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UBS Investment Research
Sun TV Limited
Stock price unlikely to re-rate in near term
Newsflow on involvement in 2G scam has led to stock price weakness
Sun TV’s stock price has declined 25% and underperformed the BSE Sensex 15%
YTD 2011 due to negative newsflow regarding the involvement of Sun TV
promoters in the recent mobile scam (2G). While the company has denied any such
involvement, we believe any further negative newsflow on this could lead to
further weakness in the stock price.
Tamil Nadu state elections (in May 2011) could create further overhang
The promoters of Sun TV have family links to the current political regime of Tamil
Nadu (TN). There is a perceived benefit accruing to them as long as the regime
stays in power. We believe this perception could change if the current regime (the
DMK party) loses power in the upcoming TN elections (to be held this May). This
might result in additional pressure on Sun TV’s stock price in the near future.
Fundamentals improving; would await better environment to enter stock
Sun TV’s fundamentals seem to improve as its entertainment channels continue to
have dominant viewership share in TN, Andhra Pradesh and Karnataka. Sun TV
recently implemented an ad rate hike in its Tamil and Telugu channels (from 1
April 2011). The distribution partnership with IBN18 has also started gaining
traction. However, we believe any bad news could outweigh the strong
fundamentals in the near term, given Sun TV’s stock price still trades at premium
valuations (18.8x FY12E PE).
Valuation: maintain cautious view; lower PT from Rs500 to Rs400
We lower our price target from Rs500 to Rs400 as we raise our WACC assumption
from 11.8% to 13.3% to incorporate higher risk. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool.
Negative newsflow could outweigh strong
fundamentals in near term
Sun TV’s stock price has declined 25% in absolute terms and has
underperformed the BSE Sensex 15% YTD 2011. This is primarily due to
negative newsflow as given below:
1) Sun TV promoter, Mr. Kalanithi Maran, allegedly funded his stake purchase
in SpiceJet from money received as bribe during 2G spectrum allocation. 1
2) Sun TV was associated with Kalaignar TV, which had received a loan of
Rs2.14 bn from DB Realty, relating to the 2G scam. 2
3) Astro (a related company to Maxis, which owns a majority stake in the
telecom company Aircel in India) invested in Sun Direct within four months
of Aircel getting 14 new telecom licences. 3
We believe the newsflow relating to Kalaignar TV receiving money from DB
Realty has negatively impacted the stock price as Kalaignar TV is operated by
Mr. M. Karunanidhi, who is related to Sun TV promoters. However, Sun TV has
issued a statement that it does not have and has never had a shareholding in or
transaction with Kalaignar TV.
Sun TV has also denied any involvement in the 2G scam. SpiceJet has clarified
that Mr. Kalanithi Maran had pledged his shares in Sun TV to purchase the stake
in SpiceJet. We note that the stake in Sun TV pledged by its promoters increased
by 11.33% from 5.51% in March 2010 to 16.84% in June 2010 (refer to Chart 2).
The board approval for purchase of stake in SpiceJet by Mr. Kalanithi Maran
and a public announcement to the shareholders of SpiceJet for the open offer
was made on 14 June 2010
However, we believe the stock is unlikely to re-rate in the near term due to:
Any further negative newsflow on promoters’ involvement in the 2G scam
could create an overhang on the Sun TV stock price.
State assembly elections in TN are due in May 2011.
Sun TV’s promoters are related to the present Chief Minister of TN, Mr. M
Karunanidhi, who leads the DMK political party. Due to this, Sun TV is
perceived to benefit if DMK remains in power. TN assembly elections are
due to be held in May 2011 and we could see further pressure on Sun TV’s
stock price if the DMK party does not win. However, this is only sentiment
negative as we did not see any significant negative impact on Sun TV’s
financial performance when there was a familial dispute between Sun TV
promoters and Mr. M Karunanidhi.
Valuation
We lower our price target from Rs500 to Rs400 (2% above the current share
price) as we raise our WACC assumption from 11.8% to 13.3% to incorporate
higher risk. We derive our price target from a DCF-based methodology and
explicitly forecast long term valuation drivers using UBS’s VCAM tool.
VCAM is a DCF and an economic profit model
VCAM is a discounted cash flow (DCF) and economic profit analysis (EPA)
valuation methodology which calculates economic profit along with free
cashflows each year.
It assumes that a company’s DCF Value = Current earnings [NOPAT] valued
in perpetuity + present value of all future incremental economic profit.
The accompanying economic profit forecast indicates whether or not free
cash flow is value-added and it is economic profit growth that justifies an
intrinsic value greater than the company’s current earnings valued in
perpetuity.
A key assumption in the VCAM model is the value creation horizon (VCH),
which refers to the number of future years a company is expected to generate
incremental economic profits. At the end of the VCH, we value the NOPAT
into perpetuity to calculate terminal value.
The major subjective drivers of our VCAM price targets are long-term
margin assumptions and the weighted average cost of capital (WACC).
Our sensitivity and valuation tables come directly from VCAM and clients are
free to modify the data and/or use their own assumptions on our website
(www.ubs.com/investmentresearch). The site also has a number of tools
including sensitivity analysis, long-term trends, and a goal seeker, and an
extensive VCAM user guide.
Sun TV Limited
Sun TV Network Ltd (Sun) is the largest TV broadcaster in south India and has
channels catering for the four regional languages: Tamil; Telegu; Kannada; and
Malayalam. Kalanithi Maran is the majority shareholder with a 77% stake. Sun
and its two subsidiaries have radio licences in 44 cities.
Statement of Risk
We believe the company faces regulatory risks and competitive risks in its core
business of broadcasting.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Sun TV Limited
Stock price unlikely to re-rate in near term
Newsflow on involvement in 2G scam has led to stock price weakness
Sun TV’s stock price has declined 25% and underperformed the BSE Sensex 15%
YTD 2011 due to negative newsflow regarding the involvement of Sun TV
promoters in the recent mobile scam (2G). While the company has denied any such
involvement, we believe any further negative newsflow on this could lead to
further weakness in the stock price.
Tamil Nadu state elections (in May 2011) could create further overhang
The promoters of Sun TV have family links to the current political regime of Tamil
Nadu (TN). There is a perceived benefit accruing to them as long as the regime
stays in power. We believe this perception could change if the current regime (the
DMK party) loses power in the upcoming TN elections (to be held this May). This
might result in additional pressure on Sun TV’s stock price in the near future.
Fundamentals improving; would await better environment to enter stock
Sun TV’s fundamentals seem to improve as its entertainment channels continue to
have dominant viewership share in TN, Andhra Pradesh and Karnataka. Sun TV
recently implemented an ad rate hike in its Tamil and Telugu channels (from 1
April 2011). The distribution partnership with IBN18 has also started gaining
traction. However, we believe any bad news could outweigh the strong
fundamentals in the near term, given Sun TV’s stock price still trades at premium
valuations (18.8x FY12E PE).
Valuation: maintain cautious view; lower PT from Rs500 to Rs400
We lower our price target from Rs500 to Rs400 as we raise our WACC assumption
from 11.8% to 13.3% to incorporate higher risk. We derive our price target from a
DCF-based methodology and explicitly forecast long-term valuation drivers using
UBS’s VCAM tool.
Negative newsflow could outweigh strong
fundamentals in near term
Sun TV’s stock price has declined 25% in absolute terms and has
underperformed the BSE Sensex 15% YTD 2011. This is primarily due to
negative newsflow as given below:
1) Sun TV promoter, Mr. Kalanithi Maran, allegedly funded his stake purchase
in SpiceJet from money received as bribe during 2G spectrum allocation. 1
2) Sun TV was associated with Kalaignar TV, which had received a loan of
Rs2.14 bn from DB Realty, relating to the 2G scam. 2
3) Astro (a related company to Maxis, which owns a majority stake in the
telecom company Aircel in India) invested in Sun Direct within four months
of Aircel getting 14 new telecom licences. 3
We believe the newsflow relating to Kalaignar TV receiving money from DB
Realty has negatively impacted the stock price as Kalaignar TV is operated by
Mr. M. Karunanidhi, who is related to Sun TV promoters. However, Sun TV has
issued a statement that it does not have and has never had a shareholding in or
transaction with Kalaignar TV.
Sun TV has also denied any involvement in the 2G scam. SpiceJet has clarified
that Mr. Kalanithi Maran had pledged his shares in Sun TV to purchase the stake
in SpiceJet. We note that the stake in Sun TV pledged by its promoters increased
by 11.33% from 5.51% in March 2010 to 16.84% in June 2010 (refer to Chart 2).
The board approval for purchase of stake in SpiceJet by Mr. Kalanithi Maran
and a public announcement to the shareholders of SpiceJet for the open offer
was made on 14 June 2010
However, we believe the stock is unlikely to re-rate in the near term due to:
Any further negative newsflow on promoters’ involvement in the 2G scam
could create an overhang on the Sun TV stock price.
State assembly elections in TN are due in May 2011.
Sun TV’s promoters are related to the present Chief Minister of TN, Mr. M
Karunanidhi, who leads the DMK political party. Due to this, Sun TV is
perceived to benefit if DMK remains in power. TN assembly elections are
due to be held in May 2011 and we could see further pressure on Sun TV’s
stock price if the DMK party does not win. However, this is only sentiment
negative as we did not see any significant negative impact on Sun TV’s
financial performance when there was a familial dispute between Sun TV
promoters and Mr. M Karunanidhi.
Valuation
We lower our price target from Rs500 to Rs400 (2% above the current share
price) as we raise our WACC assumption from 11.8% to 13.3% to incorporate
higher risk. We derive our price target from a DCF-based methodology and
explicitly forecast long term valuation drivers using UBS’s VCAM tool.
VCAM is a DCF and an economic profit model
VCAM is a discounted cash flow (DCF) and economic profit analysis (EPA)
valuation methodology which calculates economic profit along with free
cashflows each year.
It assumes that a company’s DCF Value = Current earnings [NOPAT] valued
in perpetuity + present value of all future incremental economic profit.
The accompanying economic profit forecast indicates whether or not free
cash flow is value-added and it is economic profit growth that justifies an
intrinsic value greater than the company’s current earnings valued in
perpetuity.
A key assumption in the VCAM model is the value creation horizon (VCH),
which refers to the number of future years a company is expected to generate
incremental economic profits. At the end of the VCH, we value the NOPAT
into perpetuity to calculate terminal value.
The major subjective drivers of our VCAM price targets are long-term
margin assumptions and the weighted average cost of capital (WACC).
Our sensitivity and valuation tables come directly from VCAM and clients are
free to modify the data and/or use their own assumptions on our website
(www.ubs.com/investmentresearch). The site also has a number of tools
including sensitivity analysis, long-term trends, and a goal seeker, and an
extensive VCAM user guide.
Sun TV Limited
Sun TV Network Ltd (Sun) is the largest TV broadcaster in south India and has
channels catering for the four regional languages: Tamil; Telegu; Kannada; and
Malayalam. Kalanithi Maran is the majority shareholder with a 77% stake. Sun
and its two subsidiaries have radio licences in 44 cities.
Statement of Risk
We believe the company faces regulatory risks and competitive risks in its core
business of broadcasting.
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