Buy Sun TV Network: 2011 Mid-Cap pick: Antique

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Sun TV Network Limited
Shining ‘Bright’ as ever!



Investment rationale
Sustained leadership commanding premium
With sustained dominance in the South regional genre, which seconds
the Hindi GEC genre in terms of viewership, Sun TV Network (Sun) is able
to command premium ad rates in these markets. As a result, Sun TV has
managed to increase its ad rates every year during the month of January.
We expect scale benefits to persist and estimate advertisement revenue
CAGR of 25% over FY10-12e

Growing digitisation and movie portfolio
Sun’s DTH business is growing with a CAGR of 29% over FY10-12e. This,
coupled with a healthy growth in its movie business with a portfolio of 8-10
movie releases per year, are key positives and triggers for Sun’s revenue
growth. Going forward, we estimate a total revenue growth of 28% and 20%
in FY11e and FY12e, respectively.

EBITDA growth momentum to continue
Increasing traction in revenues coupled with high proportion of fixed costs
should generate operating leverage in the coming quarters. This will help
maintain the growth momentum in EBITDA. We have estimated EBITDA CAGR
of 30% during FY10-12e.

Valuation and outlook
Historically, the company has been traded at one-year forward average P/E
of ~30x. At the current market price, the company is trading at P/E of 23.3x
on FY12e EPS and 11.4x on FY12e EV/EBITDA basis.
We reiterate a BUY with a target price of INR624 based on average of
FY12e P/E of 30x and 12x EV/EBITDA.


Investment rationale
Stronger ad revenues in 3Q and 4Q
Historically, the company has always seen a jump in 3Q and 4Q revenues due to
strong ad momentum from festival season and hike in advertisement rates. After posting
a 32% YoY growth in 1HFY11, we expect a stronger 2HFY11 and estimate 28% and
21% growth in FY11e and FY12e.


EBITDA margin to remain strong
Due to the cost structure of the industry wherein a large portion of costs are fixed, we
expect the increase in Sun’s revenues to generate significant operating leverage and
drive EBITDA growth. We have estimated EBITDA CAGR of 30% during FY10-12e.


Strong balance sheet and cash flow
Sun is a zero-debt company with a net cash balance of INR5-6bn as of 2QFY11.
This adds a significant degree of comfort, since the company is free to pursue any
organic/ inorganic growth options, without leveraging. Going forward, we estimate
an RoCE of 38% and 41% for FY11e and FY12e, respectively.


Valuation and outlook
Sun’s has successfully maintained its dominance in the South regional genre over
the years and we expect the same to continue going forward. Consequently, we
expect its ability to command premium ad rates in these markets. We feel that
Jan’11 will see a hike in its ad rates, in keeping with its annual practice of increasing
ad rates in January every year. We estimate advertisement revenue CAGR of 25%
over FY10-12e, thereby generating benefits of scale.
We believe that the rapid digitisation of content will result in an increase in viewership
and subscription revenues. Additionally, Sun’s foray into movie production should
serve as an additional stream of revenues. Lastly, turnover should get a fillip from the
new Sun-18 JV, which is targetted at the regional population in non-Hindi speaking
markets.
Sun TV is a net cash company (INR5.6bn as of 2QFY11); with RoCE of 41% and twoyear
earnings CAGR of 31% between FY10-12e, making it the most attractive
proposition in the media sector.
Historically, it has traded at one-year forward average P/E of ~30x and at the current
market price, the company is trading at P/E of 23.3x on FY12e EPS and 11.4x on
FY12e EV/EBITDA basis. We reiterate a BUY with a target price of INR624 based on
average of FY12 P/E of 30x and 12x EV/EBITDA.