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Sun TV Network (SUNTV)
Media
Endhiraan shines; some clouds over core business. Sun TV reported 3QFY11 EBIT at
Rs3.28 bn (+46% yoy, +36% qoq) led by (1) blockbuster movie ‘Endhiraan’ EBIT
contribution of Rs440 mn and (2) lower-than-expected amortization of telecast rights.
However, 3QFY11 advertising and subscription revenues were below expectations;
advertising growth has tapered off despite seasonally strong quarter and steady ratings
performance. Retain our estimates for now; we await management commentary on
3QFY11 operating metrics. Sun TV also declared an interim dividend of Rs5/share,
already implying FY2011E dividend yield of 2.1%.
Robust 3QFY11 results but core business operating metrics is lower versus expectations
We highlight that yoy and qoq comparison of 3QFY11 results may not be entirely correct on
account of release of India’s largest movie ‘Endhiraan’, certainly not a usual occurrence (even
on a yoy comparative). The EBIT contribution of Rs440 mn may not be repeatable and thus,
3QFY11 may not be indicative of future performance.
Sun TV reported 3QFY11 EBIT at Rs3.28 bn (+46% yoy, +36% qoq) led by Rs440 mn EBIT
contribution from ‘Endhiraan’. Core business EBIT at Rs2.84 bn (+27% yoy, +17% qoq) was
largely led by lower-than-expected cost of telecast rights of films even as 3QFY11 revenues
were below expectations. We note EBIT is the right financial metric as Sun TV accounts for a
significant portion of its content costs as amortization.
Sun TV noted Rs1.32 bn cost of production for Endhiraan (including Negative as well as P&A –
print and advertising). Sun TV also highlighted net recovery of Rs1.79 bn, of which Rs150 mn of
sales of TV rights (non-South markets) is yet to be realized. Sun TV has booked Rs1.51 bn of
income and Rs1.07 bn of costs for the movie during 3QFY11, ahead of our expectations (our
cost expectation was higher given lack of guidance previously).
Endhiraan was a high-risk, high-reward strategy, in our view, given the relatively modest size of
the Tamil film market (the film was simultaneously released in 3 languages) versus the larger
Hindi film market (where films with budgets ~Rs1 bn have routinely failed to recover film costs
and ~Rs0.5 bn films are considered in the high-budget category).
However, the high-risk high-reward strategy paid off in case of Endhiraan; additionally, Sun TV
prudently de-risked itself to a large extent by pre-selling all non-Tamil rights (except TV rights in
South-Indian markets, which will be exploited later by Sun TV channels). The relatively subdued
performance of Endhiraan’s Hindi version validated the approach.
3QFY11 results analysis (contd.)—core business
As previously highlighted, the success (operating as well as financial) of Endhiraan may
not be recurring for Sun Pictures (and Sun TV at the consolidated level). However, Sun TV
core broadcasting business will benefit from inexpensive TV rights (all South-Indian
languages available) likely in FY2012E.
Sun TV reported 3QFY11 advertising revenues of Rs2.61 bn (+17% yoy, +12% qoq),
marginally below our and street expectations. We have previously had trouble reconciling
the structural shift in Sun’s advertising revenues in FY2010 (see Exhibit 2; no rate hikes in
FY2010 and on the back of double-digit decline in market share across markets except
Tamil) but growth seems to be moderating on a high base.
The good news is that ratings of most Sun TV flagship channels (barring Surya TV in the
Kerala/Malayalam market) have stabilized (Gemini TV in Telugu/Andhra Pradesh market
has witnessed robust increase on a yoy basis). Exhibits 3-6 present the trends in ratings of
key Sun TV channels across its markets.
Sun TV has benefitted from the downturn in the Indian economy resulting in moderating
competitive intensity. However, competition is on an upswing again (Maa TV has
announced its movie and kids channels in the Telugu market). Nonetheless, we expect
ratings of Sun TV network to remain stable in the near term; new launches are unlikely in
4QFY11E-1QFY12E given strong cricket calendar.
Strong cricket calendar (ICC ODI World Cup and expanded IPL Season 4) will impact all
other media platforms (other genres on TV, print et al with the exception of radio given
significant programming around cricket on FM radio). The impact on ratings of TV
channels may be moderate but sports/cricket is the only platform that provides a pan-
India audience; Telecom and Auto among other large advertisers (with the exception of
FMCG) have already indicated higher spends on cricket.
Sun TV reported 3QFY11 subscription revenues of Rs1.23 bn (+48% yoy, -1% qoq),
marginally below our and street expectations. Sun TV reported 3QFY11 DTH revenue at
Rs700 mn (+59% yoy, flat qoq). Sun TV noted timing issues with renewal of contracts
with some DTH operators; 4QFY11E DTH subscription revenues are expected to include
Sun’s incremental share of 3QFY11 subscription as well. Sun TV reported 3QFY11 cable
subscription revenues at Rs530 mn (+36% yoy, -2% qoq).
Sun TV’s strong 3QFY11 financial performance was largely on account of lower content
costs. Sun TV reported 3QFY11 cost of revenues at Rs226 mn (-10% yoy, -10% qoq),
largely immune from rising general media inflation. We note that Sun TV had added
niche kids and comedy channels to its portfolio throughout FY2010. Sun TV benefits from
a large movie library for its comedy channels but still needs to buy content for its kids
channels from third-party vendors (we highlight the deal between DQ Entertainment and
Sun TV for 117 ½-hours of content in June 2010).
More striking, Sun TV’s reported 3QFY11 depreciation and amortization expenses
(excluding amortized cost of Endhiraan) at Rs670 mn was much below Rs850 mn
expectation. Sun TV had reported average D&A expenses (excluding Sun Pictures
amortization cost) of ~Rs760 mn in 1HFY11. Sun TV noted reduced number of large
movie premiers during 3QFY11 versus previous quarters as the key driver behind the
lower-than-expected TV rights amortization expenses.
Sun Pictures provides an opportunity for Sun TV to lower its cost of TV rights acquisition
but is currently a relatively small venture present only in the Tamil film market. Sun TV
would benefit from availability of inexpensive TV rights of Endhiraan likely in FY2012E but
Sun Pictures will need to expand its scale of operations and portfolio considerably for
long-term benefit. We have not witnessed any slowdown in TV rights cost (on the
contrary, cost of TV rights in Hindi film market have increased considerably) and we
expect Sun’s D&A expenses to normalize ahead.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun TV Network (SUNTV)
Media
Endhiraan shines; some clouds over core business. Sun TV reported 3QFY11 EBIT at
Rs3.28 bn (+46% yoy, +36% qoq) led by (1) blockbuster movie ‘Endhiraan’ EBIT
contribution of Rs440 mn and (2) lower-than-expected amortization of telecast rights.
However, 3QFY11 advertising and subscription revenues were below expectations;
advertising growth has tapered off despite seasonally strong quarter and steady ratings
performance. Retain our estimates for now; we await management commentary on
3QFY11 operating metrics. Sun TV also declared an interim dividend of Rs5/share,
already implying FY2011E dividend yield of 2.1%.
Robust 3QFY11 results but core business operating metrics is lower versus expectations
We highlight that yoy and qoq comparison of 3QFY11 results may not be entirely correct on
account of release of India’s largest movie ‘Endhiraan’, certainly not a usual occurrence (even
on a yoy comparative). The EBIT contribution of Rs440 mn may not be repeatable and thus,
3QFY11 may not be indicative of future performance.
Sun TV reported 3QFY11 EBIT at Rs3.28 bn (+46% yoy, +36% qoq) led by Rs440 mn EBIT
contribution from ‘Endhiraan’. Core business EBIT at Rs2.84 bn (+27% yoy, +17% qoq) was
largely led by lower-than-expected cost of telecast rights of films even as 3QFY11 revenues
were below expectations. We note EBIT is the right financial metric as Sun TV accounts for a
significant portion of its content costs as amortization.
Sun TV noted Rs1.32 bn cost of production for Endhiraan (including Negative as well as P&A –
print and advertising). Sun TV also highlighted net recovery of Rs1.79 bn, of which Rs150 mn of
sales of TV rights (non-South markets) is yet to be realized. Sun TV has booked Rs1.51 bn of
income and Rs1.07 bn of costs for the movie during 3QFY11, ahead of our expectations (our
cost expectation was higher given lack of guidance previously).
Endhiraan was a high-risk, high-reward strategy, in our view, given the relatively modest size of
the Tamil film market (the film was simultaneously released in 3 languages) versus the larger
Hindi film market (where films with budgets ~Rs1 bn have routinely failed to recover film costs
and ~Rs0.5 bn films are considered in the high-budget category).
However, the high-risk high-reward strategy paid off in case of Endhiraan; additionally, Sun TV
prudently de-risked itself to a large extent by pre-selling all non-Tamil rights (except TV rights in
South-Indian markets, which will be exploited later by Sun TV channels). The relatively subdued
performance of Endhiraan’s Hindi version validated the approach.
3QFY11 results analysis (contd.)—core business
As previously highlighted, the success (operating as well as financial) of Endhiraan may
not be recurring for Sun Pictures (and Sun TV at the consolidated level). However, Sun TV
core broadcasting business will benefit from inexpensive TV rights (all South-Indian
languages available) likely in FY2012E.
Sun TV reported 3QFY11 advertising revenues of Rs2.61 bn (+17% yoy, +12% qoq),
marginally below our and street expectations. We have previously had trouble reconciling
the structural shift in Sun’s advertising revenues in FY2010 (see Exhibit 2; no rate hikes in
FY2010 and on the back of double-digit decline in market share across markets except
Tamil) but growth seems to be moderating on a high base.
The good news is that ratings of most Sun TV flagship channels (barring Surya TV in the
Kerala/Malayalam market) have stabilized (Gemini TV in Telugu/Andhra Pradesh market
has witnessed robust increase on a yoy basis). Exhibits 3-6 present the trends in ratings of
key Sun TV channels across its markets.
Sun TV has benefitted from the downturn in the Indian economy resulting in moderating
competitive intensity. However, competition is on an upswing again (Maa TV has
announced its movie and kids channels in the Telugu market). Nonetheless, we expect
ratings of Sun TV network to remain stable in the near term; new launches are unlikely in
4QFY11E-1QFY12E given strong cricket calendar.
Strong cricket calendar (ICC ODI World Cup and expanded IPL Season 4) will impact all
other media platforms (other genres on TV, print et al with the exception of radio given
significant programming around cricket on FM radio). The impact on ratings of TV
channels may be moderate but sports/cricket is the only platform that provides a pan-
India audience; Telecom and Auto among other large advertisers (with the exception of
FMCG) have already indicated higher spends on cricket.
Sun TV reported 3QFY11 subscription revenues of Rs1.23 bn (+48% yoy, -1% qoq),
marginally below our and street expectations. Sun TV reported 3QFY11 DTH revenue at
Rs700 mn (+59% yoy, flat qoq). Sun TV noted timing issues with renewal of contracts
with some DTH operators; 4QFY11E DTH subscription revenues are expected to include
Sun’s incremental share of 3QFY11 subscription as well. Sun TV reported 3QFY11 cable
subscription revenues at Rs530 mn (+36% yoy, -2% qoq).
Sun TV’s strong 3QFY11 financial performance was largely on account of lower content
costs. Sun TV reported 3QFY11 cost of revenues at Rs226 mn (-10% yoy, -10% qoq),
largely immune from rising general media inflation. We note that Sun TV had added
niche kids and comedy channels to its portfolio throughout FY2010. Sun TV benefits from
a large movie library for its comedy channels but still needs to buy content for its kids
channels from third-party vendors (we highlight the deal between DQ Entertainment and
Sun TV for 117 ½-hours of content in June 2010).
More striking, Sun TV’s reported 3QFY11 depreciation and amortization expenses
(excluding amortized cost of Endhiraan) at Rs670 mn was much below Rs850 mn
expectation. Sun TV had reported average D&A expenses (excluding Sun Pictures
amortization cost) of ~Rs760 mn in 1HFY11. Sun TV noted reduced number of large
movie premiers during 3QFY11 versus previous quarters as the key driver behind the
lower-than-expected TV rights amortization expenses.
Sun Pictures provides an opportunity for Sun TV to lower its cost of TV rights acquisition
but is currently a relatively small venture present only in the Tamil film market. Sun TV
would benefit from availability of inexpensive TV rights of Endhiraan likely in FY2012E but
Sun Pictures will need to expand its scale of operations and portfolio considerably for
long-term benefit. We have not witnessed any slowdown in TV rights cost (on the
contrary, cost of TV rights in Hindi film market have increased considerably) and we
expect Sun’s D&A expenses to normalize ahead.
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