Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUN TV NETWORK
RECOMMENDATION: BUY
TARGET PRICE: RS.595
FY12E P/E: 18.1X
Following negative newsflow and consequent price declines, we review our
investment thesis on Sun TV Network. We find that earnings risks to the
stock are minor (6-7%), and the price – value gap significant, given current
information set. With complete discounting of earnings risks, and
incorporating a reasonable discount for risks relating with recent adverse
news-flow, we believe Sun TV Network should be valued at Rs 595/ share
(FY12 – end), implying favorable risk-reward. We maintain our positive
stance on the stock, and re-iterate BUY.
n Sun TV Network has declined 15% since we initiated coverage on the company,
despite posting strong 3QFY11 results. Broadly, the decline is on account of : 1/
certain unsubstantiated media reports suggesting enquiries are on against promoter/related entities, 2/ risks posed to the company from lack of management
bandwidth following media reports of the resignation of the company’s COO, 3/
risks of changes in competitive/regulatory dynamics in Tamil Nadu.
n Rumors on involvement of promoters in irregularities are yet unsubstantiated and
have been replied to by the company/ related entities (in media/ letter to stock
exchanges); however, other adverse news-flow speculation could have real impact on the company's earnings, or the timing of the same, or both.
n In our opinion, a relatively small portion of the company's revenue estimates are
exposed to declines, assuming macroeconomic factors and competitive pressure
remain somewhat the same. Sun TV Network's benefits accrue from a somewhat unique content-distribution combination, which we think are not easy to
replicate/ replace in the medium-term.
n We believe Sun TV shall have to sacrifice only one stream of revenues, largely
from one state (Tamil Nadu) in order to maintain its competitive position, and
drive strong revenue growth. Estimating 40% share of Tamil Nadu in the analogue revenues of Sun TV, it appears to us that our FY12 estimates on Sun TV
Network's analogue revenues could, at worst, face a jolt of 30% (y/y) in FY12E.
There could be, in addition to above, negative developments in the company's
international subscription revenues stream, due to lack of management bandwidth (assuming rumors of COO's resignation are true).
n We choose to maintain our FY12/FY13 estimates, and to wait for earnings events
to play out, while recognizing that our FY12/FY13 EPS estimates could face a risk
of 6%-7%. We believe that after accounting for the adverse earnings scenarios,
there is a substantial price-value gap, which is explained perhaps by market discounting aggressively the possibility that Sun TV Network may be impacted by
adverse news flow. The same discount, as per our calculation, is an aggressive
21%. We find the discounting exaggerated, although we recognize that it could
persist, and shall reduce only gradually.
n Even if this were to be a structural shift in the base from which analogue revenues shall grow, we estimate that the EPS growth of the company in FY10-
FY13E shall be 27%, and should ideally command a PEG ratio of 1 - implying a
fair value of Rs 592.
n We reduce our price target to Rs 595/ share (prior price target: Rs 666/ share) to
account for risks to the company's earnings, as well as a discount to account for
the risk that stock faces from enquiries that are reported to be in progress. We
retain our BUY rating on the stock.
n Sun TV Network has become a more risky stock to hold, but also more rewarding. As of now, Sun TV Network is trading at the lower end of its PE band. Bar ring further negative news-flow, we believe the stock is trading at cheap valuations. We would advice buying at current levels. We would be aggressive buyers
at declines of 8-10%.
n Risks, other than those discussed above/ further, include: 1/ competitive risks, 2/
macroeconomic risks arising from poor advertising environment
Sun TV Network - Examination of Vulnerability
n Advertising, Slot Sales, Program Licensing Income, Radio and Movies shall remain largely unaffected as long as competitive situation of channels, macroeconomic factors remain same. Subscription revenues are the only revenue stream
that is likely to be impacted significantly post adverse changes in competitive/
regulatory dynamics in TN. It has been the case in the past that certain entities
have attempted to challenge Sun TV Network by launching parallel MSOs/ nationalize cable distribution in the state. Such a move may impact analogue cable
revenues of the company. Since COO Mr. Vidyasagar took over, Sun TV had also
made conscious attempts to make further inroads in international markets, and
such efforts may receive a setback from his departure, of that were to happen.
n DTH revenues are a function of channels' competitive position. DTH value chain
is largely transparent, and the company shall continue to benefit from larger subscriber adds. We note that recent softness in DTH revenues of the company is
likely to be reversed in 4QFY11, as the company renews its contracts with DTH
service providers (Sun TV does not sign MG deals with DTH operators, but signs
deals based on a certain number of subscribers, which may be exceeded in the
contract period, thus providing a short-term benefit to DTH operators).
n The company has taken various steps to ensure greater international subscription
revenues - foremost of them being an attempt to gather revenues from cable
platforms in the USA. These steps shall stay unhindered by domestic political
situation, but are susceptible to slowdown assuming these were being driven by
COO of the company, and that the company may not be able to pass on the
baton to able hands (unlikely).
n Analogue cable revenues emanate from a low-transparency value chain, and
have been seen to be volatile. In the past, there have been news reports that
certain entities have attempted to launch new MSOs/ made demands to nationalize cable distribution to challenge Sumangali Cable, which is owned by the
promoters of Sun TV Network.
n Given that TN contributes ~40% to analogue revenues of Sun TV Network, we
believe that altering our FY12E base for analogue revenues of Sun TV Network
by 30% should provide a worthy idea of the risk that Sun TV's earnings/ fair
value faces.
n Sun TV's revenue streams have been significantly altered by introduction of DTH,
and Sun Direct has served a strong purpose in reducing dependence on cable
operators.
Viewership Basics: Sun TV has strong viewership in consolidated
markets….
n It is useful to remember that in TN, the state vulnerable to political changes, no
other GEC has even a 10% share in viewership, compares to ~70% share that
Sun TV Network consistently brings.
n Sun TV Network's business is not built on distribution strength alone. Sumangali
Cable has little presence in other states (Karnataka, Andhra Pradesh) where Sun
TV Network's channels dominate.
n We believe that ~40% of the total television viewership in South Indian languages is movie-related. In this sense, Sun TV's strong movie library, with approximately 9000 movies (all running into perpetuity) is a useful tool. Sun TV
channels have ~90% share in Tamil movie and Telugu movie genres.
n Longer-term, it shall be most difficult to displace Sun TV Network, in TN or other
states; short-term disturbances may take place. In exchange for 'buying shortterm share maintenance', we believe the highest price that Sun TV Network
shall pay will be sacrifice on analogue cable revenues. This is equivalent to a
carriage fees being paid to cable operators
n Advertising Income to benefit from rate hikes affected by the company: Sun TV
has raised advertising rates as well as slot rates across channels by 9%-43% for
Telugu channels, and 8%-32% for channels in other languages (prime time rates
shall rise more than others).
n The company is currently running strong inventory fill rates across channels (in
certain prime time properties, the inventory utilization is greater than 100%).
Advertising outlook seems robust, as industry professionals predict a 14-18%
growth in TV broadcasting advertising revenues.
n Regional Channels shall continue to benefit from cost advantage provided by
way of lower cost per thousand. We note that even following the rate - hikes
affected, Sun TV Network channels are well cheaper than Hindi GECs - a factor
that shall drive higher national advertising towards the company. We note that
national advertising accounts for ~70% of Sun TV Network's advertising revenues.
Analogue Revenues Under Threat in Tamil Nadu…Limited Impact
on Earnings
Tamil Nadu accounts for ~35% of the total C&S population in the four southern
states.
Given this, and the fact that Chennai is an FTA market, we believe that TN contributes ~35-40% to the total analogue subscription pie of Sun TV Network - this portion is prone to high risk, given present circumstance.
Let us assume that analogue subscription revenues emanating from TN are wiped
out by 70%, due to adverse competitive/regulatory factors (Scenario -1, in the table
below). Given that current COO's departure may lead to further impact on collections, we factor in 60% decline in FY12 - base for analogue revenues and 7-10% reduction in the base for international (largely subscription) revenues
Our fair value estimates indicate that the market is aggressively discounting the risks
arising from certain adverse, and unsubstantiated media reports. Given our estimates/valuation assumptions, the CMP implies that the market is discounting the
risk at 21% - this seems to us an aggressive number, given present information set
and apparent strength of Sun TV’s model. A reduction in this discounting shall be
the prime mover of the stock. Clearly, this shall be a gradual process, and could well
take over six months in the least, and could well take over a year to completely
unwind itself. We believe that it is fair to assume a 70% reduction in the perception
of this risk, over one year's time. Given the political climate as well as company lack
of reaction to rumors of COO's departure, we believe it would be fair to discount
fully Scenario - 2 mentioned above.
We accordingly reduce our price target on Sun TV Network by Rs 73, to Rs 593/
share. We re-iterate BUY on the stock. The value thus accorded to Sun TV implies
PER of 26x FY12 PER.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUN TV NETWORK
RECOMMENDATION: BUY
TARGET PRICE: RS.595
FY12E P/E: 18.1X
Following negative newsflow and consequent price declines, we review our
investment thesis on Sun TV Network. We find that earnings risks to the
stock are minor (6-7%), and the price – value gap significant, given current
information set. With complete discounting of earnings risks, and
incorporating a reasonable discount for risks relating with recent adverse
news-flow, we believe Sun TV Network should be valued at Rs 595/ share
(FY12 – end), implying favorable risk-reward. We maintain our positive
stance on the stock, and re-iterate BUY.
n Sun TV Network has declined 15% since we initiated coverage on the company,
despite posting strong 3QFY11 results. Broadly, the decline is on account of : 1/
certain unsubstantiated media reports suggesting enquiries are on against promoter/related entities, 2/ risks posed to the company from lack of management
bandwidth following media reports of the resignation of the company’s COO, 3/
risks of changes in competitive/regulatory dynamics in Tamil Nadu.
n Rumors on involvement of promoters in irregularities are yet unsubstantiated and
have been replied to by the company/ related entities (in media/ letter to stock
exchanges); however, other adverse news-flow speculation could have real impact on the company's earnings, or the timing of the same, or both.
n In our opinion, a relatively small portion of the company's revenue estimates are
exposed to declines, assuming macroeconomic factors and competitive pressure
remain somewhat the same. Sun TV Network's benefits accrue from a somewhat unique content-distribution combination, which we think are not easy to
replicate/ replace in the medium-term.
n We believe Sun TV shall have to sacrifice only one stream of revenues, largely
from one state (Tamil Nadu) in order to maintain its competitive position, and
drive strong revenue growth. Estimating 40% share of Tamil Nadu in the analogue revenues of Sun TV, it appears to us that our FY12 estimates on Sun TV
Network's analogue revenues could, at worst, face a jolt of 30% (y/y) in FY12E.
There could be, in addition to above, negative developments in the company's
international subscription revenues stream, due to lack of management bandwidth (assuming rumors of COO's resignation are true).
n We choose to maintain our FY12/FY13 estimates, and to wait for earnings events
to play out, while recognizing that our FY12/FY13 EPS estimates could face a risk
of 6%-7%. We believe that after accounting for the adverse earnings scenarios,
there is a substantial price-value gap, which is explained perhaps by market discounting aggressively the possibility that Sun TV Network may be impacted by
adverse news flow. The same discount, as per our calculation, is an aggressive
21%. We find the discounting exaggerated, although we recognize that it could
persist, and shall reduce only gradually.
n Even if this were to be a structural shift in the base from which analogue revenues shall grow, we estimate that the EPS growth of the company in FY10-
FY13E shall be 27%, and should ideally command a PEG ratio of 1 - implying a
fair value of Rs 592.
n We reduce our price target to Rs 595/ share (prior price target: Rs 666/ share) to
account for risks to the company's earnings, as well as a discount to account for
the risk that stock faces from enquiries that are reported to be in progress. We
retain our BUY rating on the stock.
n Sun TV Network has become a more risky stock to hold, but also more rewarding. As of now, Sun TV Network is trading at the lower end of its PE band. Bar ring further negative news-flow, we believe the stock is trading at cheap valuations. We would advice buying at current levels. We would be aggressive buyers
at declines of 8-10%.
n Risks, other than those discussed above/ further, include: 1/ competitive risks, 2/
macroeconomic risks arising from poor advertising environment
Sun TV Network - Examination of Vulnerability
n Advertising, Slot Sales, Program Licensing Income, Radio and Movies shall remain largely unaffected as long as competitive situation of channels, macroeconomic factors remain same. Subscription revenues are the only revenue stream
that is likely to be impacted significantly post adverse changes in competitive/
regulatory dynamics in TN. It has been the case in the past that certain entities
have attempted to challenge Sun TV Network by launching parallel MSOs/ nationalize cable distribution in the state. Such a move may impact analogue cable
revenues of the company. Since COO Mr. Vidyasagar took over, Sun TV had also
made conscious attempts to make further inroads in international markets, and
such efforts may receive a setback from his departure, of that were to happen.
n DTH revenues are a function of channels' competitive position. DTH value chain
is largely transparent, and the company shall continue to benefit from larger subscriber adds. We note that recent softness in DTH revenues of the company is
likely to be reversed in 4QFY11, as the company renews its contracts with DTH
service providers (Sun TV does not sign MG deals with DTH operators, but signs
deals based on a certain number of subscribers, which may be exceeded in the
contract period, thus providing a short-term benefit to DTH operators).
n The company has taken various steps to ensure greater international subscription
revenues - foremost of them being an attempt to gather revenues from cable
platforms in the USA. These steps shall stay unhindered by domestic political
situation, but are susceptible to slowdown assuming these were being driven by
COO of the company, and that the company may not be able to pass on the
baton to able hands (unlikely).
n Analogue cable revenues emanate from a low-transparency value chain, and
have been seen to be volatile. In the past, there have been news reports that
certain entities have attempted to launch new MSOs/ made demands to nationalize cable distribution to challenge Sumangali Cable, which is owned by the
promoters of Sun TV Network.
n Given that TN contributes ~40% to analogue revenues of Sun TV Network, we
believe that altering our FY12E base for analogue revenues of Sun TV Network
by 30% should provide a worthy idea of the risk that Sun TV's earnings/ fair
value faces.
n Sun TV's revenue streams have been significantly altered by introduction of DTH,
and Sun Direct has served a strong purpose in reducing dependence on cable
operators.
Viewership Basics: Sun TV has strong viewership in consolidated
markets….
n It is useful to remember that in TN, the state vulnerable to political changes, no
other GEC has even a 10% share in viewership, compares to ~70% share that
Sun TV Network consistently brings.
n Sun TV Network's business is not built on distribution strength alone. Sumangali
Cable has little presence in other states (Karnataka, Andhra Pradesh) where Sun
TV Network's channels dominate.
n We believe that ~40% of the total television viewership in South Indian languages is movie-related. In this sense, Sun TV's strong movie library, with approximately 9000 movies (all running into perpetuity) is a useful tool. Sun TV
channels have ~90% share in Tamil movie and Telugu movie genres.
n Longer-term, it shall be most difficult to displace Sun TV Network, in TN or other
states; short-term disturbances may take place. In exchange for 'buying shortterm share maintenance', we believe the highest price that Sun TV Network
shall pay will be sacrifice on analogue cable revenues. This is equivalent to a
carriage fees being paid to cable operators
n Advertising Income to benefit from rate hikes affected by the company: Sun TV
has raised advertising rates as well as slot rates across channels by 9%-43% for
Telugu channels, and 8%-32% for channels in other languages (prime time rates
shall rise more than others).
n The company is currently running strong inventory fill rates across channels (in
certain prime time properties, the inventory utilization is greater than 100%).
Advertising outlook seems robust, as industry professionals predict a 14-18%
growth in TV broadcasting advertising revenues.
n Regional Channels shall continue to benefit from cost advantage provided by
way of lower cost per thousand. We note that even following the rate - hikes
affected, Sun TV Network channels are well cheaper than Hindi GECs - a factor
that shall drive higher national advertising towards the company. We note that
national advertising accounts for ~70% of Sun TV Network's advertising revenues.
Analogue Revenues Under Threat in Tamil Nadu…Limited Impact
on Earnings
Tamil Nadu accounts for ~35% of the total C&S population in the four southern
states.
Given this, and the fact that Chennai is an FTA market, we believe that TN contributes ~35-40% to the total analogue subscription pie of Sun TV Network - this portion is prone to high risk, given present circumstance.
Let us assume that analogue subscription revenues emanating from TN are wiped
out by 70%, due to adverse competitive/regulatory factors (Scenario -1, in the table
below). Given that current COO's departure may lead to further impact on collections, we factor in 60% decline in FY12 - base for analogue revenues and 7-10% reduction in the base for international (largely subscription) revenues
Our fair value estimates indicate that the market is aggressively discounting the risks
arising from certain adverse, and unsubstantiated media reports. Given our estimates/valuation assumptions, the CMP implies that the market is discounting the
risk at 21% - this seems to us an aggressive number, given present information set
and apparent strength of Sun TV’s model. A reduction in this discounting shall be
the prime mover of the stock. Clearly, this shall be a gradual process, and could well
take over six months in the least, and could well take over a year to completely
unwind itself. We believe that it is fair to assume a 70% reduction in the perception
of this risk, over one year's time. Given the political climate as well as company lack
of reaction to rumors of COO's departure, we believe it would be fair to discount
fully Scenario - 2 mentioned above.
We accordingly reduce our price target on Sun TV Network by Rs 73, to Rs 593/
share. We re-iterate BUY on the stock. The value thus accorded to Sun TV implies
PER of 26x FY12 PER.
No comments:
Post a Comment