which tend to inflate near-term earnings.
􀁠 2QFY11 subscription revenues at Rs1.24 bn were largely in line with expectations. 2QFY11
cable revenues of Rs540 mn (+50% yoy; +6% qoq) were led by (1) strengthening of
distribution business (Sun18) and (2) Malayalam channels turning pay. However, DTH revenues
(+75% yoy; +3% qoq) slackened due to a seasonally weak quarter and some technical issues in
Sun Direct, which contributes ~60% of Sun TV’s DTH subscriber base.
􀁠 Other revenues (Sun Pictures movie division) were below expectations due to only one movie
during 2QFY11 and Endhiran/Robot being pushed to 3QFY11. However, lower revenues were
matched by lower costs (booked in amortization expenses).
􀁠 2QFY11 SG&A expenses at Rs268 mn (+11% yoy, +94% qoq) were higher on account of onetime
expenses such as pre-release advertising of Endhiran/Robot. 2QFY11 employee costs at
Rs407 mn (+27% yoy, +2% qoq) were in line but uncertainty remains over the promotermanagement
remuneration policy, which constitutes ~70% of the employee costs. We model
FY2011E employee expenses of Rs1.5 bn versus Rs806 mn reported in 1HFY11.