Emkay Your success is our success

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1 Emkay Your success is our success August 19, 2013 Rating Buy CMP Rs381 EPS Chg FY14E/FY15E (%) Target Price change (%) Target Price Rs530 NA/NA NA Nifty 5,415 Sensex 18,308 Price Performance (%) 1M 3M 6M 12M Absolute Rel. to Nifty Source: Bloomberg Relative price chart 500 Rs Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Source: Bloomberg Stock Details Sector Bloomberg Sun TV (LHS) Rel to Nifty (RHS) % Media & Entertainment 2 SUNTV IB Equity Capital (Rs mn) 1,970 Face Value(Rs) 5 No of shares o/s (mn) Week H/L 495/ 280 Market Cap (Rs bn/usd mn) 150/ 2,395 Daily Avg Volume (No of sh) 1,201,949 Daily Avg Turnover (US$mn) 7.5 Shareholding Pattern (%) Jun'13 Mar'13 Dec'12 Promoters FII/NRI Institutions Private Corp Public Source: Bloomberg Naval Seth [email protected] Financial Snapshot (Consolidated) Sun TV Network Digitization play, Initiate with BUY Broadcasters to be key beneficiaries of the ongoing digitization, with a significant jump in subscription revenue Improving subscriber declaration, higher revenue share from MSOs, and growth in ARPU to trigger a potential upside of Rs6.6bn in Sun TV s domestic subscription revenue Sun s de-risked business model and leadership position would continue to drive ad growth going forward Promising growth-drivers, potential revenue triggers from ongoing digitization and inexpensive valuations. We initiate BUY with a TP of Rs530 (incl. Rs95/share NPV of incremental subscription revenue potential) Digitization to trigger huge upside to revenue in the coming years Digitization provides incremental revenue upside potential of Rs6.6bn to Sun TV. We expect this growth to be largely driven by: a) improving subscriber reporting, b) increase in broadcasters ARPU share, c) Sun TV s dominant position in South, d) healthy DTH subscriber additions, and e) gradual rise in consumer ARPU. We estimate domestic subscription revenue of Rs6.8bn by FY15E from Rs5.1bn in FY13, factoring in little impact of digitization. However, we estimate the potential for total incremental subscription revenue of Rs6.6bn in our best case scenario, assuming incremental ARPU of Rs15 (Exhibit 3). Dominant player in South India Increasing demand for regional advertising in the last few years has resulted in robust ad growth for Sun TV Network. This has been on the back maintaining a consistent leadership share in Tamil Nadu (70%), Andhra Pradesh (39%) and Karnataka (38%). Going forward, ad and broadcast revenues would register decent growth on the back of rising ad spends by FMCG companies (which account for 55% of Sun TV s ad revenue). Ad spends by FMCG firms would continue to rise due to deceleration in volume growth. We estimate ad and broadcast revenue of Rs15bn at a CAGR (FY13-15E) of 12.3%. Robust balance sheet and healthy dividend payout Robust subscription revenue with no incremental cost is likely to drive cash generation. Strong profitability and a limited capex over next two years would result in strong FCF of Rs14.9bn. We expect cash and investments of Rs14.6bn by FY15E. A strong balance sheet and a healthy dividend payout of over 50% would provide safety to investors. Valuations Re-rating on the cards The broadcasting industry is poised for promising revenue growth, thanks to the annuity model of subscription revenue unlike ad revenue (which is cyclical due to the direct linkage to macroeconomic factors). We estimate a revenue/ebitda CAGR of 16%/12.9% over FY13-15E (EBITDA growth is muted due to IPL losses ). We value Sun at 19x our FY15 earnings, and assuming Rs95/share NPV from potential revenue of Rs5.3bn from digitization (Exhibit 21). The key risks to our call include a 12min/hr cap on ads (potential downside risk if yield remains unchanged as Sun TV channels operate on around 17mins paid/hr), delay in digitization, Arasu Cable getting a DAS (Digital access system) licence, and the ongoing CBI probe against promoters. YE- Net EBITDA EPS EPS RoE EV/ (Rsmn) Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV FY12A 18,472 14, , FY13A 19,230 14, , FY14E 23,265 16, , FY15E 25,836 17, , Initiating Coverage Emkay Global Financial Services Ltd. 1

2 Investment Rationale Sun TV - Digitization Play Subscription revenue kicker to drive significant revenue upside Domestic subscription revenues have been plagued by subscriber under-reporting by local cable operators (LCOs ). A low channel capacity of channels in the analogue signal regime has restricted broadcasters from showcasing their entire bouquet of channels, and also resulted in demand for high carriage fees from broadcasters. New channels launched in recent years have been bleeding because of high carriage fees and net loss on subscription revenues (Sun does not pay carriage fees). We expect subscription revenues to be driven largely by: a) improving subscriber declaration with ongoing digitization, b) higher revenue share to broadcasters, c) gradual rise in consumer ARPU (average revenue per user) growth, and d) continued growth in DTH subscriber base. Going forward, with greater channel capacity, the carriage cost of broadcasters with a large bouquet of offerings would also decrease. As explained above, domestic subs cription revenues had been impacted adversely in the past, causing a revenue loss for broadcasters. With digitization, subscription revenue drivers are perceptibly more promising than ever. Going forward, digitization would ensure the due share of revenues for the parties (MSOs, broadcasters and the government) in the value-chain. Digitization is set to benefit broadcasters in terms of subscription revenue growth. In the TV distribution value-chain, the broadcaster is the only party to benefit from digitization without any additional cost. In the past and till date, subscription revenue from DTH (Direct-to-Home) has been a safeguard for big broadcasters. Sun TV enjoys a dominant position in southern states, with as many as 32 channel offerings. Sun TV s subscription revenue was also impacted adversely due to the re-launch of Arasu Cable by the Jayalalitha government in FY12 in Tamil Nadu. Arasu Cable had been offering cable TV services at prices as low as Rs70/month, which excluded Sun TV (where it was earning Rs120mn/month as subscription revenue). However, in September 2012, Sun TV and Arasu Cable agreed to broadcast Sun TV channels, which are now fetching Rs25mn/month revenue in Tamil Nadu (ex-chennai). Going forward, Sun TV s dominant position in broadcas ting and DTH segments (Sun Direct is a promoter group company) would continue to drive subscriptions. As per our estimates, four southern states constitute 50mn TV households (HHs), of which 8.9mn are DTH subs cribers. We estimate 80% of TV viewers to subscribe to Sun TV given its dominant position. Clearly, Sun TV is a leader in Tamil Nadu and Andhra Pradesh with a huge margin, besides having a reasonable market share in Karnataka and enjoying No. 2 position in Kerala. The table below indicates TV HHs that are yet to switch over from the analogue cable. Exhibit 1: Cable TV HHs in 4 southern states Cities (subscribers in mn) TV HHs Rural Urban Tamil Nadu Chennai Coimbatore Others Andhra Pradesh Hyderabad Vishakhapatnam Others Karnataka Bangalore Mysore Others Kerala Total (Four states) Source: Company, Industry, Emkay Research Emkay Research August 19,

3 Digitization-led subscription revenue boost We have assumed three plausible scenarios for analyzing the incremental revenue potential of the Sun TV Network with digitization. Currently, Sun TV has an ARPU of Rs4 from the analogue platform vis-à-vis around Rs39 on DTH. According to management, post-digitization, ARPU on the digital platform would increase to around Rs25, driven largely by: a) overall rise in the declaration level, b) higher revenue share from MSOs, and c) increase in monthly subscription per subscriber from the current Rs160 to nearly Rs250 going forward. We estimate incremental ARPU of Rs15 for cable subscriptions in the digitized scenario. Sun TV generates 73% of subscriptions from the DTH segment, with one-fourth of the subscribers on cable. Sun operates on a per subscriber model on the DTH segment, which leads to strong revenue generation, despite a low subscriber base. Even with cable operators, Sun TV is working on a per-sub model, though the pricing is lower than DTH. Exhibit 2: Disproportionate revenue and subscriber mix due to under-reporting in analogue regime FY13 financials DTH Analogue Subscribers (mn) Revenue (Rs mn) 3,730 1,390 ARPU 38 4 % of Total domestic subscription revenue % of Total Subscribers With implementation of digitization, Sun TV has the potential to generate incremental revenue of Rs6.6bn in our best case scenario. However, we have assumed scenario 3 in our valuation assumption, and remain conservative because of delays that might happen during the digitization process. We have assumed incremental ARPU of Rs15/sub and blended ARPU of Rs20 in digitized scenario against management s guidance of Rs25 ARPU/subscriber. Exhibit 3: Digitization-led incremental revenue potential of Rs6.6bn for Sun TV Current cable ARPU depressed due to under-reporting Scenario 1 Scenario 2 Scenario 3 Total TV HHs (mn) Already paying DTH Subs (mn) Total TV HHs -4 states (Mn)- Yet to come on Digital/DTH Platform Subscribers on Sun Network 80% 80% 80% Digitization Success 75% 65% 60% Sun TV Subscribers (mn) Current DTH subs (mn) FY13 Cable Revenue (Rs mn) 1,390 1,390 1,390 Cable ARPU (Rs/month) FY13 DTH Revenue (mn) 3,730 3,730 3,730 DTH ARPU (Rs/month) Digitization to drive subscription revenue Scenario 1 Scenario 2 Scenario 3 Current Cable TV HHs assumed for Sun (mn) % of subscribers switched to DTH Incremental DTH subscribers (mn) Switched to Digital Cable (mn) DTH ARPU (Rs/month) Incremental DTH revenue post digitization (Rs mn) Incremental Digital Cable ARPU (Rs/month) Digital cable revenue post digitization (Rs mn) Total incremental digitization revenue upside (Rs mn) Emkay Research August 19,

4 DTH subscribers for Sun TV would continue to grow, driven by higher subscriber additions by Sun Direct during the course of implementation of digitization. DTH growth will be driven by a rise in the subscriber base and steady ARPU. Exhibit 4: DTH subscriber for Sun TV is expected to grow at 11.5% CAGR (FY13-15E) In Mn FY11 FY12 FY13 FY14E FY15E Sun TV's DTH Subscriber base Analogue subscription revenue has witnessed pressure in the last two years, due to the relaunch of Arasu Cable in FY12. However, the company, having resolved the issue with Arasu Cable, has been receiving Rs25mn/month subscription revenue. In our view, improving subscriber reporting, led by digitization, would drive subscription revenue growth. Exhibit 5: Subscription revenue estimates Subscription revenue FY11 FY12 FY13 FY14E FY15E DTH 2,883 3,330 3,730 4,370 4,834 YoY Growth 57% 16% 12% 17% 11% Analogue 2,140 1,626 1,390 1,674 1,930 YoY Growth 37% -24% -15% 20% 15% Domestic Total 5,023 4,956 5,120 6,044 6,764 YoY Growth 48% -1% 3% 18% 12% International ,040 1,127 1,220 YoY Growth 23% 22% 23% 8% 8% Total Subscription Revenue 5,713 5,799 6,160 7,171 7,984 YoY Growth 44% 2% 6% 16% 11% Leading broadcaster in South, with a wide array of channels Over the past few years, Sun TV has successfully expanded its offerings to include movies, news, music, kids and comedy channels. In Tamil Nadu, Andhra Pradesh and Karnataka, it is present in all the key genres. It is the only regional broadcaster to provide a complete range of channels to advertisers, which remains a key differentiator for the network. Sun TV enjoys a leadership position, with a considerable viewership share in three of the four markets: Tamil Nadu (70%, including all the 9 channels ), Andhra Pradesh (39%) and Karnataka (38%). It is ranked second in Kerala, with a 26% market share. Exhibit 6: Sun TV s presence, market share and competitors State Ad Market size (Rs bn) All Sun channels viewership market share (%) Key competitors Tamil Nadu Kalaignar TV, Raj TV, Zee Tamil, Jaya TV, Vijay TV Andhra Pradesh E TV, MAA Telugu, Zee Telugu, Vissa, Sneha TV Karnataka ETV Kannada,Zee Kannada, Suvarna, Kasturi Kerala Asianet, Kairali, Amrita TV Emkay Research August 19,

5 Dominates southern GEC market Sun TV: Sun TV is the flagship GEC channel of the Sun Network Group. Launched in 1993, it is one of India s first regional channels. It offers a variety of programmes in Tamil, including serials, movies, movie-based shows, news, talk-shows, game-shows and children s shows. The channel enjoys a numero-uno position, a with market share of 55% compared to other channels such as Kalaignar (10%) and Star Vijay TV (13%). With 9 channels in Tamil Nadu, Sun has a viewership market share of 70%. Exhibit 7: Clear leader in Tamil GEC viewership market 70% 60% 50% 40% 30% 20% 10% 0% Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Sun TV Vijay TV KTV Zee Tamizh Kalaignar TV Source: Industry, Emkay Research Gemini TV: Launched in 2005, Gemini TV is the leading GEC channel targeting Teluguspeaking viewers. The channel, with a market share of 30%, is ahead of its competitors such as Zee Telugu (19%) and Ennadu TV (17%). With 9 channels in Andhra Pradesh, Gemini has a viewership market share of 39%. Exhibit 8: Gemini TV maintains its numero-uno position in Telugu GEC 40% 30% 20% 10% 0% Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Source: Industry, Emkay Research Gemini TV Zee Telugu Eenadu TV Maa Telugu Gemini Movies Others Udaya TV: Launched in 1994, Udaya TV is the leading GEC channel targeting Kannada viewers. The channel, with a market share of 27%, is ahead of its competitors such as Zee Kannada (18%) and Ennadu TV (18%). In Karnataka, it has 7 channels and enjoys a viewership market share of 38%. Exhibit 9: Dominant player in Kannada GEC market 50% 40% 30% 20% 10% 0% Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Udaya TV Udaya Movies ETV Kannada Zee Kannada Suvarna Source: Industry, Emkay Research Emkay Research August 19,

6 Surya TV: Launched in 1998, Surya is the second-largest Malayalam GEC channel. It continues to be rated second in Kerala and enjoys a market share of 20%. Asianet continues to remain the industry leader, with a 51% market share. Exhibit 10: Surya TV is No. 2 due to Asianet s dominance in Malayalam GEC 50% 40% 30% 20% 10% 0% Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Nov-12 Dec-12 Jan-13 Feb-13 Mar-13 Apr-13 Asianet Surya TV Mazhavil Manorama Kiran TV Source: Industry, Emkay Research Regional ad markets Under-penetrated, exhibit strong growth potential In terms of viewership, regional channels are next to Hindi channels and hence command a high audience share. Of the regional channels, Regional GEC is the most dominant genre in terms of viewership share, as it captures more than 70% of audiences. Exhibit 11: Language -wise channel share Malayam 2% Marathi 5% Telugu 8% Kanada 4% Tamil 10% Bengali 4% English 10% Others 7% Hindi 50% Source: FICCI KPMG Report 2012, Emkay Research According to industry reports, regional advertisements contribute around 25% of overall revenues and 53% of ad volumes, translating into significant low yields compared to Hindi GEC. Marathi, Bengali and southern markets are the fastest-growing and most significant regional markets in terms of ad spends. Southern states continue to be the bastion of this genre. The Tamil market dominates in terms of ad spends, followed by Telugu. National broadcasters have been focusing on regional channels with increasing investments to strengthen their brand presence. Existing regional players are also strengthening their product portfolio by launching niche channels in an effort to ensure a strong bouquet of offerings and leverage the brand presence. A relatively low media penetration and rise in incomes in smaller towns are the key motivators for advertisers to focus on regional markets. Also, the cost of reaching the audience is much lower compared to national media because of lower advertising rates. Niche genres such as kids, youth and comedy, among others, have also begun to find viewers in regional markets, besides the traditionally popular GEC, news, movies and music. As advertisers begin to recognize the potential of regional markets, they are expected to present a high growth opportunity going forward. Increasing purchasing power, high disposable income and compulsory digitization would drive both advertisement and subscription revenues of broadcasters. Per capita income in regional markets is greater than the national average. In fact, the per capita income of south Indian states is 18% more than north Indian states. Emkay Research August 19,

7 Exhibit 12: State -wise ad market size and TV penetration Language HHs (mn in the home state) Television HHs (mn, % of total HHs) C&S HHs (mn, % of television HHs) Ad market (Rs mn) Tamil (93%) 15.9 (97%) 13,500 Telugu (72%) 14.8 (98%) 9,000 Kannada (75%) 9.9 (98%) 6,200 Malayalam (93%) 7.1 (94%) 6,600 Bangla (47%) 8.6 (90%) 7,000 Marathi (67%) 14.9 (89%) 4,100 Bhojpuri* (29%) 11.3 (68%) 1,000 Punjab (87%) 4.3 (91%) 1,500 Oriya (42%) 3.5 (84%) 800 Gujarati (64%) 7.0 (87%) 450 Source: FICCI KPMG Report 2013, Emkay Research Robust business model and dominance to drive ad growth Sun TV continues to remain the largest regional broadcaster, with an industry-leading viewership market share in three of the four markets: Tamil Nadu (70%), Andhra Pradesh (39%) and Karnataka (38%). It is ranked second in Kerala, with a 26% market share. Our interactions with media industry experts indicate that Sun commands a significant ad rate pricing premium in three of its markets. This is largely attributable to the superior content and strong distribution reach across all states. The FMCG sector contributes 55% of Sun TV s total ad revenue. Ad spend of FMCG companies is rising, with volume growth increasingly coming under pressure. FMCG companies have been facing a volume slowdown, which tend to limit the scope for a price hike required for revenue growth. The market share and the mind share would happen purely on the back of increasing ad spends and promotions. We have highlighted in Exhibit 39 that the ad spend for FMCG companies of Emkay universe is expected to register a CAGR of 16% over FY13-15E. Further, to support ad revenue growth, Sun TV has increased its ad rate by 19%, a hike taken after two years, for its flagship channel, Sun TV, with effect from July 1, We believe Sun would take a further ad rate hike to offset the impact of 12min/hr advertisement cap (likely to be implemented from October 1, 2013). Media planners suggest that Sun is looking for a significant hike in ad rates to offset the impact of the 12min/hr ad cap. The increase in ad rate would be absorbed given the strong reach and leadership position of Sun in most of its markets. A sustained market share and yield improvement would augur well for ad revenue growth in the medium -to-long term. We estimate a CAGR of 12.3% over FY13-15E in ad and broadcast revenues to Rs15bn. Emami s ad expense during Q1FY14 increased by 200bps yoy, highlighting the increased ad spends as volume deceleration is visible. During a conference call, management indicated that it has factored in new norms (12mins ad/hour) of TV media spends. Sun TV has hiked prices by 100%. Emkay Research August 19,

8 Exhibit 13: Ad and broadcast revenue growth to remain healthy Rs mn 16,500 11,500 6,500 1,500 22% 12.3% CAGR (FY13-15E) 15,054 13,592 11,094 11,937 11,239 14% 11% 8% -1% FY11 FY12 FY13 FY14E FY15E 25% 20% 15% 10% 5% 0% -5% Ad revenue % growth De-risked business model Unlike its peers, Sun TV has a differentiated strategy for its serials, wherein it charges a fixed fee from producers to broadcast their content. In return, it provides an advertisement slot to content producers. While Sun TV receives the fee (broadcast fee), it also retains a few advertisement slots, which it sells to advertisers directly. Sun TV retains around four minutes of advertisement time per hour for direct sale. Under this model, the cost of production is incurred by the content producer. As Sun TV does not buy the content, no cost is recognized in P&L under the model, leading to margins being higher than 100% under this segment. According to our estimates, 13-14% of Sun TV s revenues would come under this model, i.e., 8% reported as a broadcast fee, while an estimated 2-4% is reported under advertising revenues, given the fact that Sun TV retains a few slots for direct sale. This model also leads to a better margin profile for Sun TV Network. Sun TV reported EBIT margins of 48% in FY13, adjusted for a high-margin broadcast business (~10% revs); comparable EBIT margins would be at 43%, higher than peers such as ZEEL at 31% (ex sports). We attribute the high margins to the differentiated business model, wherein it sells time slots to content producers directly for a fee. Profit margins under this segment is at 100%, since no costs is incurred for the content, besides it requires minimal investments in SG&A. Radio business Sun TV also has a presence in the radio business through two subsidiaries : South Asia FM Ltd. (59% stake) and KAL Radio Ltd. (98% stake). The former with 23 licences focuses largely on northern, eastern and western parts India, while the latter with 18 licences focuses on southern cities. Its radio business reported revenues of Rs1050mn in FY13. It posted a net profit of around Rs100mn during the same period. The company management has indicated that its strategy during Phase-III auction (whenever it is conducted) would be to sharpen the focus on southern markets, while it continues to bid in selected profitable cities in the rest of the country. IPL: Brand leverage yet to be seen in revenue growth Sun TV had acquired the rights for the Hyderabad IPL team in October 2012 at $77mn. The amount would be payable over a period of 5 years, with an annual installment of Rs851mn as franchisee fees. Revenue growth would vary year-on-year, as the IPL business is highly dynamic in nature. Besides, sponsorships and ad revenues are dependent on the performance of teams. The company management reported an EBITDA loss of Rs308mn for FY14E (first season) and continues to aim for positive EBITDA from FY15E onwards. Management s contention is that it was the first season and hence it could not capitalize on sponsorships. However, from the next season, with big sponsors expected to come on board, it could look forward to substantial revenues. Sun TV reported revenue of Rs983mn in the first IPL season (IPL-6), with an EBITDA loss of Rs308mn. However, management is confident of EBITDA profit by FY15E. With Rajasthan Royals and Chennai Super Kings currently embroiled in match-fixing allegations, the IPL brand could take a major hit with its popularity waning to moderate levels. Emkay Research August 19,

9 Therefore, we are sceptical about big sponsorships for the next season generally for all teams and particularly for Sunrisers Hyderabad. Further, any rise in player costs would also increase operating costs in a meaningful way in the next season. In our opinion, the losses could continue for the next couple of years. Exhibit 14: IPL P&L Particulars (Rs mn) FY14E FY15E Total Revenue ,143.4 Total expenditure 1, ,364.3 Operating Profit Emkay Research August 19,

10 Financial snapshot Healthy revenue growth backed by pick-up in subscription revenue We expect domestic subscription revenues to be the major growth driver for Sun. We expect subscription revenue to grow at a CAGR of 14% to Rs 8bn during FY13-15E, while domestic subscription revenue would increase 15% over the same period. The risk to revenue growth would be marginal, since growth is not directly linked to macroeconomic factors. Contributions from subscriptions (annuity in nature) would increase, as the TV distribution sector is set become more organized and transparent. We have not incorporated any significant increase in subscription revenue in our estimates (in anticipation of delays in implementation of digitization), but we have ascribed Rs95/share value in our target price based on the incremental revenue potential from digitization. Increasing A&P spend of FMCG companies indicate strong ad revenue growth going forward. We estimate ad revenue of Rs15bn by FY15E and a growth of 12.3% (CAGR) over FY13-15E. Consolidated revenue is expected to grow at a CAGR of 16% during FY13-15E to Rs25.8bn. We have incorporated IPL financials with a revenue estimate of Rs1.14bn as against Rs950mn in FY14, and a net loss of Rs 220 for FY15E as against Rs308mn in FY14. Exhibit 15: Robust revenue growth estimated going forward Rs mn 70,000 60,000 50,000 40,000 30,000 20,000 10, % CAGR (FY13-15E) 25,836 23,265 20,130 18,473 19,230 1,654 1, ,178 5,713 5,799 1,579 1,133 6,160 7, ,984 11,239 11,094 11,937 13,592 15,054 FY11 FY12 FY13 FY14E FY15E Ad and Broadcast Subscription IPL Others Total Healthy EBITDA growth led by growth in subscription revenue Going forward, EBITDA growth is expected to be strong, as incremental subscription revenue does not have cost attached to it. However, initial losses from IPL are expected to be a drag on the consolidated operating performance. We expect an EBITDA CAGR (FY13-15E) of 13%, primarily impacted by initial losses from IPL. Similarly, the consolidated EBITDA margin in FY14E is likely to take a hit. We estimate an EBITDA margin of 69.4% and 69.6% for FY14E and FY15E, respectively. However, the standalone broadcasting business is expected to register a strong 13.2% EBITDA CAGR (FY13-15E). Exhibit 16: Robust EBITDA growth Rs mn 23,000 21,000 19,000 17,000 15,000 13,000 11,000 9,000 7, % 13% CAGR (FY13-15E) 76.6% 17,975 15, % 16,147 14,143 14, % 69.6% FY11 FY12 FY13 FY14E FY15E EBITDA % EBITDA 80% 78% 76% 74% 72% 70% 68% 66% 64% Source: Emkay Research, Company Emkay Research August 19,

11 Return ratios to improve driven by strong profitability Sun TV s robust profitability, driven by incremental subscription revenue over the next 3 years, would translate into better return ratios from current levels. We expect RoE and RoCE of 27% and 39.5% by FY15E from 26% and 37% in FY13, respectively. The cash pile on the balance sheet would restrict a further expansion in return ratios. However, an increase in dividend payout would result in lower cash balance. Exhibit 17: Return ratios to improve % FY11 FY12 FY13 FY14E FY15E RoE RoCE Strong balance sheet post-digitization Strong profitability and limited capex going forward would result in robust FCF generation for Sun TV. We expect cumulative FCF of Rs14.9bn over next two years. We also expect cash and investments to increase to Rs 14.6bn by FY15E from Rs 7.5bn in FY13, despite the high dividend payouts. Going forward, a strong balance sheet would provide strength to the company for investing more in movies and higher payouts. Exhibit 18: Healthy payouts to investors FY11 FY12 FY13 FY14E FY15E Dividend (Rs mn) 4,015 4,351 4,380 4,611 5,072 Per share (rs) Dividend Yield % Pay-out ratio % Exhibit 19: FCF generation to remain strong Rs mn FY11 FY12 FY13 FY14E FY15E FCF 5, ,821 6,173 8,743 Cash & Investments 8,740 5,316 7,484 9,893 14,580 Emkay Research August 19,

12 Risks and Concerns Delays in digitization Digitization process has been delayed in both Phase-I and Phase-II because of: a) execution delays by LCOs, b) intervention of a few state governments (Kolkata and Chennai), and c) stay orders issued by High Courts for taking further extensions in some cities. Chennai is still not digitized due to pending case filed by the state-run Arasu Cable for DAS (digital access system) licence. The deferred billing process by MSOs and delayed signing of an official agreement with LCOs would delay the flow of revenue benefits to MSOs and broadcasters. Execution delays could limit upside for the stock in the near term. Weak macro-environment Macroeconomy continues to remain challenging, as overall economic growth has been impacted due to policy paralysis and a lack of reforms. However, FMCG companies have been expanding their reach and spending on advertisements. We expect A&P spends of FMCG companies to increase on the back of deceleration in volume growth, rural expansions and expansions in gross margins. However, a slowdown in rural economy could result in lower ad spends. If pressure on macroeconomy increases, then Sun TV would be impacted, as advertisement revenue contributes around 64% of its standalone revenues, while the FMCG sector accounts for 55% of total ad revenues. Intensification of competition Sun TV Network commands a lion's share of South India s television market, thanks to its extensive reach and varied content. Established players such as Star Network and Zee looking to refocus on this market, competition is bound to intensify. Sun has been facing serious competition in the Kannada market as well, where Suvarna TV has gained a market share. The market share erosion could narrow the premiumization gap in ad rates for Sun Network, which could impact revenue growth. Trai s ad cap to have substantive impact if yields remain at current levels The capping of the advertisement duration of 12mins/hour would have a substantive impact on Sun TV (flagship channel), as the prime-time advertisement duration is roughly 17mins/hour. To offset the impact of lower ad-minutes, the company has to take a significant hike in ad rates. If the regulation is implemented and Sun TV is unable to pass on the ad rate hike, its financials would be impacted substantively, since ad and broadcast revenues constitute 64% of its total revenues. Currently, Sun TV operates 17-18mins ad/hr, 50% higher than a 12mins/hr cap, which is to be implemented soon. We have highlighted below the sensitivity analysis for ad revenue and EPS. Exhibit 20: Ad growth and EPS sensitivity FY14E Change % Change in EPS Ad growth 10% -5% -8% EPS % -9% Risk s on promoter entity (Sun Direct) The main area of concern is potential ramifications of any unfavourable verdict of the Central Bureau of Investigation s (CBI) inquiry into Sun Direct s alleged illegal transactions in The CBI, as part of its probe into the case, has accused Dayanidhi Maran of forcing Chennai-based telecom promoter C. Sivasankaran to sell the stake in Aircel in 2006 to Maxis Group, a Malaysian firm owned by Kuala Lumpur-based business tycoon, T. Ananda Kris hnanare. The CBI is also investigating if an investment of Rs8.3bn by Krishnan's Astro All Asia Networks in Sun Direct TV was linked to Maxis' buyout of Siva. Any news flow on this matter, we believe, could create volatility in the stock price, and if the verdict goes against Mr. Maran, then it would weigh on the stock price significantly. Sun reported DTH revenues of Rs3.7bn in FY13 (19% to total revenues). We estimate that Sun Direct contributes major part of revenues. Although an adverse legal verdict may not halt operations of Sun Direct, potential penalties may impact growth prospects. This would provide competitors an opportunity to grab an incremental subscriber share. Emkay Research August 19,

13 Valuations Structural story intact, re-rating on cards Sun TV has been trading at a significant discount to Zee because of: a) ongoing CBI inquiry into one of the promoter group companies (Sun Direct) and Maxis investment in the telecom sector in 2006, b) continued delays in implementation of digitization in key areas of Sun TV s presence, and a) pressure on analogue cable subscription revenue due to re-launch of Arasu Cable in FY12. Clarity on the ongoing investigation, a clean chit to the group company s funding case, and rejection of a DAS licence to Arasu Cable would lead to a re-rating. However, in our view, it would continue to trade at a discount to Zee, as the subscriber reach of Zee is higher than that of Sun TV. Promising growth-drivers Broadcasting industry is entering a phase of promising revenue growth, as subscription revenue has an annuity model unlike ad revenues, which is cyclical due to its direct linkage to macroeconomic factors. Sun TV s dominant position in the broadcasting segment as well as the DTH segment would drive subscription going forward. With implementation of digitization, Sun TV has the potential to generate Rs6.6bn incremental revenue. Subscription revenues are expected to grow on the back of: 1) improving declaration due to digitization, 2) ARPU growth in digital cable, 3) Sun TV s dominant position in South, 4) higher revenue share from MSOs and continued subscriber on DTH platform. As given above, we estimate Rs6.6bn subscription revenue potential for Sun TV on full implementation of digitization. However, we remain cautious, anticipating slight delays in implementation of digitization, and assume Rs5.3bn potential revenue from digitization. This implies incremental per share NPV of Rs95 for Sun TV. Exhibit 21: Digitization-led upside potential PBT upside from digitization beyond FY15 (Rs mn) 5270 Tax outgo (Rs mn) 1,787 PAT upside (Rs mn) 3484 No. of Shares (mn) 394 EPS upside (Rs) 8.8 Valuation- P/E of 19x (Rs/share) 166 NPV/share (Rs) 95 Robust balance sheet with strong FCF generation Strong earnings growth is expected over the next 3 years, since incremental benefit due to digitization does not involve any additional cost. Robust FCF generation of Rs14.9bn over the next 2 years. Balance sheet to become stronger with cash and cash equivalents at Rs 14.6bn by FY15E. The balance sheet remains debt-free. The company has a strong dividend payout policy, with a >50% payout ratio. Promising drivers with strong cash generation to justify re-rating In the past, even without a strong earnings trigger, the company had traded at significant high multiples. Given the promising growth-drivers and robust cash generation, we expect the stock to move into new orbit. At the CMP of Rs 382, Sun trades at 19x/16.3x FY14E/15E earnings. We are valuing Sun TV at 19x on FY15E earnings and ascribe Rs 95/share value to incremental subscription benefit over the next 3-4 years. We arrive at a target price of Rs530, implying a 39% upside. Emkay Research August 19,

14 Exhibit 22: One-year forward P/E chart Sun TV-P/E band 24x 20x 16x 12x Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Oct-12 Dec-12 Feb-13 Apr-13 In the worst case scenario, we assume an ad revenue growth of 5% for FY14E/15E, and arrive at EPS of Rs19.5/20.6 for FY14/15E. The worst case EPS is 11% lower than our current estimate. If we ascribe 19x P/E to EPS of Rs20.6, we would arrive at a target price of Rs387, and add Rs 95/share NPV of digitization led revenue potential, our consolidated target price would stand at Rs 482 as against Rs530/share. We highlight that the recent price correction discounts most of the concerns. Our worst case scenario also has a target price of Rs 482, implying a 26% upside. Exhibit 23: Ad revenue and earning sensitivity FY14E Change % Change in EPS Ad growth 13.1% -5% -8% EPS % -9% FY15E Change % Change in EPS Ad growth 10.3% -5% -8% EPS % -9% Sun vs. Zee Entertainment Sun TV has been trading at a steep discount to Zee on account of the ongoing investigation into investments made by Astro in the DTH arm of Sun Group and the case related to Maxis telecom investments in India. Media reports indicate progress being made in the 2G case by the CBI, which should lead to the filing of a charge sheet against Sun TV promoters. Besides, continued delays are reported in implementation of digitization in regions where Sun has a presence. While the news flow related to the 2G case might remain adverse and keep the stock price volatile till further clarity emerges on the CBI charge sheet, we believe that current valuations (around 30% P/E discount vs. Zee) already reflect most of these negatives. Digitization: Zee has begun to see benefits of digitization in subscription revenue unlike Sun TV because of delays in digitization in Chennai, Hyderabad and Vizag. Political issues in these areas, we believe, would continue to be a drag on implementation of digitization and impact Sun TV s subscription revenue. However, if court ruling goes against Arasu Cable (TRAI has recommended that the government entity cannot own a cable distribution company and MSOs cannot have monopoly in any particular region), then it would be a significant positive for Sun TV. Zee has higher reach of close to 70-75mn analogue households, while Sun TV has 35mn households. We see scope for improvement in the market share for Zee, besides commanding higher subscription revenues. Nonetheless, Sun TV is already a clear winner. In FY13, Sun TV reported DTH revenues of Rs3.7bn as against Zee s Rs5.9bn, indicating the latter s higher reach. We remain positive on the broadcasting sector because of the ongoing digitization. Sun TV looks more attractive on the valuations front for the reasons given above. We believe that a discount between Zee and Sun TV valuations would continue till clarity emerges on either in the CBI case or Arasu Cable. Emkay Research August 19,

15 Nevertheless, Sun TV provides comfort to investors with a high payout ratio. The dividend payout for Sun TV stands at >50% compared to 30% for Zee. The dividend yield for Sun TV is at 2.6% as against 1.2% of Zee. Exhibit 24: Size and revenue benefit on Zee and Sun based on digitization implementation Domestic subscription revenue- FY13 (Rs mn) ,120 Subscription revenue (Digital + DTH)- FY16E ,913 Subscription revenue CAGR 26% 36% C&S TV subscriber HHs (mn) FY16E Assumptions Digital ARPU (Rs/month) Digital subscribers 67% 60% Analog subscribers 33% 40% Exhibit 25: Sun has been trading at a discount to Zee for a while now; we expect the discount to narrow going forward Zee SUN yr Fwd PE (x) 100% 80% 60% 40% 20% 0% -20% -40% Apr-06 Aug-06 Dec-06 Apr-07 Aug-07 Dec-07 Apr-08 Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Zee Sun TV Prem/Dis to Zee Ent P/E (RHS) Exhibit 26: Comparative financials Revenue (Rs mn) EBITDA (Rs mn) PAT (Rs mn) RoE % P/E (x) EV/EBITDA (x) Company FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E FY13 FY14E FY15E Zee Ent Sun TV Sun TV s financials does not include full impact of digitization (due to delay in digitization in the respective areas). For Zee we have included benefits arising from digitization in our projections Emkay Research August 19,

16 Company background Sun TV Network Ltd. is a leading broadcasting company operating 32 channels in South India, with a reach of more than 95mn HHs. Established on April 13, 1993, the company created and owns a variety of television channels and radio stations in multiple languages, covering all Indian states. Part of the Sun Group, it has a presence in TV broadcasting, radio, cable and DTH, film production/distribution and print media. Together with its subsidiaries (Kal Radio and South Asia FM, 97.8%/59.2% held by Sun), Sun TV operates 43 radio stations across India [23 stations of SAFM and 14 stations of Kal branded under Red FM] and undertakes movie production/distribution business under Sun Pictures. Sun TV Networks are the owners IPL Team, taken over from the Deccan Chargers in The team has been named Sunrisers Hyderabad. Exhibit 27: TV channel bouquet of Sun Group SD Channels Category Tamil Telugu Kannada Malayalam Entertainment Channels Sun TV Gemini TV Udaya TV Surya TV Music Channels Sun Music Gemini Music Udaya Music Surya Music Movie Channels K TV Gemini Movies Udaya Movies Kiran TV News Channels Sun News Gemini News Udaya News Old Song Channels Sun Life Gemini Life Comedy Channels Adithya TV Gemini Comedy Udaya Comedy Chirithira Kids Channels Chutti TV Kushi TV Chintu TV Kochu TV Action Movie Channels Sun Action Gemini Action Suriyan TV Surya Action HD Channels Category Tamil Telugu Kannada Malayalam Entertainment Channels Sun TV HD Gemini TV HD Music Channels Sun Music HD Movie Channels K TV HD Exhibit 28: Board of directors Name Kalanithi Maran Designation Executive Chairman K. Vijaykumar Managing Director & CEO Kavery Kalanithi S. Selvam Director Executive Director J. Ravindran Independent Director Nicholas Martin Paul M.K. Harinarayanan Independent Director Independent Director R. Ravivenkatesh Independent Director Source: Emkay Research, Company Emkay Research August 19,

17 Industry snapshot Exhibit 29: TV ad growth has been out-performing overall industry ad growth TV ad revenue growth to continue at healthy pace The Indian advertising industry has clocked a CAGR of 10.4% to Rs327bn over CY08-12, despite a tough macro-environment. TV, being the second-largest contributor to the total advertising industry, recorded a growth of 11.1% (CAGR) over FY13-15E. TV s share in the total ad industry has consistently grown from 36% in FY07 to 38% in FY12. TV s ad revenues, which grew 7.6% to Rs125bn in CY12, have been lower than the industry s advertising growth. However, going forward (FY12-17E), the TV advertising industry is expected to log a growth of 14.0% (CAGR) at par with industry growth. The share of TV in the advertising industry is expected to remain stable at 38.2% by CY17E, primarily because of increasing TV penetration levels and improving ad spends by FMCG companies. In our view, the digitization drive and the higher focus on rural economies would result in greater ad spend on TV. Being one of the largest contributors to the ad market, TV is likely to be a key beneficiary. Ad growth CAGR% (08-12) 2013E 2014E 2015E 2016E 2017E CAGR% (12-17E) TV Print Radio OOH Digital Advertising Total Source: FICCI KPMG Report 2013, Company Exhibit 30: Revenue split of television industry Subscription revenue growth to be backed by digitization Thanks mainly to increasing DTH subscribers, subscription revenues witnessed a CAGR of 11.6% over CY Currently, subscription revenue contributes 65% of total TV industry revenues, which are expected to inch up to 72% by FY17E, purely on the back of digitization. Subscription revenue is expected to grow at a CAGR of 20% to Rs607bn over FY12-17E. Out of total industry subscription revenues, a major portion is retained by LCOs because of subscriber under-reporting. Multi-system operators (MSOs) and broadcasters combined garner only 25-35% of total subscription revenues. TV E 2014E 2015E 2016E 2017E CAGR% (12-17E) Subscription Revenue Ad Revenue Total Source: FICCI KPMG Report 2013, Emkay Research Broadcasters to be key beneficiaries of digitization Digitization has finally kicked in with successful seeding of boxes in Delhi and Mumbai as well as in most of Phase-II cities. TRAI has also set the deadline for submission and validation of the subscriber KYC form for implementation of channel packaging. Benefits of digitization remain undisputed: under-reporting and a lack of strong intent from the government has plagued the industry for long. Digitization is expected to create transparency with every TV set in the country becoming paid. Although achieving a 100% declaration level would be gradual and would happen over long-term, the rate at which Phase-I and majority of Phase-II has been digitized is clearly indicative of strong willingness of all parties in the value-chain: broadcasters, MSOs and the government. Domestic subscription revenues have been plagued by subscriber under-reporting by LCOs. A low channel capacity of channels in the analogue signal regime has also resulted in demand for high carriage fees from broadcasters. New channels launched in recent years have been bleeding because of high carriage fees and net loss on subscription revenues. We expect subscription revenues to be driven largely by: a) improving subscriber declaration with ongoing digitization, b) increasing TV penetration, Emkay Research August 19,

18 c) higher revenue share for broadcasters, d) gradual rise in consumer ARPU (average revenue per user) growth (which would happen gradually), and e) continued growth in DTH. Going forward, with greater channel capacity, the carriage cost of broadcasters with a large bouquet of offerings would also decrease. Exhibit 31: Digitization to drive subscription revenue Rs bn % 36% % % % 48% 48% Ad Revenue Subscription Revenue Subscription of total broadcasting rev. Source: FICCI KPMG Report 2013, Emkay Research 60% 50% 40% 30% 20% 10% 0% India s estimated TV penetration at 61% is much lower vis-à-vis both developing and developed countries. Besides, the amount of time spent on TV viewing in the country is also comparatively low. Greater TV penetration and higher viewing-time would augur well for subscription and ad revenues going forward. Exhibit 32: TV penetration level amongst the lowest in India Exhibit 33: TV viewing time is also low compared to other countries 120% 100% 80% 60% 40% 20% 0% 90% 97% 98% 78% 61% India Indonesia Brazil Germany China Minutes per day US 240 UK 174 Indonesia China Vietnam India Source: FICCI KPMG Report 2012, Emkay Research Source: FICCI KPMG Report 2012, Emkay Research As per industry estimates, homes that own TVs are expected increase to 181mn by FY16E compared with around 150mn currently. Penetration of cable and satellite (C&S) in India is expected to increase to 95% by FY16E from the present 82%. The uptrend in C&S penetration and improving declaration levels are likely to sustain the industry s subscription revenue growth. Demand for high-quality content and increasing entertainment spends would drive subscription revenue growth. Exhibit 34: TV and C&S penetration to increase E 2013E 2014E 2015E 2016E No. of HHs in India (Mn) Growth Rate % 4% 3% 3% 3% 3% 3% 3% No. of TV HHs (Mn) Growth Rate % 9% 5% 5% 5% 4% 4% 3% TV penetration in India 59% 60% 61% 62% 62% 63% 64% No. of C&S HHs (Mn) Growth Rate % 12% 8% 9% 8% 7% 6% 6% C&S penetration 80% 82% 86% 89% 92% 93% 95% Source: Dish TV presentation, Emkay Research Emkay Research August 19,

19 Key drivers for subscription revenue growth going forward Under-reporting a past scourge; Good times are here Subscriber under-reporting and low consumer ARPU shared by LCOs (partly because of free connections provided to second and third TV sets) have adversely affected the analogue cable distribution sector. Hence, under-declaration of subscribers has benefited only LCOs in the analogue cable distribution industry. Digitization would improve subscriber declaration, besides increasing the subscriber ARPU. Currently, the digital cable ARPU is in the range of Rs , while base pack for DTH starts at Rs220/TV. The increase in ARPU of digital cable is unavoidable, since MSOs would not be able to operate with such low ARPU on the digital platform. If we calculate the rise in subscription revenues as a result of improving declaration, it would be 5x for the industry. ARPU growth is further expected to drive industry subscription revenues. A reduction in under-reporting and increase in ARPU are likely to result in a steady rise in subscription revenues, which would be incrementally positive for all concerned parties in the value-chain: MSOs, broadcasters and the government. Particularly for broadcasters, incremental subscription revenues would not entail additional investments. Broadcasters would benefit both from declaration and ARPU improvement. Further, a carriage fee for larger broadcasters is also expected to come down because of unrestricted channel capacity available on the digital platform. Higher revenue share for broadcasters Out of total industry subscription revenues, a major portion is retained by LCOs by way of subscriber under-reporting. MSOs and broadcasters combine garner only 25-35% of total subscription revenues. However, with digitization all parties in the value-chain would get their fair share. As mentioned in Exhibit 35, the broadcaster s share is expected to increase to 30-35% of subscription from the current 10-15%, thereby boosting subscription revenues going forward. Exhibit 35: ARPU share of broadcaster was eaten up by LCOs in the pre-digitization scenario Stake-holder revenue share Pre-digitization Post-digitization Consumer ARPU 100% 100% LCO 65-70% 35-50% Distributor 5% 0-5% MSO 15-20% 25-30% Broadcaster 10-15% 30-35% Source: FICCI KPMG Report 2012, Emkay Research ARPU growth is inevitable Going forward, the ongoing digitization process is expected to be the push factor for ARPU growth. Increasing demand for higher number of channels, good quality content and value-added services would lead to a higher payout from customers. With digitization, the second and third TV sets would become paid and thus benefiting broadcasters. Dish TV expects ARPU of Rs250 in medium term v/s current ARPU of Rs157. The same way we believe Digital Cable ARPU will improve to justify business model. Since November 2011, DTH operators have hiked package prices thrice, indicating that operators do not have any other option to offset increasing costs and curtail losses. MSOs have launched packages starting at Rs150 for the base pack, while premium packages are priced at over Rs225/TV. These packages fall short in terms of number of channels and quality of services compared to DTH. MSOs cannot have a viable business model at current ARPU levels. After losing money for many years, MSOs have turned their focus on profitability, which would be driven largely by higher pricing. Besides, any increase in ARPU for MSOs would also translate into a higher revenue share for broadcasters. As digitization proceeds towards Phase-III and Phase-IV, we believe, consumers would pay for quality of services and higher number of channels. Secondly, free services provided for the second and third TV sets would be eliminated from the system. Going forward, ARPU would be driven largely by a higher number of channels and better quality of services. Moreover, value-added services, including pay per view, movie on demand, etc., and demand for HD would support the increase in ARPU. Emkay Research August 19,

20 Exhibit 36: ARPU to trend upwards going forward ARPU (Rs) P 2014P 2015P 2016P Analog Digital DTH IPTV Source: FICCI KPMG Report 2012, Emkay Research and growing DTH subscribers would continue to drive revenues Our channel-checks suggest that the DTH industry has garnered 15-20% of the 32mn analogue subscriber base during Phase-I (metros) and Phase-II. We expect a similar share for DTH in Phase-III, while in Phase-IV DTH would have higher penetration. This could be partly driven by a lack of established brand presence of DTH and scarcity of infrastructure for digital cable. Sun has ARPU of Rs38 and Rs4 in DTH and analogue cable, respectively. Management, which expects digital cable ARPU to remain lower than DTH, looks forward to ARPU of Rs25 with the full implementation of digitization. In our opinion, healthy DTH subscriber growth and high ARPU would continue to drive subscription revenues. Phase-IV and cable dark areas would continue benefit the DTH industry in the incremental subscriber addition. Exhibit 37: DTH subscriber growth to remain strong Subscriber in Million 100 CAGR 15% (FY13-16E) E 2014E 2015E 2016E TV ad revenue growth to continue at healthy pace TV ad revenues, which grew 7.6% to Rs125bn in CY12, have been lower than industry advertising growth. However, going forward (FY12-17E), the TV advertising industry is expected to log a growth of 14.0% (CAGR) at par with industry growth. Being the second-largest contributor to the total advertising industry, TV s share has increased from 36% in CY07 to 38% in CY12. TV ad revenues have reported a growth of 11% to Rs125bn, which has been higher than industry ad growth. Going forward, the share of the TV in the ad industry is expected to remain stable at 38.2% by FY17E because of increasing TV penetration levels and improving ad spends by FMCG companies. The TV advertising is expected to clock a growth of 14% (CAGR) over FY12-17E in line with industry growth. In our view, the digitization drive and higher focus on rural economies would increase ad spend across media platforms. Being one of the largest contributors to the ad market, TV is likely to be a key beneficiary. Exhibit 38: TV ad growth has been out-performing overall industry ad growth Ad Revenue CAGR% (CY08-12) 2013E 2014E 2015E 2016E 2017E CAGR% (CY12-17E) TV Print Radio OOH Digital Advertising Total Source: FICCI KPMG Report 2013, Company Emkay Research August 19,

21 A&P spends of major FMCG companies poised for double-digit growth over the next 3 years Notwithstanding the economic slowdown, advertisement and promotion (A&P) spends by major FMCG companies of Emkay universe (highlighted in Exhibit 39) have been buoyant at 19.3% (CAGR) over FY08-FY12. Out of total A&P spends, advertisement is the major contributor. Hence, if A&P grows at a healthy pace, it would also translate into higher ad spends. TV advertising industry reported a growth of 11% (CAGR) during CY08-12, driven on the back of rising A&P spend by FMCG companies (highlighted in the exhibit below). A&P spends of FMCG companies (highlighted in Exhibit 39) clocked a growth of 18.2% over the same period, which is indicative of a similar trend across the industry. For instance, when Hindustan Unilever Ltd. (which contributes around 10% of the advertising industry s total revenues) bridled its ad spends last fiscal, it caused a perceptible impact on revenues of broadcas ters, leading to moderation in their revenue growth. FMCG companies contribute 45-50% of total volumes of TV advertisements. Our FMCG analyst estimates that major companies A&P spends would rise at a CAGR of 16.1% over FY13-15E. Ad spends of FMCG companies are expected to be driven by increasing penetration of TV in rural areas and Tier-II towns. Robust ad spends by FMCG companies are likely to continue to drive ad revenues for broadcasters. In our report on Steady Ad Growth in FY14, released in February 2013, we had underscored the possibility of FMCG companies ad spends increasing with volume growth coming under pressure. A similar trend has been noticed historically, too. FMCG companies have been facing a volume slowdown, which tend to limit the scope for a price hike required for revenue growth. The market share and mind the share would happen purely on the back of ad spends and promotions. In our view, an increase in A&P spends would be the primary option to drive volumes in the current scenario. Exhibit 39: Advertisement and Promotion spends by major FMCG companies Company (Rs mn) FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E CAGR (FY13-15E) HUL % % of sales Jubilant Foodworks % % of sales Colgate % % of sales GSK Consumer * % % of sales Asian Paints % % of sales Marico % % of sales Nestle India * % % of sales GCPL % % of sales Berger Paints % % of sales *HUL ad spends for FY09 is for 15months. * Nestle and GSK are CY ending Emkay Research August 19,

22 Key Financials (Consolidated) Income Statement Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E Net Sales 18,472 19,230 23,265 25,836 Growth (%) Expenditure 4,328 5,139 7,118 7,861 Raw Materials Employee Cost 1,859 1,994 2,074 2,303 Other Exp 2,469 3,145 5,044 5,558 EBITDA 14,143 14,091 16,147 17,975 Growth (%) EBITDA margin (%) Depreciation 4,736 4,417 4,984 5,183 EBIT 9,408 9,674 11,164 12,792 EBIT margin (%) Other Income Interest expenses PBT 10,145 10,347 11,955 13,745 Tax 3,317 3,306 4,039 4,595 Effective tax rate (%) Adjusted PAT 6,828 7,042 7,915 9,150 Growth (%) Net Margin (%) (Profit)/loss from JVs/Ass/MI Adj. PAT After JVs/Ass/MI 6,929 7,096 7,971 9,214 E/O items Reported PAT 6,929 7,096 7,971 9,214 PAT after MI 6,929 7,096 7,971 9,214 Growth (%) Cash Flow Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E PBT (Ex-Other income) 9,349 9,625 11,124 12,750 Depreciation 4,736 4,417 4,984 5,183 Interest Provided Other Non-Cash items Chg in working cap -6, , Tax paid -3,317-3,306-4,039-4,595 Operating Cashflow 4,288 10,277 9,879 12,482 Capital expenditure -4,175-4,456-3,706-3,740 Free Cash Flow 113 5,821 6,173 8,743 Other income Investments Investing Cashflow -2,907-4,234-2,876-2,744 Equity Capital Raised Loans Taken / (Repaid) Interest Paid Dividend paid (incl tax) -4,351-4,380-4,611-5,072 Income from investments Others 6,101 3,126 4,795 7,212 Financing Cashflow 1,691-1, ,098 Net chg in cash 3,072 4,740 7,148 11,836 Opening cash position 6,023 3,072 4,740 7,148 Closing cash position 3,072 4,740 7,148 11,836 Balance Sheet Y/E Mar (Rsmn) FY12A FY13E FY14E FY15E Equity share capital 1,970 1,970 1,970 1,970 Reserves & surplus 24,169 26,884 30,244 34,387 Net worth 26,139 28,855 32,215 36,357 Minority Interest Secured Loans Unsecured Loans Loan Funds Net deferred tax liability Total Liabilities 26,770 29,486 32,846 36,988 Gross Block 31,597 34,777 37,657 40,537 Less: Depreciation 19,121 22,262 26,420 30,743 Net block 12,476 12,515 11,237 9,794 Capital work in progress Investment 2,244 2,744 2,744 2,744 Current Assets 14,303 17,172 22,478 28,127 Inventories Sundry debtors 5,090 5,868 7,390 7,475 Cash & bank balance 3,072 4,740 7,148 11,836 Loans & advances 5,739 5,975 7,229 8,028 Other current assets Current lia & Prov 2,288 2,980 3,648 3,713 Current liabilities 2,288 2,980 3,648 3,713 Provisions Net current assets 12,015 14,192 18,829 24,415 Misc. exp Total Assets 26,770 29,486 32,846 36,988 Key Ratios Y/E Mar FY12A FY13E FY14E FY15E Profitability (%) EBITDA Margin Net Margin ROCE ROE RoIC Per Share Data (Rs) EPS CEPS BVPS DPS Valuations (x) PER P/CEPS P/BV EV / Sales EV / EBITDA Dividend Yield (%) Gearing Ratio (x) Net Debt/ Equity Net Debt/EBIDTA Working Cap Cycle (days) Emkay Research August 19,

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