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EARNINGS REVIEW
Sun TV Network (SUTV.BO)
Sell
In line with expectations; reiterate Sell as base effect starts to catch up
What surprised us
After beating expectations continuously for the last few quarters, Sun TV
reported 2QFY11 results that were in-line with our numbers and slightly
below BB consensus estimates. Net Profit for the quarter was Rs1674 mn
– up 28% on a YoY basis. EBIT margins for the quarter stood at c.57% vs
58% in 2QFY10.
Advertising revenue was up c.19% YoY – much lower than the c.50% YoY
growth seen in 1QFY10, mainly due to the high base of 2QFY10. Subscription
revenues continued to deliver strong growth - increasing by more than 60%
YoY on account of strong growth in both the DTH and cable segments.
What to do with the stock
Given Sun TV’s dominance across the genres that it operates, we continue
to believe that growth prospects remain strong. However, as the share of
the lower margin movie business (12-15% vs 75-80% in the core television
business) increases, we expect EBIT margins to contract by 300 bps over
FY10-13E. We have adjusted our FY11E-13E EPS estimates by -1 to -5%.
We believe current premium valuations (64% premium to Zee
(ZEE.BO, Neutral, Rs277.9) on 12-m fwd P/E vs 2-yr median premium
of 33%) price in an exceptionally strong growth scenario, leaving
little room for risks – leading to our Sell rating on the stock. Our
12-m TP of Rs 392 (vs. Rs 397 earlier) is based on 22X average of FY11E
and FY12E EPS.
Key risks:1) Stronger than expected advertising revenue growth, 2)Better
than expected margin performance
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