Maintain ad revenue guidance of 12% for FY14: Sun TV

Sun TV maintains its advertisement growth guidance of 12 percent for FY14, says SL Narayanan, Group CFO. The company witnessed slight slippage in ad revenue in the September quarter, but Narayanan is confident that the company will perform better on this front in the December quarter since October-December period is driven by festivals and is the best quarter for Sun TV’s ad business.

Speaking to CNBC-TV18 post Q2 results, Narayanan says the company is hopeful of retaining 75 percent level on margins going ahead. The company posted a net profit at Rs 169 crore versus Rs 151.7 crore for the same period last year. Below is the verbatim transcript of SL Narayanan’s interview on CNBC-TV18 Q: The margins this time have slipped to 72.5 percent versus 76 percent, same quarter last year. What kind of pressures have you faced in your operational performance this quarter and do you expect that to continue? A: If you break down revenue growth from 7.6 percent, the constituent parts that are advertising and subscription revenues; the subscription revenues have been exceptionally good because if you look at our cable revenues, they have grown by almost 45 percent. It was Rs 33.9 crore same time last year and has gone up to almost Rs 50 crore this quarter. The global revenue that we license to networks abroad is up by about 29 percent, helped by weak rupee and DTH revenues are up by almost 21 percent. So, the subscription revenue part of the business has done exceedingly well. What has not done so well is the advertising part because there is new mandate which has capped the number of minutes to no more than 60 minutes per hour between July-September which has further been reduced to 12 minutes starting October 1. This is something which has required some tweaking of rates and therefore, there is some lumpiness in that part of the business. We had guided that for the full year advertisement revenues would be up by about 12 percent. At this time, we are still holding to that guidance so you will see the advertisement revenue coming back in full flow beginning December quarter because the best quarter for Sun TV’s ad business is the time between October-December because a lot of advertising is Diwali driven or pooja driven or Christmas or new year’s eve driven. Even December quarter of last year was exceptionally good, we had 19 percent growth in ad revenues. Therefore, net-net ad revenues despite the slight slippage in September quarter which is largely due to transition from the earlier dispensation to the new Telecom Regulatory Authority of India (TRAI) dispensation, I would say the numbers are extremely good. Q: If you can break 12 minute cap and the fact that you would have raised ad rates, going forward what would be the net impact? Would we see these margins now in early 70s trajectory or will they still be back to 75-76 percent beginning December quarter or maybe quarter after that? A: Let’s stay away from very precise numbers because if we look at the subscription revenue part of the business, we are adding revenues with practically zero cost there because it is largely on account of revenues that are discovered because we are having full visibility into the customers that are paying for our content. So, on the wash between advertising and subscription, we should be going back to the 75 percent margin in a couple of quarter from now. Q: I didn’t get the exact ad revenue growth for this quarter. You said that you will stick to your 12 percent growth target for the year but what has it been in Q2? A: I think Q2; the numbers were down by about 4.5 percent. Q: Were there any other higher content cost that you had to face that pressurized your margins this time? A: No, it is because of the change in the mix and the change in the number of minutes that sellout. So, this is a transition – at the end of the day one doesn’t know how much to tweak the tariff by in order to protect the overall growth number. There were several moving parts because the number of minutes have to be managed across the bouquet of channels and also, the extent of price rise has to be administered in such a way that the customers are also willing to take those increases and yet not compromise on the number of minutes. Q: Given your dominant position and the fact that this 12 minute cap has now set in, do you think you will be required to take more advertising price hikes and will you be in a position to take those hikes? A: Most hikes have already been passed on but we would be holding on to the overall guidance of 12 percent growth in ad revenues but at the same time we thought that our subscription revenues would grow 25 percent year-on-year. That number seems to be going far more than 25 percent because the cable revenues are up by almost 45 percent and that is a large opportunity that we are looking forward to because most homes are still being served by an analog. Q: The ad revenue degrowth that you spoke about is what has spooked your investors because the stock is down about 5.5 percent but what was the contribution from phase II digitisation in this quarter’s performance? A: Even the phase II digitisation has not played out completely because in Andhra Pradesh, Vizag has still not gone completely digital, Hyderabad has turned digital towards the end of Q2, Bangalore went through reasonably well and in Tamil Nadu, which is one of our largest catchment markets, both Chennai and Coimbatore have still not gone fully digital because of various legal actions that are pending in several places. So once those bottlenecks are removed, I think the revenues from the subscription side of the business should see a fairly prodigious growth.