Sun TV Network - More headroom available - ElaraCapital

Results below par on margin miss

Sun TV reported below estimates, but still healthy performance for Q4FY13, with topline and earnings growth of 11% and 12% respectively. While ad revenues remained strong with 15% growth, fall in broadcast fee on more in-house content during the quarter led to revenues and margins missing estimates. The quarter saw high cost pressures in all line items, with content costs rising by 67% and staff costs by 16%, leading to a 320bps YoY contraction in EBITDA margin The management noted high portion of in-house content during the quarter as the key reason behind lower margins. Fall in amortization costs (down 5% YoY), along with a sharp rise in other income led to earnings reporting 11% YoY growth, though still 5% below estimates.

Medium term earnings visibility remains in-tact

Sun TV ended FY13 with a 2% YoY decline in earnings, as margins contracted by 150bps YoY on sharp rise in content costs (up 54% YoY) and delays in subscription revenues scaling up (slower DAS rollout, ARASU). Going forward, while content costs expected to stay high, contribution from high margin subscription revenues is set to rise steadily as DAS gets rolled over in five key southern states which, along with a double digit ad growth projections in FY14E provide enough comfort over a strong 21% earnings CAGR during FY13-FY15E as digitization benefits accrue for the full year.

Valuations - maintain positive stance

Sun TV's share price has seen valuation re-rating despite persisting negatives around its operating environment, mainly on DAS roll out and ad growth recovery. With long term growth prospects around both ad and subscription revenues in-tact, we believe that the stock is likely to see higher levels, as valuations point towards significant gap to peers. Maintain 'Buy', as we near the DAS 2 implementation and ad growth outlook remains healthy.

Source : Equity Bulls

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