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Correction an opportunity
ƒ Change in TN government and 2G scam weigh on Sun TV
ƒ We expect minimal operational impact from change in government
ƒ Management highlights no connection with 2G scam
ƒ Retain BUY; reduce TP to INR400 to factor overhang
Reasons for stock decline
Sun TV’s stock has been under pressure
over the past few weeks due to a change
in Tamil Nadu (TN) government and its
potential negative implications on the
group. Also, allegations by media
regarding involvement of group
companies in the spectrum scandal have
resulted in additional pressure on the
stock. The stock has almost halved from
its 12-month high of INR546 on the back
of these allegations.
New government impact minimal
During the recent earnings calls,
management highlighted that even if the
TN state government was to offer cable for free or with a subsidy, the
subsidy would have to be borne by the state government in a manner
similar to schemes which offer free television or free rice. On the other
hand Sun TV expects that, with government control, under-reporting of
subscription revenues would fall, benefiting broadcasters such as Sun
TV. The company mentioned that Sumangali Cable, (a promoter-owned
cable company) contributes only INR250m out of its INR2.1b cable
revenue. That figure is just 1.25% of Sun TV’s total revenue. While Sun
Direct accounts for 60% of its direct-to-home (DTH) revenue, we do not
see this as risk as we do not expect state governments to have any
influence on the DTH business.
Management highlights no involvement in 2G scam
In a call we had with management seeking clarity into Sun TV’s
involvement in the 2G scam, management highlighted that there is no
direct connection between Sun TV and Sun Direct, the group company
providing satellite TV or DTH services, which is the subject of allegations
related to the 2G scam. In addition, management also highlighted that
Sun TV’s subsidiary, South Asia FM’s investment in Deccan Digital
Networks came in at a much later date in August 2007 compared to
Deccan Digital’s investment in Aircel (privately held) in March 2006,
which is the subject of the 2G scam.
Reiterate BUY with lowered TP to factor uncertainty
We retain our BUY rating on Sun TV Network and are reducing our TP
from INR575 to INR400 based on lower target P/E multiple of 18x
(reduced from 25x) to factor in the 2G scam overhang. We do not expect
any significant impact on financials due to the change in the state
government. Risk to our TP is adverse government regulations in TN
impacting Sun TV’s viewership and distribution revenue
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Correction an opportunity
ƒ Change in TN government and 2G scam weigh on Sun TV
ƒ We expect minimal operational impact from change in government
ƒ Management highlights no connection with 2G scam
ƒ Retain BUY; reduce TP to INR400 to factor overhang
Reasons for stock decline
Sun TV’s stock has been under pressure
over the past few weeks due to a change
in Tamil Nadu (TN) government and its
potential negative implications on the
group. Also, allegations by media
regarding involvement of group
companies in the spectrum scandal have
resulted in additional pressure on the
stock. The stock has almost halved from
its 12-month high of INR546 on the back
of these allegations.
New government impact minimal
During the recent earnings calls,
management highlighted that even if the
TN state government was to offer cable for free or with a subsidy, the
subsidy would have to be borne by the state government in a manner
similar to schemes which offer free television or free rice. On the other
hand Sun TV expects that, with government control, under-reporting of
subscription revenues would fall, benefiting broadcasters such as Sun
TV. The company mentioned that Sumangali Cable, (a promoter-owned
cable company) contributes only INR250m out of its INR2.1b cable
revenue. That figure is just 1.25% of Sun TV’s total revenue. While Sun
Direct accounts for 60% of its direct-to-home (DTH) revenue, we do not
see this as risk as we do not expect state governments to have any
influence on the DTH business.
Management highlights no involvement in 2G scam
In a call we had with management seeking clarity into Sun TV’s
involvement in the 2G scam, management highlighted that there is no
direct connection between Sun TV and Sun Direct, the group company
providing satellite TV or DTH services, which is the subject of allegations
related to the 2G scam. In addition, management also highlighted that
Sun TV’s subsidiary, South Asia FM’s investment in Deccan Digital
Networks came in at a much later date in August 2007 compared to
Deccan Digital’s investment in Aircel (privately held) in March 2006,
which is the subject of the 2G scam.
Reiterate BUY with lowered TP to factor uncertainty
We retain our BUY rating on Sun TV Network and are reducing our TP
from INR575 to INR400 based on lower target P/E multiple of 18x
(reduced from 25x) to factor in the 2G scam overhang. We do not expect
any significant impact on financials due to the change in the state
government. Risk to our TP is adverse government regulations in TN
impacting Sun TV’s viewership and distribution revenue
The Risk Experts
• Our starting point for this page is a recognition of the
macro factors that can have a significant impact on stockprice performance, sometimes independently of bottom-up
factors.
• With our Risk Expert page, we identify the key macro risks
that can impact stock performance.
• This analysis enhances the fundamental work laid out in
the rest of this report, giving investors yet another resource
to use in their decision-making process
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