Sun TV Networks ADD

26 September 2012

Institutional Equities
Company update
CMP 12mthTP(Rs) Marketcap(US$m) Enterprisevalue(US$m) Bloomberg Sector

Outlook improving
Sun TV Network (Sun) continues to enjoy a dominant market share in all its key markets, notwithstanding the adverse political environment and increased competitive intensity. Adrevenue growth could surprise positively in 2H as ad spend from the key advertising categories remains robust. Additionally, the low base for the remainder of FY13 augurs well. Following a regime change in Tamil Nadu, Suns key market, Suns stock de-rated ~30% on concerns of adverse impact on the companys business. Suns rating in the Tamil market remains largely unaffected even a year after formation of Arasu cable. At a P/E of 15.4x FY14ii, valuations appear inexpensive and continued strong rating performance would drive re-rating. ADD. Ad revenue growth could surprise positively in 2H: Ad spend of televisions largest category, FMCG (~60% of Suns ad revenue) remains robust even as other categories continue to be weak. Following ad-revenue decline in 2HFY12, Suns ad-revenue grew 5% YoY in 1QFY13. Given the low base for rest of FY13 and largely stable ratings across geographies, we expect ad-revenue growth trajectory to improve and possibly surprise in 2HFY13. Subscription revenue growth to pick up: Sun recently signed a content-sharing agreement with Arasu, the absence of which had led to a 30% decline in cable subscription revenue in FY12. We expect a partial recovery this quarter onwards. Further, depreciated rupee would boost overseas subscription revenue. Digitisation is expected to drive strong subscription revenue growth in the medium term. Valuations inexpensive; retain ADD: Sun is trading at P/E of 15.4x FY14ii, at ~30% discount to its historical trading range. The stock has de-rated as investors feared potential negative impact of regime change on Suns operating performance. Despite hostile operating environment in Tamil Nadu, Suns viewership share has been largely unaffected. Recovery in ad-spend growth and digitisation would drive re-rating. Retain ADD.
Bijal Shah | bijal@iiflcap.com 91 22 4646 4645

Rs323 377(17%) 2,382 2,324 SUNTVIN MEDIA

Priceperformance(%)

1M Absolute(Rs) Absolute(US$) Rel.toSensex Cagr(%) EPS

3M 10.2 18.9 (0.5) 3yrs 23.4

1Y 11.3 8.4 (4.3) 5yrs 22.9

8.2 8.5 3.1

Shareholdingpattern(%) Promoter FII DII Others

Stockperformance 77.0 13.1 2.9 6.9 345/177 394 7.0 2.7 23.0 FY11A 20,135 78.4 7,698 7,698 19.5 48.1 16.5 37.2 (0.3) 7.6 5.6
Shares(000') 50,000 40,000 30,000 20,000 10,000 0 Volume(LHS) Price(RHS) (Rs) 600 500 400 300 200 100 0

52WkHigh/Low(Rs) Shareso/s(m) Dailyvolume(US$m) DividendyieldFY13ii(%) Freefloat(%) Financialsummary(Rsm) Y/e31Mar,Consolidated Revenues(Rsm) Ebitdamargins(%) PreexceptionalPAT(Rsm) ReportedPAT(Rsm) PreexceptionalEPS(Rs) Growth(%) IIFLvsconsensus(%) PER(x) ROE(%) Netdebt/equity(x) EV/Ebitda(x) Price/book(x)

Sep10 Nov10 Jan11 Mar11 May11 Jul11 Sep11 Nov11 Jan12 Mar12 May12 Jul12 Sep12

FY12A 18,472 76.6 6,929 6,929 17.6 (10.0) 18.4 29.1 (0.1) 8.8 5.1

FY13ii 19,357 75.7 7,202 7,202 18.3 3.9 (0.8) 17.7 27.0 (0.3) 8.1 4.5

FY14ii 21,909 75.3 8,257 8,257 21.0 14.7 (2.2) 15.4 27.1 (0.4) 6.9 3.9

FY15ii 24,681 74.2 9,308 9,308 23.6 12.7 (6.6) 13.7 26.4 (0.5) 5.9 3.4

Source:Company,IIFLResearch.Pricedason25September2012
|

Jaykumar Doshi | jaykumar.doshi@iiflcap.com 91 22 4646 4668

Institutional Equities

Sun TV Networks ADD Figure2: Adrevenuedeclinein2HFY12formsalowbasefor2HFY13

(Rsm) 2,700 2,400 2,100 1,800 1,500 1,200 1Q 2Q 3Q FY11
Source:Company,IIFLResearch

Suns ad revenue growth trajectory likely to improve The ad-spend of large FMCG companies increased ~30% YoY in 1QFY13, driven by strong revenue growth and expansion of adspend-to-revenue ratio. The continued strong volume growth and management commentary of the listed FMCG players suggest that this trend is likely to continue. This augurs well for Sun as the FMCG sector contributes close to 60% to its ad revenue. Additionally, in FY12, the companys ad revenue growth moderated in 2Q and declined YoY in 2H. This forms a low base for the remainder of FY13. Accordingly, we expect Suns ad-revenue growth trajectory to improve in 2HFY13.
Figure1: FMCGadspendtorevenueratioexpandsafterseveralquartersofdecline
(Rsm) 18,000 13,500 9,000 4,500 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q 2Q 3Q 4Q 1Q FY09 FY10 FY11 FY12 FY13 Adspend(LHS) Adspendas%ofsales(RHS) (%) 16.0 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0

Advertisingrevenue(LHS) AdvertisingrevenuegrowthYoY(RHS)

(%) 60 45 30 15 0 (15)

4Q

1Q

2Q FY12

3Q

4Q

1Q FY13

Source:Company,IIFLResearch Note:AggregatedataofHUL,Dabur,GSKconsumer,Colgate,GodrejCPL,MaricoandEmamiused.

Subscription revenue to pick up from 2Q Suns cable subscription revenue declined 30% in FY12 due to lack of a content agreement with Arasu, the largest cable operator in Tamil Nadu. The company recently signed a content agreement with Arasu. Arasus contribution would result in an uptick in subscription revenue from 2Q. However, note that, Arasus contribution would be only one-fourth of Suns pre-Arasu subscription revenue from the region. Depreciated rupee should drive 20%+ growth in overseas subscription revenue in FY13. In the medium term, digitisation would make under-declaration of cable subscribers nearly impossible, leading to a meaningful increase in the subscription revenue.

bijal@iif lcap.com

Institutional Equities

Sun TV Networks ADD Figure5: Market share in Tamil Nadu remains healthy despite hostile political environment
SunNetwork(TamilNadu) 90 80
DTH 29%

Figure3: Digitisationtodrivemeaningful Figure4: Cable despite being bulk of growth in cable subscription revenue in subscriberbaseisasmall%ofrevenuebase themediumterm
DomesticSubscriptionrevenuesplit

Domesticsubscriberbasesplit DTH 24%

(Marketshare%)

Changeinregime

FormationofArasucable

70 60 50 May May Mar Mar

Cable 71%
Source:Company.IIFLresearch(FY12)

Nov

Sep

July

2011
Source:Company,IIFLResearch

2012

Ratings continue to exhibit networks strength: Competitive intensity increased in the regional GEC space in Karnataka, Tamil Nadu, Andhra Pradesh and Kerala. The total channel count in the regional, GEC, movies, comedy and kids genres in these markets has gone up from ~45 at the beginning of 2009 to ~66 at present. Nonetheless, Sun continues to enjoy a dominant market share. Further, even a year after the launch of Arasu cable, Suns viewership share in Tamil Nadu remains healthy at 65-70% and that of its flagship channel - Sun TV has been nearly unaffected at 4550%. Suns ability to retain its market share despite an adverse operating environment underlines the inherent strength of its business model.

Figure6: The closest competing Tamil GEC has market share of ~10% as against Sun TVs~45%marketshare
SunTV 60 50 40 30 20 10 Nov Sep May May July Mar Mar July Sep Jan Jan 0 (Marketshare%) VijayTV JayaTV KalaignarTV

2011
Source:Company,IIFLResearch

2012

July

Sep

Jan

Jan

Cable 76%

40

bijal@iif lcap.com

Institutional Equities

Sun TV Networks ADD Figure9: SunisrapidlyclosingthegapwiththemarketleaderAsianetinKerala SunNetwork Asianetnetwork 70 (Marketshare%) 60

50 40 30 20 Maagroup'schannels Nov Sep May May July Mar Mar July Sep
Sep12

Figure7: MAA has gained market share on improved performance and new channel launches; yet Sun Network maintains comfortable leadership position in Andhra Pradesh
60 50 40 30 20 10 Nov Sep May May July Mar Mar July Sep Jan Jan 0 (Marketshare%) SunNetwork

Jan

2011
Source:Company,IIFLResearch

Jan

10

2012

2011
Source:Company,IIFLResearch

2012

Figure10:TheSunstockistradingat~30%discounttoitshistoricaltradingrange
10x 800 (Rs) 600 400 200 0 20x 30x 40x

Figure8: Sun Network has a dominant market share in Karnataka despite high competitiveintensityinthestate
SunNetwork 60 50 40 30 20 10 Nov Sep May May July Mar Mar July Sep Jan Jan 0 (Marketshare%) SuvarnaTV ETVKannada ZeeKannada

Sep06

Sep07

Sep08

Sep09

Sep10

Mar07

Mar08

Mar09

Mar10

Mar11

Sep11

Source:Company,IIFLResearch

2011
Source:Company,IIFLResearch

2012

Assumptions Y/e31Mar,Consolidated Adrevenuegrowth(%) SubscriptionrevenueCable SubscriptionrevenueDTH Costofrevenuesas%ofRevenues Ebitdamargins(%)

Source:Companydata,IIFLResearch

FY11A 23.0 41.0 58.5 6.8 78.4

FY12A (2.6) (27.8) 14.8 7.2 76.6

FY13ii 7.0 (12.0) 12.0 7.5 75.7

FY14ii 12.0 5.0 18.0 7.9 75.3

Mar12

FY15ii 12.0 7.0 20.0 8.9 74.2 4

bijal@iif lcap.com

Institutional Equities

Sun TV Networks ADD

Financial summary
Incomestatementsummary(Rsm) Y/e31Mar,Consolidated Revenues Ebitda Depreciationandamortisation Ebit Nonoperatingincome Financialexpense PBT Exceptionals ReportedPBT Taxexpense PAT Minorities,Associatesetc. AttributablePAT Ratioanalysis Y/e31Mar,Consolidated Persharedata(Rs) PreexceptionalEPS DPS BVPS Growthratios(%) Revenues Ebitda EPS Profitabilityratios(%) Ebitdamargin Ebitmargin Taxrate Netprofitmargin Returnratios(%) ROE ROCE Solvencyratios(x) Netdebtequity NetdebttoEbitda Interestcoverage
Source:Companydata,IIFLResearch

FY11A 20,135 15,779 (4,805) 10,974 487 (23) 11,439 0 11,439 (3,831) 7,608 90 7,698 FY11A 19.5 8.7 57.2 38.6 44.6 48.1 78.4 54.5 33.5 37.8 37.2 51.3 (0.3) (0.4) NM

FY12A 18,472 14,143 (4,736) 9,408 796 (58) 10,145 0 10,145 (3,317) 6,828 101 6,929 FY12A 17.6 9.5 63.7 (8.3) (10.4) (10.0) 76.6 50.9 32.7 37.0 29.1 40.1 (0.1) (0.2) NM

FY13ii 19,357 14,656 (4,874) 9,783 875 (58) 10,599 0 10,599 (3,498) 7,102 100 7,202 FY13ii 18.3 8.8 71.8 4.8 3.6 3.9 75.7 50.5 33.0 36.7 27.0 37.7 (0.3) (0.6) NM

FY14ii 21,909 16,504 (5,234) 11,271 963 (58) 12,175 0 12,175 (4,018) 8,157 100 8,257 FY14ii 21.0 8.8 82.6 13.2 12.6 14.7 75.3 51.4 33.0 37.2 27.1 38.3 (0.4) (0.8) NM

FY15ii 24,681 18,316 (5,574) 12,742 1,059 (58) 13,743 0 13,743 (4,535) 9,208 100 9,308 FY15ii 23.6 8.8 96.1 12.7 11.0 12.7 74.2 51.6 33.0 37.3 26.4 37.6 (0.5) (1.1) NM

Balancesheetsummary(Rsm) Y/e31Mar,Consolidated Cash&cashequivalents Inventories Receivables Othercurrentassets Creditors Othercurrentliabilities Netcurrentassets Fixedassets Intangibles Investments Otherlongtermassets Totalnetassets Borrowings Otherlongtermliabilities Shareholdersequity Totalliabilities

FY11A 6,899 14 4,291 1,592 2,728 1,735 8,334 9,503 4,513 1,848 0 24,198 1 1,659 22,537 24,198 FY11A 10,974 (3,831) 4,805 (63) (413) 11,472 (23) 487 11,936 (6,393) 1 538 6,082 0 0 (4,015) 2,067

FY12A 3,393 5 5,090 2,391 2,016 364 8,499 11,913 4,347 1,926 0 26,684 0 1,565 25,119 26,684 FY12A 9,408 (3,317) 4,736 (3,671) 5 7,161 (58) 796 7,898 (6,979) 0 (72) 847 0 (1) (4,351) (3,506)

FY13ii 8,671 5 5,334 2,391 2,190 464 13,748 10,427 3,758 1,926 0 29,858 0 1,545 28,313 29,858 FY13ii 9,783 (3,498) 4,874 30 0 11,188 (58) 875 12,005 (2,799) 80 0 9,286 0 0 (4,008) 5,278

FY14ii 13,259 5 6,038 2,391 2,518 564 18,611 10,653 2,898 1,926 0 34,088 0 1,525 32,563 34,088 FY14ii 11,271 (4,018) 5,234 (275) 0 12,211 (58) 963 13,116 (4,600) 80 0 8,596 0 0 (4,008) 4,588

FY15ii 19,297 5 6,802 2,391 2,965 664 24,865 10,797 1,780 1,926 0 39,368 0 1,505 37,863 39,368 FY15ii 12,742 (4,535) 5,574 (216) 0 13,564 (58) 1,059 14,565 (4,600) 80 0 10,045 0 0 (4,008) 6,037 5

Cashflowsummary(Rsm) Y/e31Mar,Consolidated Ebit Taxpaid Depreciationandamortization Networkingcapitalchange Otheroperatingitems Operatingcashflowbeforeinterest Financialexpense Nonoperatingincome Operatingcashflowafterinterest Capitalexpenditure Longterminvestments Others Freecashflow Equityraising Borrowings Dividend Netchgincashandequivalents
Source:Companydata,IIFLResearch

bijal@iif lcap.com

Institutional Equities

Sun TV Networks ADD

Key to our recommendation structure BUY - Absolute - Stock expected to give a positive return of over 20% over a 1-year horizon. SELL - Absolute - Stock expected to fall by more than 10% over a 1-year horizon. In addition, Add and Reduce recommendations are based on expected returns relative to a hurdle rate. Investment horizon for Add and Reduce recommendations is up to a year. We assume the current hurdle rate at 10%, this being the average return on a debt instrument available for investment. Add - Stock expected to give a return of 0-10% over the hurdle rate, ie a positive return of 10%+. Reduce - Stock expected to return less than the hurdle rate, ie return of less than 10%.

Published in 2012. India Infoline Ltd 2012 This report is published by IIFLs Institutional Equities Research desk. IIFL has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information of the clients of IIFL, a division of India Infoline, and should not be construed as an offer or solicitation of an offer to buy/sell any securities. We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice. India Infoline or any persons connected with it do not accept any liability arising from the use of this document. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. India Infoline or any of its connected persons including its directors or subsidiaries or associates or employees shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained, views and opinions expressed in this publication. India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker, Investment Advisor, etc. to the issuer company or its connected persons. India Infoline generally prohibits its analysts from having financial interest in the securities of any of the companies that the analysts cover. In addition, the company prohibits its employees from conducting F&O transactions or holding any shares for a period of less than 30 days.

bijal@iif lcap.com