Sun TV Network - s3.ap-south-1.amazonaws.com

Company Report Industry: Media Entertainment

Balwindar Singh ([email protected]) +91-22-66322239

Sun TV Network

Dominant South player; to benefit from huge digitization potential

June 20, 2014 2

Sun TV Network

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents Page No.

Investment Rationale .................................................................................................. 5

Digitization- Phase III/IV implementation accounts for the larger pie .............................................. 5

Potential for digitization .................................................................................................................... 6

Unique business model - lends stability & higher profitability.......................................................... 7

DTH revenues- growth supported by subscriber additions as well as higher ARPUs ........................ 8

ARPU - post digitization, ARPU from digital cable to increase to Rs25 from Rs5 currently ............ 10

Regional broadcasting has emerged as a new growth driver over the last few years .................... 10

Regional advertising - gaining ground ............................................................................................. 11

Indian Premier League- expect IPL to turn profitable in FY17 ......................................................... 12

Addressing problems arising out of TRAI ad cap ............................................................................. 13

Implementation of digitization in Tamil Nadu will solve the Arasu cable problem......................... 14

SUN TV - undisputed leader in the South ........................................................................................ 15

Business Background ................................................................................................ 17

Key Management Personnel ........................................................................................................... 18

Risks .......................................................................................................................... 19

SUN v/s Zee ............................................................................................................... 20

Financials .................................................................................................................. 21

Expect SUN’s revenues to increase at a CAGR of 13% over FY14-16E driven by 18% YoY increase in domestic subscription revenues ...................................................................................................... 21

EBITDA likely to increase by 14% over FY14-16E; PAT growth of 17% ............................................ 21

RoE/ROCE to expand by 220bps/310bps over FY14-16E................................................................. 22

Balance sheet to strengthen further ............................................................................................... 23

Valuations ................................................................................................................. 24

Annexure ................................................................................................................... 25

South India Media & Entertainment Industry ................................................................................. 25

Television industry in South India is expected to grow at a CAGR of 20.0% ................................... 26

TV subscription revenues to grow at 23% CAGR over FY13-17 ....................................................... 27

New channel launches in South India in last one year .................................................................... 27

Sun TV Network

Company Report June 20, 2014

Rating Accumulate

Price Rs430

Target Price Rs510

Implied Upside 18.6%

Sensex 25,106

Nifty 7,511

(Prices as on June 20, 2014)

Trading data

Market Cap. (Rs bn) 169,454.4

Shares o/s (m) 394.1

3M Avg. Daily value (Rs m) 518.4

Major shareholders

Promoters 75.00%

Foreign 16.00%

Domestic Inst. 2.00%

Public & Other 7.00%

Stock Performance

(%) 1M 6M 12M

Absolute 0.9 15.2 19.4

Relative (2.0) (3.9) (14.8)

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2015 21.9 21.9 0.0

2016 25.8 25.8 0.3

Price Performance (RIC:SUTV.BO, BB:SUNTV IN)

Source: Bloomberg

0

100

200

300

400

500

Jun

-13

Au

g-1

3

Oct

-13

De

c-1

3

Feb

-14

Ap

r-1

4

Jun

-14

(Rs)(Rs)

Phase-III/IV digitization provides huge upside potential for SUN TV: We believe

that Phase-III/IV digitization would provide the biggest upside for SUN TV as this

phase collectively accounts for ~85% of the total subscriber base in South India.

This is despite the fact that SUN has been unable to cash in on the opportunities

in Phase-I (Chennai) /Phase-II (Hyderabad, Coimbatore, Vizag).

We estimate Rs5.5bn (Exhibit 2) as the incremental revenue potential from

digitization for SUN TV. However, we have modelled for an increase in domestic

subscription revenues of only Rs2.5bn from Rs6.5bn in FY14 to Rs9.0bn in FY16E

as digitization continues to get delayed. Majority of the incremental revenues

from digitization is likely to translate into bottom-line as there is no incremental

cost attached to it.

Dominant position in South India; indispensable medium for advertisers: SUN

continues to be the market leader in South India by way of its popular content

and wide distribution reach. SUN’s dominant positioning has catapulted it into

an envious position where it has become an indispensable choice for

advertisers. SUN is the only broadcaster in South India to be present across

genres in different languages. SUN is the market leader in Tamil (70% market

share incl. 9 channels), Telugu (collective market share of 38% from 9 channels)

and Kannada channels (collective market share of 38% from 7 channels).

Contd...4

Key financials (Y/e March) 2013 2014 2015E 2016E

Revenues (Rs m) 19,531 22,236 25,069 28,425

Growth (%) 4.6 13.9 12.7 13.4

EBITDA (Rs m) 14,392 15,097 17,124 19,530

PAT (Rs m) 7,096 7,480 8,638 10,179

EPS (Rs) 18.0 19.0 21.9 25.8

Growth (%) 2.4 5.4 15.5 17.8

Net DPS (Rs) 9.5 9.5 11.0 12.0

Profitability & Valuation 2013 2014 2015E 2016E

EBITDA margin (%) 73.7 67.9 68.3 68.7

RoE (%) 26.8 25.4 26.4 27.6

RoCE (%) 35.5 33.2 34.6 36.3

EV / sales (x) 8.5 7.3 6.4 5.6

EV / EBITDA (x) 11.5 10.8 9.4 8.1

PE (x) 23.9 22.6 19.6 16.6

P / BV (x) 6.1 5.5 4.9 4.3

Net dividend yield (%) 2.2 2.2 2.6 2.8

Source: Company Data; PL Research

Sun TV Network

June 20, 2014 4

In a transition mode, addressing TRAI ad cap with some hiccups: After

witnessing double-digit ad growth from Q3FY13 to Q1FY14, SUN TV witnessed a

decline of 4.3% and 7.2% YoY in Q2FY14 and Q3FY14, respectively, due to

implementation of the TRAI ad cap. SUN undertook price hikes to combat

decline in secondages; however, due to weak macros, rising competition and

unchanged ad rates of its content partners, SUN’s strategy fell apart.

SUN has now recalibrated price hikes and undertaken number of initiatives,

including reduction in content partners’ ad slots, extending fiction programming

to six days a week and encouraging cross-selling approach to offset the negative

impact of the ad cap. Thanks to the above-mentioned initiatives, ad growth

bounced back to 4.7% YoY in Q4FY14. In FY15E, we have modelled for ad growth

of 10.3% YoY.

Strong balance sheet with healthy dividend payout; a cash-generating

machine: We expect SUN’s earnings to increase at a CAGR of 16.7% over FY14-

16E. RoE/ROCE is likely to expand by 220bps/310bps to 27.6%/36.3% by FY16E,

respectively. Going forward, improved profitability, coupled with limited capex,

is likely to translate into healthy FCFF generation for SUN. We expect SUN to

generate cumulative FCFF of Rs16bn during this period. Consequently, cash

balances (incl. long & short term investments) are likely to increase to Rs16.3bn

from Rs10.8bn in FY14, despite high dividend payouts. Dividend payout is likely

to remain high at ~50%.

Re-rating imminent; valuation discount with Zee at multi-year highs: SUN is a

key beneficiary of the ongoing digitization due to its wide reach and dominant

positioning in South India. SUN used to trade at an average P/E of 20-22x.

However, during the last one year, we have seen P/E sliding to 17x-18x due to

continued delay in digitization, overhang of Sun Direct-Astro case, Arasu Cable

asking for a DAS license, implementation of the TRAI ad cap etc. Valuation

discount with Zee has increased to 30% compared to ~8-10% earlier. We believe

concerns are overdone and the valuation discount with Zee would narrow

gradually over the next 1-1.5 years as digitization picks up pace and SUN adjusts

to the ad cap implementation.

Recommend “Accumulate” with target price of Rs510: We value SUN at 19x

FY15E earnings of Rs21.9 and arrive at a price of Rs410. To this, we add the NPV

of Rs106 as the potential of digitization (Exhibit 2) since the complete benefits

from digitization are likely to accrue only beyond FY16E. Consequently, we

arrive at a target price of Rs510 and recommend “Accumulate”. Negative

newsflow related to SunDirect-Astro case remains a risk.

Sun TV Network

June 20, 2014 5

Investment Rationale

Digitization- Phase III/IV implementation accounts for the larger pie

SUN’s dominant position in the southern region provides significant benefits to be

reaped out of digitization. Though it has been unable to cash in on the opportunities

in Chennai during Phase-1 (due to the deadlock related to distribution of cable

services between Arasu Cable and Central Govt.), Phase-II involves five cities with a

larger audience base. Five cities (Bangalore, Coimbatore, Hyderabad,

Vishakhapatnam and Mysore) collectively account for 4.6m TV households

compared to 1.1m households in Chennai.

Phase-III/IV digitization would provide the biggest upside for SUN TV as Phase-

III/IV collectively account for ~85% of the total subscriber base in South India. Since

digitization implementation continues to be delayed, we expect these benefits to

percolate over the medium-term for SUN TV.

Exhibit 1: Opportunity in South India- Number of households in (m)

Region Urban HHs Rural HHs Total HHs TV HHs Penetration of TV

Tamil Nadu 8.9 9.5 18.4 16.1 87.5%

Chennai 1.1 0 1.1 1.1 100.0%

Coimbatore 0.7 0.2 0.9 0.8 88.9%

Others 7.1 9.3 16.4 14.2 86.6%

Andhra Pradesh 6.8 14.3 21.1 12.3 58.3%

Hyderabad 0.9 0 0.9 0.7 77.8%

Vishakhapatnam 0.5 0.6 1.1 0.7 63.6%

Others 5.4 13.7 19.1 10.9 57.1%

Karnataka 5.4 7.9 13.3 7.8 58.6%

Bangalore 2.2 0.2 2.4 2 83.3%

Mysore 0.3 0.4 0.7 0.4 57.1%

Others 2.9 7.3 10.2 5.4 52.9%

Kerala 4.0 4.0 8.0 6.0 75.0%

Total of South India states 25.1 35.7 60.8 42.2 69.4%

Phase-I (Chennai) 1.1 0 1.1 1.1 100.0%

Phase-II (Bangalore, Coimbatore, Hyderabad, Vishakhapatnam, Mysore) 4.6 1.4 6.0 4.6 76.7%

Source: PL Research

Sun TV Network

June 20, 2014 6

Potential for digitization

Four southern states (Andhra Pradesh, Karnataka, Kerala and Tamil Nadu)

collectively constitute 42m TV households. We have assumed different probabilities

for success of digitization and penetration of SUN TV under different scenarios. We

have created three scenarios - Bear, Base and Bull case for the opportunity arising

out of digitization for SUN TV. As per base case, digitization provides incremental

upside revenue potential of Rs4.6bn. As there is no additional cost attached to it,

digitization would lead to incremental PAT of Rs3.1bn translating into EPS of Rs7.9.

Incremental EPS under different scenarios would be Rs6.6/7.9/9.3, respectively.

Since these benefits would only be realized by FY17E, we arrive at NPV of

Rs89/106/126 under different scenarios.

Exhibit 2: Scenario Analysis

Bear case Base case Bull case

No. of TV households in South India (m) 42 42 42

Current DTH subscribers (m) 10 10 10

Digitization Opportunity- No. of subscribers (m) 32 32 32

Success probability of digitization 70.0% 75.0% 80.0%

No. of probable subscribers (m) 22.5 24.2 25.8

Penetration of SUN TV 70.0% 75.0% 80.0%

No. of probable SUN subscribers (m) 15.8 18.1 20.6

Churn to DTH 30.0% 35.0% 40.0%

Subscribers opting for DTH (m) 4.7 6.3 8.2

Incremental DTH ARPU (Rs) 33.0 33.0 33.0

Incremental DTH revenues (Rs m) 1,874 2,510 3,264

Subscribers opting for digital cable (m) 11.0 11.8 12.4

Incremental Digital ARPU post digitization (Rs) 15.0 15.0 15.0

Incremental Digital revenues (Rs m) 1,988 2,119 2,226

Incremental annual revenues owing to digitization (Rs m) 3,862 4,630 5,490

Incremental contribution to PBT (Rs m) 3,862 4,630 5,490

Taxes @33% 1,275 1,528 1,812

Incremental PAT owing to digitization (Rs m) 2,588 3,102 3,678

No. of shares 394 394 394

Incremental EPS 6.6 7.9 9.3

Assigned P/E 19.0 19.0 19.0

Upside potential in stock (Rs) 125 150 177

NPV- Rs/share 89 106 126

Source: Company Data, PL Research

Sun TV Network

June 20, 2014 7

Exhibit 3: Status of digitization in Phase-I/II

Addressable region for SUN State Seeding of set-top boxes CAF compliant Packages deployment Gross Billing ARPU

Phase I

Chennai Tamil Nadu Status quo NA NA NA NA

Phase II

Bangalore Karnataka 90-95% 80-85% Underway Pending Rs250-300

Coimbatore Tamil Nadu Status quo NA NA NA NA

Hyderabad Andhra Pradesh 50-70% NA NA NA NA

Vishakhapatnam Andhra Pradesh ~70% NA NA NA NA

Mysore Karnataka 90% 80-85% Underway Pending Rs220-250

Source: Industry, PL Research

Unique business model - lends stability & higher profitability

SUN operates on a unique business model for its GEC channels, whereby, it partly

leases out prime time advertising slots to third-party content providers, while

charging them a fixed fee (broadcast fee) for broadcasting their content. SUN leases

out primetime slots on 30 minutes basis to content providers, offering them right to

three minutes of advertising inventory, while it retains three minutes of advertising

inventory (based on six minutes of advertising per 30 minutes). SUN also charges

them a fee for broadcasting their content which is termed as broadcast fee in P&L

statement.

Under this differentiated model, the cost of producing the content is borne by the

content producer. Since SUN does not incur any costs, risks associated with the

programming as well as recovering the costs lie with the content producer.

Consequently, SUN enjoys 100% margins under this segment. SUN has also

incorporated strict clauses in this business model - content providers are required to

maintain certain ratings, failing which, SUN can change their slot timings or stop the

content being aired, producer is required to have an exclusive arrangement with

SUN TV i.e. he will work only for SUN TV during this period, post the conclusion of

show producer cannot telecast the serial on any other network for next two years.

SUN’s dominant position in the southern markets has enabled it to operate on such

a unique model as it has become an indispensable network in the Southern region.

Broadcast fee contributed 6.4% to the top-line in FY14. Our estimates suggests that

SUN is able to generate ~12-14% of its top-line through this model, while 6% of top-

line is reported as broadcast fee; ~6-8% is included under advertising revenues as

SUN retains three minutes/thirty minutes of primetime advertising.

Sun TV Network

June 20, 2014 8

Exhibit 4: Broadcasting revenues

1,537

1,640

1,436

1,267 1,270 1,302

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1,000

1,100

1,200

1,300

1,400

1,500

1,600

1,700

FY11 FY12 FY13 FY14 FY15E FY16E

(Rs

m)

Broadcast fees Broadcast revenues as a % of total (RHS)


SUN’s differentiated strategy helps the company to boast of higher margins across

the industry. SUN TV reported EBIT margins of 46.1% in FY14. Compared to this, Zee

reported EBIT margins of 26.1% during FY14. Adjusting for Zee’s loss-making sports

business and SUN’s high-margin broadcasting business, SUN still generated

comparatively higher margins of 42.6% (excl. broadcasting) in FY14 compared to

33.3% for Zee (excluding sports). Exhibit 5: Reported EBIT margins - Sun v/s Zee

18%

25%

32%

39%

46%

53%

60%


Sun Zee


Exhibit 6: Adjusted EBIT margins - Sun v/s Zee

18%

25%

32%

39%

46%

53%

60%


SUN excl. broadcast fees ZEE excl. sports


DTH revenues- growth supported by subscriber additions as well as higher ARPUs

SUN TV has benefitted tremendously from the increasing penetration of DTH

services over the last few years. Sun’s DTH revenues stood at Rs4.5bn in FY14 and

have grown at a scorching pace of 25% over FY09-14. It is estimated that SUN Direct

constitutes a major chunk (~60%) of SUN TV’s revenues. SUN Direct is the DTH arm

of SUN Network which began operations in 2007 and today ranks among one of the

fastest growing DTH service providers in the country, having garnered over 9+ m

subscribers.

Sun TV Network

June 20, 2014 9

DTH subscribers for SUN totalled 10.2m at the end of FY14 and have grown at a

CAGR of 13% over FY09-14. With Phase-III/IV digitization on the cards, we expect

SUN’s subscriber base to grow rapidly over the medium-term. We estimate SUN’s

DTH subscribers to grow at a CAGR of 14% over FY14-16, while we expect DTH

revenues to grow at a CAGR of 15% during the same period.

Exhibit 7: SUN’s DTH subscribers

7.0 8.2 8.7

10.2 11.8

13.2

-10%

0%

10%

20%

30%

40%

50%

60%

1.0

3.0

5.0

7.0

9.0

11.0

13.0

15.0


(m)

Sun's DTH subscribers YoY gr. (RHS)


Exhibit 8: SUN’s DTH revenues & growth

2,900 3,330

3,730

4,492 5,139

5,897

-10%

0%

10%

20%

30%

40%

50%

60%

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY11 FY12 FY13 FY14 FY15E FY16E(R

s m

)

DTH revenues YoY gr. (RHS)


Growth in the DTH business has also been supported by substantially higher ARPUs.

In FY14, SUN’s ARPU from the DTH business stood at Rs37 compared to Rs5 on the

analog platform. Due to its dominance, SUN has been able to negotiate with DTH

operators on a per subscriber basis, resulting into substantially higher realizations.

While subscriber base for DTH constituted only one-fourth of SUN’s total subscriber

base in FY14, revenues from DTH contributed 70% of total subscription revenues in

FY14.

Exhibit 9: SUN’s ARPU comparison - DTH v/s analog

DTH Analog

Total number of subscribers in FY14 10.2 33.0

% of total subscribers 23.6% 76.4%

Revenues in FY14 (Rs m) 4,492 1,957

% of subscription revenues 69.7% 30.3%

ARPU 36.7 4.9


Sun TV Network

June 20, 2014 10

ARPU - post digitization, ARPU from digital cable to increase to Rs25 from Rs5 currently

Our analysis shows that due to rampant under-declaration by LCOs during the

analog regime, SUN TV has been unable to monetize its offerings despite a dominant

position in the South. Further, fixed fee deals with MSOs, Arasu Cable paying only

Rs25m/month to SUN and SUN TV network channels being free-to-air in Chennai

have also led to depressed ARPUs for the company.

Though SUN operates on a ‘per subscriber model’ even with MSOs, pricing is

significantly lower than DTH, resulting into lower monetization from cable.

According to SUN’s management, they expect analog ARPU to inch upto Rs25 post

digitization. We have assumed incremental ARPU of Rs15 post digitization from

digital cable.

Regional broadcasting has emerged as a new growth driver over the last few years

Rising per capita income, increasing aspirations of the Tier-II cities and rapid

technology advancements have resulted into demand for regional channels inching

up fast. As per FICCI-KPMG, regional channels accounted for ~26.7% of total

television viewership in CY13. With a sizeable chunk of viewership being generated

from the regional base, broadcasters are rushing to strengthen their regional

portfolio through launch of newer channels. CY12 witnessed Zee and Star launching

their Bengali movie channels – Zee Cinema Bangla and Jalsha Movies. Star owned

Asianet Communications also launched Asianet Movies, the first satellite movie

channel in Malayalam.

Within the regional basket, Tamil is the largest category, accounting for 27% share of

regional viewership, followed by Telugu accounting for 24%. Marathi accounted for

14% of viewership share, while Kannada accounted for 12% of viewership share.

Exhibit 10: Viewership share by genres in CY13

Hindi GEC30.0%

Regional GEC18.0%Hindi Movies

15.1%

Kids7.5%

Music3.6%

Regional News3.6%

Regional Movies3.4%

Others18.6%

Source: FICCI-KPMG Report2014, PL Research

Exhibit 11: Viewership share of regional channels in CY13

Tamil27%

Telugu24%Marathi

14%

Kannada12%

Bengali11%

Malayalam6%

Others6%

Source: FICCI-KPMG Report2014, PL Research

Sun TV Network

June 20, 2014 11

Within regional channels, regional GEC is the most dominant genre by viewership

share, accounting for 76-78% of audiences in the Bengali and Marathi markets and

65-70% in the entire southern market. Fiction offerings continue to dominate

viewership trends.

Regional advertising - gaining ground

Regional advertising accounted for 27.7% of the national advertising pie in CY13

which is proportionate to their viewership market share. Rapid growth in Tier-II/III

cities has created opportunities for national/regional entrepreneurs who have a

localized offering and want to cash in on the boom in these markets. Regional

advertising offers localized content as it gives local advertisers the platform to

advertise on regional channels where they have a higher product appeal. While

regional ad accounts for 27.7% of the total advertising pie, they contribute 53% in

terms of ad volumes resulting into significantly lower yields.

TV advertising market in South India is worth Rs40bn in FY13 and is likely to grow at

a CAGR of 14% over FY13-17E to reach Rs68bn. Growth is likely to be driven by both

volumes (new channel launches) and price hikes (to compensate for decline in ad

inventory due to 12minutes/hr ad cap). Tamil Nadu and Andhra Pradesh collectively

accounted for 60% of TV ad revenues, while the remaining 40% was equally

contributed by Karnataka and Kerala.

Exhibit 12: TV advertisement market in South India

15 18 21 24 27 10 12

13 15

17 7

8 9

10 12

7 8

10 11

12

5

15

25

35

45

55

65

75

FY13* FY14E FY15E FY16E FY17E

(Rs

bn)

Tamil Nadu Andhra Pradesh Karnataka Kerala

Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research

Exhibit 13: Advertisement expenditure by genre

Hindi GECs27.1%

Regional

GECs+News

+Movies+Music

27.7%

Hindi News

8.6%

Hindi

Movies

6.7%

English News+Ente

rtain9.7%

Others20.2%

Source: FICCI-KPMG Report 2014, PL Research

Sun TV Network

June 20, 2014 12

Indian Premier League- expect IPL to turn profitable in FY17

In Oct 2012, SUN won the bid for Hyderabad franchisee of the IPL for a consideration

of Rs850m p.a. payable for five years which would result in total outflow of Rs4.2bn.

In addition to this, SUN would also be bearing players’ salary and other overhead

costs. Assuming ~Rs500-550m as annual outflow related to overhead costs and

players’ salary, SUN would have an outflow of Rs1.4bn p.a. From the 6th year

onwards, the Rs850m obligation will not have to be paid and only 20% of the

revenue will be shared with BCCI.

SUN TV had earlier targeted that this business will breakeven in FY15E. However,

given that IPL-7’s initial phase had been shifted out of India, we believe there might

be some losses. SUN expects this business to turn profitable from third year

onwards. However, we have estimated IPL to turn profitable in FY17E.

Exhibit 14: SUN's expectation of IPL business - PAT

Year (Rs m)

FY14- Year 1 -350

FY15- Year 2 Losses will be lower than FY14

FY16- Year 3 100

FY17- Year 4 200

FY18- Year 5 400


Exhibit 15: IPL financials

1,040 1,123 1,293

1,483 1,613

(354)(261)

(162)

18 77

(500)

-

500

1,000

1,500

2,000

FY14 FY15E FY16E FY17E FY18E

(Rs

m)

IPL revenues IPL PAT


Sun TV Network

June 20, 2014 13

Movies

SUN entered movie production and distribution business in Sep 2008 through its

division, SUN Pictures. SUN buys ~70-80% of regional language movies and boasts of

more than 9,000 movie titles. SUN TV has a policy of buying movie rights as exclusive

owner so as to generate exclusive content. Through its exclusive content rights, the

movie content is used in various forms such as comedy clips, music clips, action clips,

etc. on its channels. Sun has an accounting policy of amortizing movies on the day of

first telecast of the film.

Addressing problems arising out of TRAI ad cap

TRAI’s regulation restricting advertisement time to 12minutes/hr has claimed

number of victims, the most prominent one being SUN. After witnessing double-digit

ad growth from Q3FY13 to Q1FY14, SUN TV witnessed decline of 4.3% and 7.2% YoY

in Q2FY14 and Q3FY14, respectively. This was due to the TRAI ad cap regulations

which were supposed to come into effect from Oct 1, 2013. To combat the decline in

secondages (from 16 mins/hr to 10 mins/hr of commercial advertisements), SUN TV

took a sharp price hike of 19% across the board in July’13. However, due to weak

macros, rising competition (in Telugu, Kannada and Malayalam) and unchanged ad

rates of its content partners SUN’s strategy fell apart.

SUN has now recalibrated price hikes and undertaken number of initiatives,

including reduction in content partners’ ad slots, extending fiction programming to

six days a week and encouraging cross-selling approach to offset the negative impact

of TRAI ad cap:

Reduction of content partners’ ad slots: SUN has reduced the content partners’

ad slots to three minutes/half hour compared to four minutes/half hour on its

primetime GECs earlier. Remaining one minute of ad slot has been adjusted on

some other non-GEC channel. Thus, SUN has been successful in reducing its

losses to the minimum.

Extension of fiction programming to Saturday: Extension of programming to

Saturday has resulted in increasing the original hours of programming per week

and thereby, increasing the ad revenues. This move has the potential to increase

ad revenues by ~1/6th.

Rate hikes across different channels: For its primetime GEC slots on SUN TV,

SUN has increased ad rates from Rs43,000/10 seconds in Q2FY14 to

Rs65,000/10 seconds in Q4FY14. For non-primetime slots or for its smaller

channels, ad rates have been hiked in the 5-15% range.

Sun TV Network

June 20, 2014 14

Transferring inventory from GECs to other smaller channels: Reduction in ad

inventory on GECs has been somewhat mitigated by transferring part of the

inventories to other niche channels like music, kids, comedy, news etc.

Customers have been benefitted by way of broadcasting their ads at lower rates

on these channels. Alternately, SUN has benefitted as inventory is at least

getting utilized rather than a complete miss due to ad cap.

Thanks to the above-mentioned initiatives, ad growth bounced back to 4.7% YoY in

Q4FY14 after witnessing two consecutive quarters of decline. It has also been helped

by the fact that SUN ran 12 (commercial advertisements) +2 (self-promotion)

minutes of advertising in Q4 compared to 10+2 in Q3 due to no final decision on the

ad cap. Meanwhile, SUN continues to push through the rate hikes. Management

does not plan to take any further rate hikes in H1FY15. We believe customers will

eventually absorb the price hikes after initial reluctance due to SUN’s wide

distribution reach and leadership position in the South. In FY15E, we have modelled

for ad growth of 10.3% YoY.

Implementation of digitization in Tamil Nadu will solve the Arasu cable problem

FY12 witnessed re-launch of Arasu Cable TV Corp. Ltd., a public undertaking under

the Jayalalitha government in Tamil Nadu, which started offering cable TV services at

a modest price of Rs70/month and was declared as the only official cable distributor

in Tamil Nadu. Arasu Cable went live on Sep 2, 2011 and since Arasu-Sun was not

able to arrive at an agreement, Sun’s channels were not available on Arasu’s

network across Tamil Nadu (except Chennai) in 2011.

Finally, after 9-10 months of intense discussions, in Aug 2012, SUN-Arasu entered

into an agreement, whereby, Arasu agreed to distribute SUN’s channels on its

network. Arasu agreed to pay Rs 5m/month to SUN for broadcasting these channels

in Tamil Nadu (except Chennai). In Chennai, SUN’s channels continue to be Free-to-

Air (FTA). As SUN TV’s one-year deal with Arasu expired in Aug 2013, SUN is in talks

with Arasu to renew its subscription deal on fresh commercial terms. However, no

new negotiations have gone through and Arasu continues to pay SUN on older rates

currently even as Sun TV is asking for an increase in payout.

Further, digitization in Chennai & Coimbatore continues to elude due to deadlock

over DAS license to Arasu. In July 2011, Arasu had applied for DAS license but the

Ministry of Information & Broadcasting (MIB) has refused to grant it a license stating

that state-owned bodies are not supposed to run cable TV network. Tamil Nadu

govt. has repeatedly objected to it and the matter is currently in Madras High Court.

Consequently, digitization in Chennai has not yet kicked off.

Sun TV Network

June 20, 2014 15

Though digitization deadlock in Tamil Nadu continues to prevail, we believe things

will eventually fall in place sooner than later. We expect the new govt. to carry

through the digitization process as digitization is beneficial for all the stakeholders

viz. Broadcasters, Consumers, MSOs, Government etc. With the implementation of

digitization, SUN would be able to effectively monetize its offerings on the digital

cable platform as higher ARPU as prescribed under digitization regime would come

into play.

SUN TV - undisputed leader in the South

SUN continues to be the market leader in South India through its wide array of

offerings. Popular content, wide distribution reach, South India’s preference for

regional channels has catapulted SUN into an envious position where it has become

an indispensable choice for advertisers. SUN is the only broadcaster in South India to

be present across genres in different languages which has become a key

differentiating factor. SUN is the market leader in Tamil, Telugu and Kannada

channels with a wide margin, while it is rated second in Malayalam.

Exhibit 16: Viewership share of SUN TV Network

State Language Prominent channels SUN (all

channels) Market Share

Competition

Tamil Nadu Tamil SUN TV, Sun Music, K TV 70% Kalaignar TV, Raj TV, Zee Tamil, Star Vijay, Jaya TV

Andhra Pradesh Telugu Gemini TV, Gemini Music, Gemini Movies 38% E TV, Maa Telugu, Zee Telugu, Sneha TV, Vissa

Karnataka Kannada Udaya TV, Udaya Music, Udaya Movies 38% ETV Kannada, Zee Kannada, Suvarna TV, Kasthuri

Kerala Malayalam Surya TV, Surya Music, Kiran TV 25% Asianet, Kairali, Amrita TV

Source: Company Data, Industry, PL Research

Tamil Nadu (Tamil) - SUN is the clear market leader in Tamil, offering nine

regional channels and enjoying a market share of 70% (including nine channels).

Its flagship GEC, SUN TV continues to remain a market leader with no

meaningful competition. SUN TV enjoyed a market share of >60% in FY14, while

its nearest competitor, Star Vijay had a market share of 12-14%. Tamil remains

the bastion of SUN Network and company continues to strengthen its market

positioning through its differentiated strategy. SUN’s market leadership in Tamil

enables it to enjoy a lion’s share of the Tamil advertising market, which in itself

is the largest regional ad market in South India with market size of Rs18bn (39%

of the South India TV Advertisement market).

Kerala (Malayalam) - In the Malayalam space, SUN Network operates six

regional channels with a collective market share of 25%. Within the Malayalam

GEC genre, Surya TV is ranked second with market share of 20%, while the

leader Asianet commands a market share of 51%. In terms of advertising

market, Malayalam market has a market size of Rs8.4bn (18% of South Indian TV

advertisement market).

Sun TV Network

June 20, 2014 16

Andhra Pradesh (Telugu) - SUN Network continues to dominate the Telugu

space through its offering of nine channels and enjoys a collective market share

of 38%. Within the Telugu GEC space, GEMINI TV remains the market leader

with a market share of 27% in FY14 compared to 20% market share for its

nearest competitor, ETV and 17% market share for Zee Telugu. Lately, GEMINI

TV has been facing increased competition from other GECs in the fiction genre.

However, the company has increased its focus on strengthening content which

should yield results over the next few months. In terms of advertising market in

South India, Telugu is the second largest with market size of Rs12bn (25% of

South India TV advertisement market) and GEMINI’s dominance in Andhra

makes it a preferred choice for advertisers.

Karnataka (Kannada) - SUN Network is also a market leader in the Kannada

space through its offerings of seven channels across genres and collectively

enjoys a market share of 38%. Within the Kannada GEC space, Udaya TV leads

the market with a market share of >30%, while its nearest competitor, Suvarna

has a market share of ~23% followed by Zee with market share of ~20%. From

an advertising perspective, Kannada language has a market size of Rs8.1bn (18%

of South Indian TV advertisement market).

Sun TV Network

June 20, 2014 17

Business Background

SUN TV Network is promoted by the SUN Group, one of the largest conglomerates in

India. SUN TV Network is a leading broadcasting company operating 33 television

channels in South India, reaching out to more than 95m households. Apart from

broadcasting, SUN operates 41 radio stations through its two subsidiaries, has

interests in film production through SUN Pictures and owns the Hyderabad franchise

of Indian Premier League.

Exhibit 17: Revenues break-up FY14

Advertising income51.1%

Broadcast fees6.1%

Program

licensing income

6.0%

Cable

subscription

9.4%

DTH revenues

21.5%

Others6.0%


Exhibit 18: SUN TV’s offerings

Language GEC Music Movies News Old songs Comedy Kids Action

Tamil Sun TV Sun Music K TV Sun News Sun Life Adithya TV Chutti TV Sun Action

Telugu Gemini TV Gemini Music Gemini Movies Gemini News Gemini Life Gemini Comedy Kushi TV Gemini Action

Kannada Udaya TV Udaya Music Udaya Movies Udaya News

Udaya Comedy Chintu TV Suriyan TV

Malayalam Surya TV Surya Music Kiran TV

Chirithira Kochu TV Surya Action

Tamil HD Sun TV HD Sun Music HD K TV HD

Telugu HD Gemini TV HD

Source: Company, PL Research

Sun TV Network

June 20, 2014 18

Key Management Personnel

Kalanithi Maran - Executive Chairman: Mr. Kalanithi Maran serves in the

capacity of Executive Chairman of SUN TV Network. He also serves as a Director

on the Board of Sun TV Network, Kal Radio, South Asia FM, Udaya FM Pvt. Ltd,

Kungumam Publications Pvt. Ltd, Sun Direct TV Pvt. Ltd, Sun Business Solutions

and a number of other companies. He also serves as the Non-Executive

Chairman of SpiceJet and has been its Non-Executive Director since November

2010.

K. Vijaykumar - Managing Director & CEO: Mr. K. Vijaykumar has been the Chief

Executive Officer at Sun TV Network since July 12, 2011 and has been its

Managing Director since April 20, 2012. Mr. Vijaykumar served as a Senior Vice

President at Kannada Programmes until March 2011. Mr. Vijaykumar served as

the Chief Operating Officer of Sun TV Network from March 2011 to July 2011.

Kaveri Kalanithi - Executive Director: Mrs. Kavery Kalanithi Maran served as the

Managing Director at Sun TV Network since April 20, 2012. Mrs. Maran served

as the Chairman at SpiceJet since November 2010 and has been its Non-

Executive Director since November 15, 2010. She has been an Executive Director

of Sun TV Network since April 20, 2012. She served as a Director of Sun TV

Network from June 16, 2005 to April 20, 2012. She holds a Bachelor's Degree in

Arts from University of Madras.

Sun TV Network

June 20, 2014 19

Risks

Final decision on TRAI’s ad cap of 12 minutes/hr can impact earnings

modestly: SUN TV is currently running 12+2 minutes of advertising on

primetime GECs against TRAI’s restriction limiting ad minutes to 10+2/hr. Final

decision on the TRAI ad cap is due soon. Implementation of TRAI ad cap can

make ad growth volatile for 1-2 quarters.

Delay in digitization will put at risk our earnings estimates: Implementation of

digitization has met with multiple headwinds in Phase-I and II delaying the

process by more than a year. Unless gross billing commences, the benefits of

digitization will not be visible. While we are modelling for delay of 6-12months

in implementation, any further delay can put at risk our earnings assumptions,

going forward.

Aggressive bidding for movies/sports can offset benefits of digitization:

Though implementation of digitization is likely to result in improved profitability

for broadcasters, aggressive bidding for movies/sports rights to strengthen

content and maintain market share might result into partially offsetting benefits

of digitization. Successful monetization of such high costs property remains a

risk to earnings.

Ongoing case against Sun Direct - promoter group entity: Ongoing case related

to Sun Direct’s alleged involvement in illegal transactions during 2006 has been

a major overhang on stock. The Central Bureau of Investigation (CBI) has been

carrying out investigation on former Telecom Minister Dayanidhi Maran in the

Aircel-Maxis case. Mr. C Sivasankaran, former owner of Aircel has alleged that

Maran forced him to sell his stake in Aircel in 2006 to Maxis Group, owned by

Kuala Lumpur-based business tycoon T. Ananda Krishnan. It is also alleged that

Maxis made a quid-pro-quo investment in Sun Direct TV, owned by Dayanidhi’s

brother, Kalanidhi Maran, through Astro All Asia Networks Ltd. CBI is

investigating whether Astro had to pay a premium to buy the stake in Sun

Direct.

SUN generates significant proportion of its DTH revenues through SunDirect.

Though any unfavourable decision will not impact day to day operations of

SunDirect, it may result in one-time penalty which can impact its growth

prospects.

Intensifying competition: With regional broadcasting emerging as a new growth

driver for the industry over the last few years, national broadcasters like Zee and

SUN have increased their focus on regional markets by strengthening their

content, launching new channels, acquisition of movies etc. Though SUN

remains a market leader in Telugu, Tamil and Kannada, its absolute market

share has come down from its peak. Decline in market share can reduce the ad

premium that SUN enjoys over other broadcasters.

Sun TV Network

June 20, 2014 20

SUN v/s Zee

SUN TV continues to trade at a significant discount to Zee due to the ongoing CBI

investigation against SunDirect, which is a promoter group entity and delay in

digitization in SUN’s geographical footprint. While the news flow related to the

ongoing CBI investigation might keep the stock under pressure, we try to analyse

SUN and Zee on different business parameters:

Exhibit 19: Zee V/s SUN

Parameters Zee Sun

Digitization- Phase-I/II Zee has already seen some benefits flowing in from

Phase-I/II. Gross billing remains the next trigger

Phase-I digitization in Chennai not yet kicked off. In Phase-II, Hyderabad, Coimbatore, Vizag remain

laggard

Digitization- Phase-III/IV Huge opportunity for Zee Big opportunity for Sun as Phase-III/IV collectively account for ~85% of the total subscriber base in

South India

Reach Zee has higher reach of 70-80m households SUN is predominantly a South India focused player.

Reaches 30-40m households

Other issues NA Ongoing case against SUN Direct promoters remains

a major overhang

Loss-making business currently Sports Sunrisers Hyderabad

FY15E losses of Rs800m FY15E losses of Rs261m


Exhibit 20: Zee v/s SUN financials (Rs m)

ZEE SUN

Domestic Subscription revenues FY14 13,184 6,449

Domestic Subscription revenues FY16E 18,823 8,957

Domestic Subscription CAGR FY14-16E 19.5% 17.9%

FY16E TV Advertising revenues 31,476 14,641

FY14-16E Ad growth CAGR% 15.0% 11.7%

FY16E Total revenues 57,676 28,425

FY16E PAT 12,115 10,179

FY16E PAT margin (%) 21.0% 35.8%

FY16E RoCE % 27.3% 36.3%

FY16E RoE % 21.1% 27.6%

FY16E FCFF 8,979 8,461


Sun TV Network

June 20, 2014 21

Financials

Expect SUN’s revenues to increase at a CAGR of 13% over FY14-16E driven by 18% YoY increase in domestic subscription revenues

We expect SUN’s revenues to increase at a CAGR of 13% over FY14-16E driven

primarily by growth in domestic subscription revenues. Subscription revenues are

expected to increase at a CAGR of 18% over FY14-16E led by ongoing digitization.

Phase-III/IV provides a larger opportunity for SUN TV as it encompasses the

maximum number of South Indian cities. Though the potential from digitization is

huge for SUN TV (Exhibit 2), we have incorporated only a small proportion of it in

our financials as digitization continues to be delayed. Rather, we have incorporated

the NPV of Rs106 as potential digitization value in our target price. We expect

international revenues to increase at a CAGR of 14% during this period.

On the advertising side, we expect ad growth to recover in FY15E as rate hikes get

absorbed gradually and market adjusts to the TRAI ad cap. Improvement in

economic scenario post a stable govt. coming in at the Centre, would also support

advertising recovery.

Exhibit 21: Consolidated revenues and growth

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

-

5,000

10,000

15,000

20,000

25,000

30,000

FY11 FY12 FY13 FY14E FY15E FY16E

(Rs

m)

Consol revenues YoY gr. (RHS)


Exhibit 22: Subscription revenues contribution set to surge

52% 56% 60% 53% 53% 52%

26% 27% 27%29% 31% 32%

8%9% 7%

6% 5% 5%14% 8% 6% 11% 11% 11%

0%

20%

40%

60%

80%

100%


Advertising Subscription Broadcast fees Others


EBITDA likely to increase by 14% over FY14-16E; PAT growth of 17%

We expect consolidated EBITDA to increase by 13.7% CAGR over FY14-16E. Though

increase in subscription revenues are likely to flow directly to EBITDA (as there is no

incremental cost attached to it), part of it will be offset by losses in the IPL business.

Overall, we expect EBITDA margins to improve by 80bps over FY14-16E. PAT is likely

to increase at a CAGR of 16.7% over FY14-16E, with EPS increasing to Rs25.8 in FY16E

compared to Rs19.0 in FY14.

Sun TV Network

June 20, 2014 22

Exhibit 23: EBITDA & EBITDA margins

60.0%

65.0%

70.0%

75.0%

80.0%

-

5,000

10,000

15,000

20,000

25,000


(Rs

m)

Consol EBITDA Margin (RHS)


Exhibit 24: PAT and PAT growth

-20.0%

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

0

2,000

4,000

6,000

8,000

10,000

12,000


(Rs

m)

Consol PAT YoY gr. (RHS)


RoE/ROCE to expand by 220bps/310bps over FY14-16E

We expect RoE/ROCE to expand by 220bps/310bps to 27.6%/36.3% by FY16E,

respectively. Improvement in margins driven by higher subscription revenues are

likely to result in improvement in return ratios. However, cash pile up in the Balance

Sheet will restrict further expansion in return ratios.

Exhibit 25: RoE/RoCE to improve

37.2%

29.1%26.8% 25.4% 26.4%

27.6%

51.2%

37.6% 35.5%33.2% 34.6%

36.3%

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%


RoE RoCE


Sun TV Network

June 20, 2014 23

Balance sheet to strengthen further

Going forward, improved profitability, coupled with limited capex, is likely to

translate into healthy FCFF generation for SUN. We expect SUN to generate FCFF of

Rs7.6bn/8.5bn for FY15E/16E, respectively, translating into cumulative FCFF of

Rs16bn during this period. Consequently, cash balances (incl. long & short term

investments) are likely to increase to Rs16.3bn from Rs10.8bn in FY14, despite high

dividend payouts. Strong balance sheet would enable SUN to invest further into

content as digitization will throw up newer opportunities for niche channels.

Exhibit 26: FCFF generation

8,124

929

6,117 6,496

7,617 8,461

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


(Rs

m)


Exhibit 27: Cash (incl. Investments)

8,747

5,319 6,599

10,781

13,053

16,335

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


(Rs

m)


Exhibit 28: Expect dividend payouts to remain high


Dividend (Rs m) 3,448 3,744 3,744 3,744 4,335 4,729

No. of shares (m) 394 394 394 394 394 394

DPS (Rs) 8.7 9.5 9.5 9.5 11.0 12.0

EPS (Rs) 19.5 17.6 18.0 19.0 21.9 25.8

Dividend payout % 44.8% 54.0% 52.8% 50.0% 50.2% 46.5%


Sun TV Network

June 20, 2014 24

Valuations

While Phase-I digitization (Chennai) has not yet started, Phase-II digitization benefits

continue to elude due to delay in gross billing. Further, implementation of the TRAI

ad cap has resulted in reworking of the entire ad structure.

However, we believe, concerns are overdone and CMP factors in all negatives.

Phase-III/IV digitization would provide the biggest upside for SUN TV as Phase-III/IV

collectively account for ~85% of the total subscriber base in South India. On the

advertising side, SUN has now recalibrated price hikes and undertaken number of

initiatives, including reduction in content partners’ ad slots, extending fiction

programming to six days a week and encouraging cross-selling approach to offset

the negative impact of TRAI ad cap. We believe SUN will return to a growth

trajectory over the next couple of quarters.

Historically, SUN has traded at an average P/E of ~20x. However, recent negative

newsflow related to continued delay in digitization, implementation of the TRAI ad

cap, overhang of SunDirect-Astro case, standstill on Arasu Cable’s issue has led to

pressure on valuations. SUN is currently trading at ~25-30% discount to Zee

compared to ~8-10% earlier. We believe concerns are overdone and the valuation

discount with Zee would narrow gradually over the next 1-1.5 years as digitization

picks up pace and SUN adjusts to the ad cap implementation.

We value SUN at 19x FY15E earnings of Rs21.9 and arrive at a price of Rs410. To this,

we add the NPV of Rs106 as the potential of digitization (Exhibit 2) since the

complete benefits from digitization are likely to accrue beyond FY16E. This leads to a

target price of Rs510 and recommend “Accumulate”.

Exhibit 29: 1 year forward Price/Earnings

29.1

19.7

19.2

13.0

18.0

0.0

10.0

20.0

30.0

40.0

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

P/E (x) Peak(x) Avg(x)

Median(x) Min(x)

Source: Company Data, Bloomberg, PL Research

Exhibit 30: 1yr. Forward EV/EBITDA

4.0x

6.5x

9.0x

11.5x

14.0x

0

50,000

100,000

150,000

200,000

250,000

300,000

Mar

-09

Jun

-09

Sep

-09

Dec

-09

Mar

-10

Jun

-10

Sep

-10

Dec

-10

Mar

-11

Jun

-11

Sep

-11

Dec

-11

Mar

-12

Jun

-12

Sep

-12

Dec

-12

Mar

-13

Jun

-13

Sep

-13

Dec

-13

Mar

-14

Jun

-14

Source: Company Data, Bloomberg, PL Research

Sun TV Network

June 20, 2014 25

Annexure

South India Media & Entertainment Industry

The South Indian Media & Entertainment (M & E) industry is estimated at Rs239bn in

FY13 and is estimated to grow at 16% CAGR over the medium term to reach Rs436bn

by FY17. Strong demand for regional content driven by rising per capita income,

increasing aspirations of the Tier-II cities, rapid technology advancements have

resulted into evolving this regional M & E industry.

Exhibit 31: South India Media and Entertainment market 2013-2017- Media-wise split (Rs bn)

FY13* FY14E FY15E FY16E FY17E CAGR '13-'17

Film 27 30 34 38 42 12.0%

Television 135 165 202 241 280 20.0%

Print 67 70 75 83 90 7.8%

Radio 4 5 6 7 8 18.6%

New Media 7 9 11 13 16 23.4%

South India M & E market size 239 278 327 381 436 16.2%


Within the southern markets, TV is the largest medium accounting for 56% of the

industry during FY13. State-wise, Tamil Nadu accounts for 36% of the market, while

Andhra Pradesh accounts for 31% of the market.

Exhibit 32: Split of South India M & E market by medium in FY13

Film11.2%

Television56.3%

Print27.9%

Radio1.8%

New Media

2.9%


Exhibit 33: Split of South India M & E market by states in FY13

Tamil Nadu36.2%

Andhra Pradesh

30.7%

Karnataka18.7%

Kerala14.4%


Tamil Nadu M&E industry is worth Rs84bn in FY13 and is expected to grow at a CAGR

of 17% over FY13-17. Growth is expected to be marginally higher than other states

with all four media platforms expected to grow faster in Tamil Nadu. Andhra Pradesh

is the second largest market with a size of Rs71bn and is expected to grow at 16%

CAGR over FY13-17E to reach Rs127bn.

Sun TV Network

June 20, 2014 26

Exhibit 34: South India Media and Entertainment market 2013-2017- State wise split

(Rs bn) FY13* FY14E FY15E FY16E FY17E CAGR '13-'17

Tamil Nadu 84 100 118 138 159 17.1%

Andhra Pradesh 71 82 96 112 127 15.6%

Karnataka 43 50 59 68 77 15.4%

Kerala 34 38 44 51 57 14.4%

South India M & E market size 233 270 317 368 420 16.0%

Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research Note: New Media has not been included in the state level market size calculations

Television industry in South India is expected to grow at a CAGR of 20.0%

The South Indian TV industry is valued at Rs135bn in FY 2013 and is expected to

grow at a CAGR of 20% over the next four years driven by ongoing digitization.

Subscription revenues, which currently account for 66% of the industry, are likely to

increase to 73% by FY17 as digitization benefits flow in.

Exhibit 35: Market size of TV industry in South India (Rs bn)


Subscription revenues 90 113 142 173 203 22.7%

Ad revenues 40 46 53 60 68 14.1%

Content revenues 5 6 7 8 9 14.1%

TV Industry in South India 135 165 202 241 280 20.0%


Exhibit 36: Split of South India TV market by medium in FY13

Subscrip-tion

66.4%

Advertise-ment

29.7%

Content3.9%


Exhibit 37: Split of South India TV market by medium in FY17

Subscrip-tion

72.6%

Advertise-ment

24.2%

Content3.1%


Sun TV Network

June 20, 2014 27

TV subscription revenues to grow at 23% CAGR over FY13-17

TV subscription market in South India is valued at Rs90bn in FY13 and is expected to

grow at a CAGR of 22.7% over the medium term to reach Rs203bn. Growth in

subscription revenues will be driven by digitization as leakage will be plugged and

ultimately every TV in the country will be mapped.

Tamil Nadu and Andhra Pradesh collectively account for 70% of the TV industry’s

subscription revenues. Although Andhra Pradesh is the most populous state in South

India, Tamil Nadu contributes the largest proportion of subscription revenues owing

to the high C&S penetration. In Tamil Nadu, C & S penetration is 90% which is

substantially higher than Andhra Pradesh’s C&S penetration of about 70%.

Exhibit 38: TV subscription market in South India (Rs bn)


Tamil Nadu 32 42 53 65 77 24.5%

Andhra Pradesh 30 37 46 56 65 21.7%

Karnataka 18 23 28 34 40 21.7%

Kerala 10 12 15 18 21 21.6%

TV subscription market in South India 90 113 143 173 203 22.7%


Exhibit 39: % share of states in South India’s population v/s subscription revenues

State % Share of South Indian population % Share of South Indian subscription revenues

Tamil Nadu 29% 36%

Andhra Pradesh 34% 33%

Karnataka 24% 20%

Kerala 13% 11%

Total 100% 100%


New channel launches in South India in last one year

With regional broadcasting emerging as a new stream of revenue generator for

broadcasters, South India has witnessed several new channel launches over the last

one year across states and genres. Further, with digitization on the cards,

broadcasters are investing in niche content to drive revenues.

Sun TV Network

June 20, 2014 28

Exhibit 40: TV channels launched post Aug' 12

Channel Genre Language Broadcaster

10TV News Telugu Co-operative news channel

Captain News News Tamil Captain Media Network

Mathrubhumi News News Malayalam Mathrubhumi group

Raj News News Kannada Raj TV Network

Media One Infotainment Malayalam Madhyamam Broadcasting Limited

Kappa TV Music Malayalam, Tamil, Hindi, English Mathrubhumi group

Surya Music Music Malayalam SUN TV

Suvarna Plus GEC Kannada Asianet


Sun TV Network

June 20, 2014 29

Income Statement (Rs m)

Y/e March 2013 2014 2015E 2016E

Net Revenue 19,531 22,236 25,069 28,425

Raw Material Expenses 1,844 3,009 3,307 3,636

Gross Profit 17,686 19,228 21,762 24,789

Employee Cost 1,994 2,190 2,507 2,843

Other Expenses 1,301 1,941 2,131 2,416

EBITDA 14,392 15,097 17,124 19,530

Depr. & Amortization 4,417 4,783 5,216 5,567

Net Interest (373) (820) (850) (1,050)

Other Income 422 866 900 1,100

Profit before Tax 10,347 11,134 12,758 15,014

Total Tax 3,306 3,682 4,210 4,955

Profit after Tax 7,042 7,452 8,548 10,059

Ex-Od items / Min. Int. 103 204 150 180

Adj. PAT 7,096 7,480 8,638 10,179

Avg. Shares O/S (m) 394.1 394.1 394.1 394.1

EPS (Rs.) 18.0 19.0 21.9 25.8

Cash Flow Abstract (Rs m)

Y/e March 2013 2014 2015E 2016E

C/F from Operations 8,690 12,392 11,543 13,472

C/F from Investing (4,768) (6,178) (4,239) (4,727)

C/F from Financing (3,823) (4,310) (5,032) (5,463)

Inc. / Dec. in Cash 100 1,903 2,272 3,282

Opening Cash 512 4,162 6,065 8,337

Closing Cash 4,155 6,065 8,337 11,619

FCFF 6,117 6,496 7,617 8,461

FCFE 5,994 4,910 8,276 9,285

Key Financial Metrics

Y/e March 2013 2014 2015E 2016E

Growth

Revenue (%) 4.6 13.9 12.7 13.4

EBITDA (%) 0.3 4.9 13.4 14.1

PAT (%) 2.4 5.4 15.5 17.8

EPS (%) 2.4 5.4 15.5 17.8

Profitability

EBITDA Margin (%) 73.7 67.9 68.3 68.7

PAT Margin (%) 36.3 33.6 34.5 35.8

RoCE (%) 35.5 33.2 34.6 36.3

RoE (%) 26.8 25.4 26.4 27.6

Balance Sheet

Net Debt : Equity (0.1) (0.2) (0.2) (0.3)

Net Wrkng Cap. (days) 37 48 — —

Valuation

PER (x) 23.9 22.6 19.6 16.6

P / B (x) 6.1 5.5 4.9 4.3

EV / EBITDA (x) 11.5 10.8 9.4 8.1

EV / Sales (x) 8.5 7.3 6.4 5.6

Earnings Quality

Eff. Tax Rate 31.9 33.1 33.0 33.0

Other Inc / PBT 4.1 7.8 7.1 7.3

Eff. Depr. Rate (%) 12.3 11.7 11.4 10.8

FCFE / PAT 84.5 65.6 95.8 91.2

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2013 2014 2015E 2016E

Shareholder's Funds 27,854 30,954 34,521 39,167

Total Debt — — — —

Other Liabilities 1,597 1,643 1,643 1,643

Total Liabilities 29,451 32,597 36,163 40,810

Net Fixed Assets 13,797 13,779 13,703 13,964

Goodwill — — — —

Investments 6,025 4,698 5,630 6,100

Net Current Assets 9,629 14,120 16,830 20,746

Cash & Equivalents 4,162 6,065 8,337 11,619

Other Current Assets 8,412 11,094 11,857 12,941

Current Liabilities 2,945 3,039 3,364 3,814

Other Assets — — — —

Total Assets 29,451 32,597 36,163 40,810

Quarterly Financials (Rs m)

Y/e March Q1FY14 Q2FY14 Q3FY14 Q4FY14

Net Revenue 6,019 4,664 5,083 5,202

EBITDA 3,537 3,377 3,720 4,000

% of revenue 58.8 72.4 73.2 76.9

Depr. & Amortization 1,174 1,176 1,061 1,123

Net Interest (127) (369) (125) (126)

Other Income 134 378 149 132

Profit before Tax 2,489 2,570 2,785 3,003

Total Tax 845 879 927 1,027

Profit after Tax 1,644 1,692 1,858 1,976

Adj. PAT 1,644 1,692 1,858 1,976

Key Operating Metrics

Y/e March 2013 2014 2015E 2016E

Revenue Growth (%)

Advertisement 11.0 1.6 10.3 13.0

Domestic Subs. 3.2 26.0 18.4 17.3

International Subs. 21.7 26.9 13.4 10.3

Source: Company Data, PL Research.

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Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

27.4%

52.8%

19.8%

0.0%0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% o

f To

tal C

ove

rage

PL’s Recommendation Nomenclature

BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as

information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be

considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy

or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,

statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The

suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an

independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or

engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

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