Sun Direct plans Capex of Rs 300-400 cr per fiscal over the medium term

Direct to home (DTH) operator Sun Direct has planned a Capex of Rs 300-400 crore per fiscal over the medium term. The company expects cash accrual of over Rs 500 crore per fiscal in 2020 and 2021.

Crisil has upgraded its ratings on bank facilities of Sun Direct TV Private Limited (Sun Direct) to ‘CRISIL A-/Stable/CRISIL A2+’ from ‘CRISIL BBB+/Stable/CRISIL A2’.

The rating upgrade reflects Crisil’s expectation of improvement in Sun Direct’s business risk profile, driven by healthy subscriber additions and sustained growth in average revenue per user (ARPU).

The company reported healthy growth in earnings before interest, taxes, depreciation, and amortisation (EBITDA), for the nine months ended 31st December 2019, as the active subscriber base grew by over 20 lakh, while average revenue per user (ARPU) was up by nearly Rs 20. Sun Direct’s gross subscriber base stood at 19.36 million as of 31st December 2019.

Sun Direct reported EBITDA of Rs 477 crore (EBITDA margin of 28.3%) for the nine months ended 31st December 2019, as compared to Rs 413 crore (EBITDA margin of 25.5%) for fiscal 2019.

The DTH operator’s net profit for FY19 has narrowed to Rs 10 crore from Rs 45 crore in FY18. Revenue rose to Rs 1602 crore on the back strong subscriber addition compared to Rs 1367 crore.

According to Crisil, the implementation of the new tariff order (NTO), has been beneficial for Sun Direct, as few subscribers have migrated from other platforms like cable to direct-to-home (DTH). Thus, despite an increase in ARPU, Sun Direct has added healthy pay subscribers during nine months ended 31st December 2019.

It expects EBITDA to improve further over the medium term, aided by healthy subscriber addition, increased HD penetration and improvement in ARPU.

The ratings continue to reflect Sun Direct’s established market position in South India, healthy debt protection metrics, and high financial flexibility. These strengths are partially offset by a weak capital structure and exposure to risks inherent in the DTH industry.

Sun Direct enjoys strong liquidity, driven by cash and cash equivalents of Rs 190 crore as on 31st December 2019, and cash accrual of over Rs 500 crore expected per fiscal in 2020 and 2021.

This, Crisil said, should comfortably cover the long-term debt repayment of around Rs 120 crores in fiscal 2021, and planned Capex of Rs 300-400 crore per fiscal, over the medium term. Fund-based limit of Rs 65 crore was utilised only to an extent of 30%, on an average over the 12 months ended 31st January 2020.

Sun Direct has a strong presence, with over 45% market share among DTH operators in South India, as on December 31, 2019. The business strategy remains focused on this region, which contributes around 90% of the total subscriber base. However, the company has made efforts to widen its geographic reach, by launching services in Maharashtra, Odisha and West Bengal, last year.

Availability of additional transponder space during fiscals 2018 and 2019, has helped offer more channels and led to healthy growth in subscriber base. Besides, implementation of NTO has also benefitted Sun Direct, as few cable subscribers have moved to the DTH platform.

Shareholders have invested Rs 1,088 crore over the five fiscals through 2016, in addition to providing personal guarantees against term loans. Sun Direct remains strategically important to the Sun group, as it complements the flagship broadcasting business, and reinforces its market position as a media conglomerate.

Though promoters have not invested in Sun Direct during the past two fiscals due to healthy internal accrual, need-based financial support continues to underpin the high financial flexibility.

Continued net losses until fiscal 2016, led to large accumulated losses. Though the company has reported profit over the past three fiscals, networth may remain negative in fiscal 2020. However, with sustained growth in profit, networth is expected to turn positive in the medium term.

The DTH industry involves large capital expenditure, as operators need to incur significant establishment costs (installation service, and software, operation, and customer support) and operating expenses (advertising as well as the cost of acquiring subscribers) to ensure sustained ramp-up in scale.

They also face intense competition from other DTH operators and local cable television providers. Furthermore, there are risks of technological obsolescence in the future, and change in consumer behaviour such as acceptance of over-the-top (OTT) platforms.

Sun Direct, a Chennai-based DTH operator, began operations in December 2007. Maran Group holds 80% equity in Sun Direct and the remaining 20% is held by South Asia Entertainment Holdings Ltd, Mauritius, an investment arm of All Asia Networks Plc, Malaysia’s leading cross-media group.

On February 2, 2017, the special court dismissed the Aircel-Maxis case acquitting all accused, including Sun Direct and its promoters. Subsequently, CBI had also filed a revision petition in Delhi High Court which is pending adjudication.