Sun TV Network. Company Report Industry: Media Entertainment. Dominant South player; to benefit from huge digitization potential

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1 Company Report Industry: Media Entertainment Sun TV Network Dominant South player; to benefit from huge digitization potential Balwindar Singh

2 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 Regional broadcasting has emerged as a new growth driver over the last few years Regional advertising - gaining ground Indian Premier League- expect IPL to turn profitable in FY Addressing problems arising out of TRAI ad cap Implementation of digitization in Tamil Nadu will solve the Arasu cable problem SUN TV - undisputed leader in the South Business Background Key Management Personnel Risks SUN v/s Zee Financials Expect SUN s revenues to increase at a CAGR of 13% over FY14-16E driven by 18% YoY increase in domestic subscription revenues EBITDA likely to increase by 14% over FY14-16E; PAT growth of 17% RoE/ROCE to expand by 220bps/310bps over FY14-16E Balance sheet to strengthen further Valuations Annexure South India Media & Entertainment Industry Television industry in South India is expected to grow at a CAGR of 20.0% TV subscription revenues to grow at 23% CAGR over FY New channel launches in South India in last one year 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 June 20,

3 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 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) M Avg. Daily value (Rs m) Major shareholders Promoters 75.00% Foreign 16.00% Domestic Inst. 2.00% Public & Other 7.00% 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 Stock Performance (%) 1M 6M 12M Absolute Relative (2.0) (3.9) (14.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff Price Performance (RIC:SUTV.BO, BB:SUNTV IN) (Rs) Source: Bloomberg Key financials (Y/e March) E 2016E Revenues (Rs m) 19,531 22,236 25,069 28,425 Growth (%) EBITDA (Rs m) 14,392 15,097 17,124 19,530 PAT (Rs m) 7,096 7,480 8,638 10,179 EPS (Rs) Growth (%) Net DPS (Rs) Profitability & Valuation E 2016E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data; PL Research

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 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. June 20,

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 % Chennai % Coimbatore % Others % Andhra Pradesh % Hyderabad % Vishakhapatnam % Others % Karnataka % Bangalore % Mysore % Others % Kerala % Total of South India states % Phase-I (Chennai) % Phase-II (Bangalore, Coimbatore, Hyderabad, Vishakhapatnam, Mysore) % Source: PL Research June 20,

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) Current DTH subscribers (m) Digitization Opportunity- No. of subscribers (m) Success probability of digitization 70.0% 75.0% 80.0% No. of probable subscribers (m) Penetration of SUN TV 70.0% 75.0% 80.0% No. of probable SUN subscribers (m) Churn to DTH 30.0% 35.0% 40.0% Subscribers opting for DTH (m) Incremental DTH ARPU (Rs) Incremental DTH revenues (Rs m) 1,874 2,510 3,264 Subscribers opting for digital cable (m) Incremental Digital ARPU post digitization (Rs) 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 1,275 1,528 1,812 Incremental PAT owing to digitization (Rs m) 2,588 3,102 3,678 No. of shares Incremental EPS Assigned P/E Upside potential in stock (Rs) NPV- Rs/share June 20,

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 Rs 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 Rs 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 topline is reported as broadcast fee; ~6-8% is included under advertising revenues as SUN retains three minutes/thirty minutes of primetime advertising. June 20,

8 (Rs m) Sun TV Network Exhibit 4: Broadcasting revenues Broadcast fees Broadcast revenues as a % of total (RHS) 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 1,640 1,537 1,436 1,267 1,270 1,302 FY11 FY12 FY13 FY14 FY15E FY16E 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Exhibit 5: Reported EBIT margins - Sun v/s Zee 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 6: Adjusted EBIT margins - Sun v/s Zee Sun Zee SUN excl. broadcast fees ZEE excl. sports 60% 60% 53% 53% 46% 46% 39% 39% 32% 32% 25% 25% 18% FY11 FY12 FY13 FY14 FY15E FY16E 18% FY11 FY12 FY13 FY14 FY15E FY16E 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 FY 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. June 20,

9 (m) (Rs m) Sun TV Network DTH subscribers for SUN totalled 10.2m at the end of FY14 and have grown at a CAGR of 13% over FY 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 Exhibit 8: SUN s DTH revenues & growth Sun's DTH subscribers YoY gr. (RHS) DTH revenues YoY gr. (RHS) % 50% 40% 30% 20% 10% 0% 7,000 6,000 5,000 4,000 3,000 2,000 2,900 3,330 3,730 4,492 5,139 5,897 60% 50% 40% 30% 20% 10% 0% 1.0 FY11 FY12 FY13 FY14 FY15E FY16E -10% 1,000 FY11 FY12 FY13 FY14 FY15E FY16E -10% 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 FY % of total subscribers 23.6% 76.4% Revenues in FY14 (Rs m) 4,492 1,957 % of subscription revenues 69.7% 30.3% ARPU June 20,

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 Regional Movies 3.4% Regional News 3.6% Music 3.6% Kids 7.5% Hindi Movies 15.1% Others 18.6% Source: FICCI-KPMG Report2014, PL Research Hindi GEC 30.0% Regional GEC 18.0% Exhibit 11: Viewership share of regional channels in CY13 Bengali 11% Kannada 12% Malayalam 6% Marathi 14% Others 6% Source: FICCI-KPMG Report2014, PL Research Tamil 27% Telugu 24% June 20,

11 (Rs bn) Sun TV Network 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 Exhibit 13: Advertisement expenditure by genre Tamil Nadu Andhra Pradesh Karnataka Kerala FY13* FY14E FY15E FY16E FY17E English News+Ente rtain 9.7% Others 20.2% Hindi Movies 6.7% Hindi News 8.6% Hindi GECs 27.1% Regional GECs+News +Movies+M usic 27.7% Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research Source: FICCI-KPMG Report 2014, PL Research June 20,

12 (Rs m) Sun TV Network 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 ~Rs m 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 FY15- Year 2 Losses will be lower than FY14 FY16- Year FY17- Year FY18- Year Exhibit 15: IPL financials 2,000 1,500 1,000 1,040 IPL revenues IPL PAT 1,293 1,123 1,483 1, (500) (162) (261) (354) FY14 FY15E FY16E FY17E FY18E June 20,

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, 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. June 20,

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 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. June 20,

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) Competition Market Share 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). June 20,

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). June 20,

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 DTH revenues 21.5% Others 6.0% Cable subscription 9.4% Advertising income 51.1% Program licensing income 6.0% Broadcast fees 6.1% 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 June 20,

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 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, Mr. Vijaykumar served as a Senior Vice President at Kannada Programmes until March Mr. Vijaykumar served as the Chief Operating Officer of Sun TV Network from March 2011 to July Kaveri Kalanithi - Executive Director: Mrs. Kavery Kalanithi Maran served as the Managing Director at Sun TV Network since April 20, Mrs. Maran served as the Chairman at SpiceJet since November 2010 and has been its Non- Executive Director since November 15, She has been an Executive Director of Sun TV Network since April 20, She served as a Director of Sun TV Network from June 16, 2005 to April 20, She holds a Bachelor's Degree in Arts from University of Madras. June 20,

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. June 20,

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 Digitization- Phase-III/IV Reach Other issues Loss-making business currently Zee has already seen some benefits flowing in from Phase-I/II. Gross billing remains the next trigger Huge opportunity for Zee Zee has higher reach of 70-80m households NA Sports FY15E losses of Rs800m Phase-I digitization in Chennai not yet kicked off. In Phase-II, Hyderabad, Coimbatore, Vizag remain laggard Big opportunity for Sun as Phase-III/IV collectively account for ~85% of the total subscriber base in South India SUN is predominantly a South India focused player. Reaches 30-40m households Ongoing case against SUN Direct promoters remains a major overhang Sunrisers Hyderabad 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 June 20,

21 (Rs m) Sun TV Network 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 Exhibit 22: Subscription revenues contribution set to surge Consol revenues YoY gr. (RHS) Advertising Subscription Broadcast fees Others 30,000 25,000 20,000 15,000 10,000 5,000 - FY11 FY12 FY13 FY14E FY15E FY16E 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 100% 80% 60% 40% 20% 0% 14% 9% 7% 8% 6% 5% 5% 26% 27% 27% 29% 31% 32% 52% 56% 60% 53% 53% 52% FY11 FY12 FY13 FY14E FY15E FY16E 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. June 20,

22 (Rs m) (Rs m) Sun TV Network Exhibit 23: EBITDA & EBITDA margins Exhibit 24: PAT and PAT growth Consol EBITDA Margin (RHS) Consol PAT YoY gr. (RHS) 25,000 20,000 15,000 10,000 5,000 - FY11 FY12 FY13 FY14E FY15E FY16E 80.0% 75.0% 70.0% 65.0% 60.0% 12,000 10,000 8,000 6,000 4,000 2,000 0 FY11 FY12 FY13 FY14E FY15E FY16E 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% -10.0% -20.0% 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 RoE RoCE 60.0% 50.0% 51.2% 40.0% 30.0% 20.0% 37.2% 37.6% 35.5% 33.2% 34.6% 29.1% 26.8% 25.4% 26.4% 36.3% 27.6% 10.0% 0.0% FY11 FY12 FY13 FY14E FY15E FY16E June 20,

23 (Rs m) (Rs m) Sun TV Network 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 9,000 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000-8, ,117 6,496 7,617 8,461 FY11 FY12 FY13 FY14E FY15E FY16E Exhibit 27: Cash (incl. Investments) 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000-8,747 5,319 6,599 10,781 13,053 16,335 FY11 FY12 FY13 FY14E FY15E FY16E Exhibit 28: Expect dividend payouts to remain high FY11 FY12 FY13 FY14 FY15E FY16E Dividend (Rs m) 3,448 3,744 3,744 3,744 4,335 4,729 No. of shares (m) DPS (Rs) EPS (Rs) Dividend payout % 44.8% 54.0% 52.8% 50.0% 50.2% 46.5% June 20,

24 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 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 Sun TV Network 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 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 Exhibit 30: 1yr. Forward EV/EBITDA P/E (x) Peak(x) Avg(x) Median(x) Min(x) , , , , ,000 50, x 11.5x 9.0x 6.5x 4.0x Source: Company Data, Bloomberg, PL Research Source: Company Data, Bloomberg, PL Research June 20,

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 Media-wise split (Rs bn) FY13* FY14E FY15E FY16E FY17E CAGR '13-'17 Film % Television % Print % Radio % New Media % South India M & E market size % Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research 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 Print 27.9% RadioNew Media 1.8% 2.9% Film 11.2% Exhibit 33: Split of South India M & E market by states in FY13 Karnataka 18.7% Kerala 14.4% Tamil Nadu 36.2% Television 56.3% Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research Andhra Pradesh 30.7% Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research Tamil Nadu M&E industry is worth Rs84bn in FY13 and is expected to grow at a CAGR of 17% over FY 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. June 20,

26 Exhibit 34: South India Media and Entertainment market State wise split (Rs bn) FY13* FY14E FY15E FY16E FY17E CAGR '13-'17 Tamil Nadu % Andhra Pradesh % Karnataka % Kerala % South India M & E market size % 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) FY13* FY14E FY15E FY16E FY17E CAGR '13-'17 Subscription revenues % Ad revenues % Content revenues % TV Industry in South India % Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research Exhibit 36: Split of South India TV market by medium in FY13 Advertisement 29.7% Content 3.9% Exhibit 37: Split of South India TV market by medium in FY17 Advertisement 24.2% Content 3.1% Subscription 66.4% Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research Subscription 72.6% Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research June 20,

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) FY13* FY14E FY15E FY16E FY17E CAGR '13-'17 Tamil Nadu % Andhra Pradesh % Karnataka % Kerala % TV subscription market in South India % Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research 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% Source: Deloitte-FICCI The Digital March, Media & Entertainment in South India, PL Research 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. June 20,