Star-Viacom18 merger a potential double whammy for Sun TV: Motilal Oswal

Sun TV Network reported a largely in-line 2QFY25, with revenue and EBITDA declining 12% and 26% YoY, respectively (on a high base). A modest 2% YoY recovery in ad revenue (versus -5% YoY in 1Q, -8% YoY for Zee) was offset by lower movie production revenue, higher direct costs and other expenses.

Recovery in ad revenue remains the key near-term monitorable, as per analysis done by Motilal Oswal Financial Services. However, Motilal Oswal believes the impending Star-Viacom merger could be a potential double whammy for Sun TV due to:

Higher competition from deep-pocketed player for ad revenue in the core business
Potential downward revision in IPL media rights in the next renewal cycle (from FY28), which would significantly impact Sun TV’s IPL franchise (SRH).

Motilal Oswal’s FY25-26 earnings estimates are broadly unchanged. It builds in a revenue/ EBITDA CAGR of ~4% over FY24-27, with core business recording 5%/ 8% revenue/ EBITDA CAGR.

Sun TV trades at ~15x one-year forward P/E (vs. 12x average PE in last 5 years). We believe the impending Star-Viacom merger could lead to a de-rating. Motilal Oswal maintains its Neutral rating with a revised TP of INR670, based on 10x Dec’26 EV/Sales for sports, 8x Dec’26 EV/EBITDA for core TV business, and INR92b cash holdings.

Sun TV’s overall revenue declined 12% YoY to Rs 9 billion (inline) as 2QFY24 had a boost from the release of ‘Jailer’. Advertising revenue at Rs 3.4 billion (3% ahead) was up 2% YoY (vs. -8% YoY for Zee). Subscription revenue at Rs 4.4 billion (2% ahead) was up 4% YoY (vs. +9% YoY for Zee).

Operating expenses were up 23% YoY to Rs 3.7 billion driven by spike in production cost (+29% YoY) and higher other expenses (+34% YoY).

EBITDA declined 26% YoY to Rs 5.3 billion (in line) as margin contracted 1160bp YoY to 58.8% (220bp below).

Depreciation inched up sharply QoQ to Rs 1.9 billion (vs. our estimate of Rs 1.2 billion), while other income grew 53% YoY to Rs 1.6 billion (vs. our estimate of Rs 1.3 billion).

Net profit declined 13% YoY to Rs 4 billion (3% miss) as the higher other income and lower tax rate were offset by higher depreciation and slightly lower EBITDA.

For 1HFY25, Sun TV’s revenue/ EBITDA/ PAT declined 7%/ 18%/ 9% YoY due to the lower contribution from movie production and higher opex.

1HFY25, OCF declined ~19% YoY to Rs 9.2 billion due to ~18% decline in EBITDA. Capex decline of ~37% YoY to Rs 1.7 billion led to FCF generation of Rs 7.4 billion (-13% YoY). Despite paying a dividend of Rs 2 billion, Sun TV’s net cash increased to Rs 76 billion (from Rs 67 billion at end-Mar’24).

For 2HFY25, the ask-rate for revenue/ EBITDA growth is 8%/ 14%, contingent on recovery in ad revenue.