Cautious with dividend payout due to pandemic: SL Narayanan, Sun Group

You do not see a pandemic every other day, that is a reason why we went with a little bit of caution, said SL Narayanan, Group CFO, Sun Group to ET Now. has been under fire from investors after a cut in its FY21 annual dividends. In the past five years the company’s dividend payout ratio was at an average of 49 per cent, which has now reduced to 13 per cent during the past fiscal. Edited excerpts:

There has been strong subscription revenue growth and advertising revenue. What has been the impact of the pandemic on your quarterly performance and what has driven your numbers?

I must say the pandemic effects were more substantial towards the end of December. If you look at the year as a whole, the first quarter which ended June of 2020, our revenues fell by almost 66%. But that degrowth reduced to about 27% in the September 2020 quarter. In the most recent quarter, we have actually posted a growth of about 8% over March 2020.

So, we have had a very nice lift up. If my memory serves me right, we have Rs 126 crore of ad revenues in June and we have touched about 300 plus in the most recent quarter which is almost two and a half times the run rate of the first quarter of the last fiscal. Net-net the mood has substantially become better.

The real question to ask ourselves is will we outdo the revenue run rate of FY20, because FY21 the industry revenues fell by about 20%. People like us who are very heavily dependent on the national FMCG advertisers we degrow by a slightly bigger number. But this year everybody is going to grow because the base is so small. The real million-dollar question that I asked myself is will we outdo the numbers of FY20 and that is going to be a function of the GDP growth.

The low dividend payout this time around has been a point of contention given the cash on the balance sheet of approximately Rs 3,800 crore. Walk us through the reason for the same. Is there a plan on the long haul to look at a buyback to flush out the excess cash in the balance sheet in FY22?
I am glad you have raised this question, so let me set this perspective first. I have been with Sun for more than a decade now. I just complete the 10 years. Let us just look at the time period from financial year ended 2011 to the financial year ended 2020. We have distributed something like Rs 5,700 crore and our dividend payout ratio has never fallen below 50%. In the year FY20, which is the last full financial year, without the effects of the pandemic our payout ratio was 86%.

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We have paid out Rs 1,188 crore in dividends, plus distribution tax out of a profit after tax of Rs 1,385 crore. There is not a board which is more focussed on driving return on shareholder equity than the board at Sun TV. We have been one of the most generous companies when it comes to distributing cash; that surplus of requirement. We have prided our return on equity ratios. It always used to be around 35%-36%, of late it has fallen to 23%. But then, you do not see a pandemic every other day. That is a reason why we went with a little bit of caution.

The board has consistently paid out moneys that is excess of immediate investing requirements even though we have very large projects committed. We have eight movies under production, one is almost complete – the Rajnikanth blockbuster which will hit the screens any moment now. Then we have one more which is a work in progress, three where production started, and three more which are in the pipeline where contracts have been signed and dates have been committed.

In terms of investments, we are extremely bullish on the years ahead. We are also making investments in high-quality content and with all that we will still have a lot of cash and the board will certainly take this issue and distribute whatever is surplus to our requirement. There is no doubt in my mind on this. Unfortunately, I cannot say anything which is in the nature of a forward-looking statement on a call like this. I am not competent and it will also be illegal under the SEBI guidelines to make anything which is speculative. But suffice to say that the board has consistently demonstrated its resolve to payout money that is surplus to our immediate investing requirements.

Given that subscription growth has largely been driven by revenues from OTT since the start of the pandemic, do you see double-digit growth coming in the next few quarters?
Yes. Please remember that very few homes have television. I think that FICCI E&Y report has just been published. If my memory serves me right, it says almost 30% of households in India are still without television. That is point number one. There are very few homes – less than 10% – that have a second television. The engagement that television has is almost about 235 minutes per day. It is a very high level of engagement that television has and, in our opinion, there is sufficient runway ahead.

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Fortunately for me, because I sit in a position where I also look over the financials of sister company Sun Direct, we are very bullish on the growth for subscriptions. The other big untapped avenue is the smartphone universe because everybody now wants news and entertainment on the go. Although the engagements levels are not more than 40 minutes a day for mobile phone users, the universe is huge and it is growing. About 450 smart phones are in use and my guess is that at least 25% of that is going to be in South India, where people are certainly watching stuff like Sun News and KTV. So, we are very bullish on subscription revenues.

What is the update on the IPL franchise SunRisers Hyderabad? What is the outlook on revenues from this team in the second half and how much of a positive is it going to spell for your overall books?
Actually, last year we grew profit after tax by 12%. That is despite a truncated revenue stream from IPL. Ticket sales of about Rs 29 crores we did not earn. The year before last, we had ticket sales of almost Rs 29 crores which we did not earn because it was in UAE and there were not ticket sales. And also, the sponsors changed and we took a hit of almost Rs 12.5 crores of the title sponsor alone.

Despite that, we have been able to pull in some revenues. But this year unfortunately because of the second wave, it has got impacted very badly midway. We believe that it will revive. Whatever is remaining of the season will happen in UAE, so it is anybody’s guess what the distribution is going to be from this year’s tournament. But we will certainly make some decent sums of money.

You are also betting big on Sun NXT. Tell us a little about the subscriber addition and the content being developed. What kind of growth are you expecting from the digital section?

At this point in time, including our subsidiary subscribers which is basically the subscribers that come through our deals with telcos and other OTT players, we have close to 22 million subscribers. We are growing very nicely. We have premiers of movies. Each time a movie goes on air on Sun NXT we see an immediate uptick in subscriber addition. This will only get better and better because once the pandemic effects are gone, we will start creating more content.

There is a well-oiled engine between Sun TV, Sun Pictures and Sun NXT. And as you may be aware, content investments have doubled in the last four years. If my memory serves me right, we spent close to Rs 900 crores in FY20. FY21 is an aberration because we did not have shoots on many months of the year, but we will be spending a considerable amount on content and there is a very well-developed ecosystem of directors, script writers and producers who work on commission basis. So, the moment things get to normal you will see a flurry of releases across the board, not just the linear TV, not just the movie house including Sun NXT.

Do you think we will see growth returning only by FY22-23? When do you see uptick coming in?

Actually, this year is going to be a growth because we are working off on a very low base. In my mind, if you can grow over the revenues that we recorded for ad sales in FY20, we would have achieved something substantial because that really is the Holy Grail at this point in time. FY22-23 I am reasonably optimistic the world would have completely stabilised. The key point to ask is what is going to happen between now and March 22. That the jury is still out, we are just keeping fingers crossed. I cannot say more than that without violating codes of engagement.

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Give us a sense as to what the overall capex plan on your movie production is? And any message to your shareholders?

See, the content investments will be largely driven by movies because in this part of India, it is movies that drive engagement. As I told you, we have two movies which are almost complete, three more in production and three committed. It will be a Herculean effort to get it all out and released in the next nine months or so. We are not even attempting that. So, between these movies, we should be spending close to a Rs 1,000 crore on movie production, eight movies and we will continue to be buyers for satellite and digital broadcast rights.

The sum we have traditionally been spending is about Rs 400 to 500 crores. If situations stabilise we should be doing that number on an annualised basis. So, if we see a lot of production coming off the shelf, we could spend at least Rs 200 crore on satellite and digital rights. We are pretty optimistic that we will spend a substantial sum on content creation.

The message to shareholders is we believe your interests are best served when we grow the top line and the bottom line, protect margins and drive very high return on equity, and that is it.



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