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Sun TV Network (SUNTV)
Media
Sun down, but not quite. We retain our rating (ADD) and fair value (Rs480) on Sun
TV Network even as the stock price is likely trading based on news-flow beyond the
fundamentals of the company. The fundamentals of Sun TV broadcasting remain robust
as seen from strong ratings of its channels even beyond the politically sensitive Tamil
market (Telugu, Kannada and Malayalam). The news-flow pertains to the one-time
tenure of Mr. Dayanidhi Maran, brother to Mr. Kalanidhi Maran (Sun TV promoter), as
Telecom Minister. We discuss the allegations and response of the company.
Stock impacted by non-fundamentals; retain rating/fair value
We retain our rating (ADD) and fair value (Rs480 on FY2013E basis) on Sun TV Network stock even
as the stock price appears to be responding to news-flow beyond the fundamentals. Our rating
and fair value is based on reasonable assumptions on the operations of the company: (1) ~16%
advertising CAGR between FY2011-13E, (2) ~22% subscription CAGR between FY2011-13E led
by turnaround in Sun Direct and (3) risk weight (WACC) of 13.5% (100 bps higher versus the
12.5% for our coverage to capture potential unknowns). The 80% market share in Tamil Nadu
may be impacted by political risk (loss of DMK in elections, resurgence of AIADMK) but high
market share (30-50%) in other markets (no political linkages) underscored the robust business
model of the company. New competition and rising fragmentation in the broadcasting market
concerns all legacy broadcasters (business risk). Sun TV stock is valued at 12X FY2012E and 10X
FY2013E EPS estimates.
Arguments and counter-arguments — a brief summary
We are not in a position to verify the basis of the reported allegations or the clarifications offered
by the company. To sum up the news-flow that is over-riding fundamentals: (1) Central Bureau of
Investigation’s (CBI’s) inquiry into the tenure of Mr. Dayanidhi Maran, brother of Mr. Kalanidhi
Maran (Sun TV promoter), as Telecom Minister, (2) allegations of corruption in the issue of 2G
telecom licenses issued by Telecom Ministry during this period, (3) links of beneficiaries with Sun
Network companies (Sun Direct and South Asia FM, subsidiary of Sun TV Network) and (4) alleged
benefit to Sun TV by BSNL, national telecom operator.
The company has responded to some of these allegations: (1) any comment on the CBI enquiry is
not possible since the matter is sub-judice, (2) Mr. Dayanidhi Maran has no holding in any of the
Sun Network companies, (3) the Sun Direct transaction pre-dates the tenure of Mr. Dayanidhi
Maran (MoU signed in 1997) as Telecom Minister, (4) the use of BSNL telecom lines for telecast of
Sun TV channels is technically not feasible (company uses satellites) and (5) the company uses
paid-for optic fiber lines for its own communication needs. Additionally, we present an analysis of
the Astro-South Asia FM (SAFM) deal, since Sun TV was listed at the time of this transaction.
Arguments and counter-arguments
We reiterate that we are in no position to verify the basis of the reported allegations or the
clarifications offered by the company. We provide a summary of allegations made by various
media reports against Sun Network and the responses of the company to the same.
Allegations related to the tenure of Mr. Dayanidhi Maran, brother of Mr. Kalanidhi Maran
(promoter of Sun Network), as telecom minister in the Government of India (between
Feb-2004 to May-2007), including the issue of 2G licenses issued to various telecom
companies during this period.
The company cannot comment on the CBI enquiry in this regard since the matter is
sub-judice. More important, notwithstanding the personal relationship between Mr.
Dayanidhi and Kalanidhi Maran, Mr. Dayanidhi Maran has no equity holding or stake
otherwise (including as director or as management) in any of the Sun Network
companies. Sun Network is owned and operated by Mr. Kalanidhi Maran and any
alleged link with Mr. Dayanidhi Maran is speculative.
Allegations related to circumstantial evidence linking the investment by Astro All Asia Plc
(a large Malaysia-based DTH operator), into Sun Direct (the DTH arm of Sun Network and
sister company of Sun TV Network) with investment by Maxis Telecom (a large Malaysiabased
telecom operator and sister company of Astro) into Aircel (a large telecom operator
in India, which was granted 2G telecom licenses by DoT during the time when Mr.
Dayanidhi Maran was Telecom Minister).
Again, the company did not wish to comment on the matter concerning the Maxis
Telecom-Aircel deal, noting that it did not have any role to play in the same and it
also cannot comment since the entire 2G telecom license matter is sub-judice.
However, the company notes that linking the Astro-Sun Direct deal with Maxis-Aircel
is incorrect since Sun Network had signed an MoU with Astro in 1997 for Sun Direct
(DTH operations of Sun Network) and pre-dates the tenure of Mr. Dayanidhi Maran
as Telecom Minister. The MoU could not become operational at that time since the
Government of India did not allow DTH operations at that time.
The relationship of Sun TV Network with Astro is also legacy one since Astro is the
largest DTH operator in Malaysia, which has a large Tamil-speaking population. Sun
TV Network has been beaming its channels on the Astro platform for a long period
of time, again pre-dating the tenure of Mr. Dayanidhi Maran as Telecom Minister.
This relationship is what brought Astro and Sun Network together in starting the Sun
Direct DTH service in India.
Various media reports have also highlighted the premium paid by Astro for its stake
(20%) in Sun Direct whereas the promoter Mr. Kalanidhi Maran invested at face
value into the company. We note that Sun Direct DTH platform was not operational
when Astro has made the investment into the company. The company noted that
there were multiple considerations to be taken into account when valuing the
premium for a stake-sale, including an established brand name (Sun) in the southern
markets of India, on-ground execution capability as well as a deep understanding of
the Indian broadcasting market.
Another alleged link, of greater relevance to Sun TV Network (the listed company),
pertains to Astro’s investment in South Asia FM (SAFM), the FM radio subsidiary of Sun
TV Network. We present our own analysis of the same since Sun TV was a listed company
and we had commented at length on the transaction (see our note “FY2009 annual
report analysis; SAFM capital infusion” dated September 17, 2009).
Exhibit 6 presents our own analysis of the SAFM transaction, where Astro increased
its stake in the company to 20% from 7% previously. We highlight that Sun TV also
invested in SAFM at the same time at similar valuation to Astro (at face value of Rs10
per share). We have verified that the share capital of SAFM (~Rs4.7 bn; from page
106 of the Sun TV FY2010 annual report) and it matches with out estimated share
capital (466 mn shares of Rs10 face value). Sun TV had also converted ICDs to SAFM
(~Rs1.3 bn) into CCPS (Compulsorily Convertible Preference Shares). Sun TV’s
investments into SAFM were to maintain Astro’s stake in SAFM <20%, the
maximum FDI allowed in FM radio in India.
Last but not the least is the allegation of undue benefit to Sun TV from BSNL, the national
telecom operator, by making available telecom lines free of cost to Sun TV for use in its
broadcasting operations (distribution).
The company noted that it is using satellites for its broadcasting operations in India
as well as internationally. Additionally, the company does use some fiber optic
infrastructure for its communication as well as domestic distribution needs but the
same is paid-for by the company at market rates.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sun TV Network (SUNTV)
Media
Sun down, but not quite. We retain our rating (ADD) and fair value (Rs480) on Sun
TV Network even as the stock price is likely trading based on news-flow beyond the
fundamentals of the company. The fundamentals of Sun TV broadcasting remain robust
as seen from strong ratings of its channels even beyond the politically sensitive Tamil
market (Telugu, Kannada and Malayalam). The news-flow pertains to the one-time
tenure of Mr. Dayanidhi Maran, brother to Mr. Kalanidhi Maran (Sun TV promoter), as
Telecom Minister. We discuss the allegations and response of the company.
Stock impacted by non-fundamentals; retain rating/fair value
We retain our rating (ADD) and fair value (Rs480 on FY2013E basis) on Sun TV Network stock even
as the stock price appears to be responding to news-flow beyond the fundamentals. Our rating
and fair value is based on reasonable assumptions on the operations of the company: (1) ~16%
advertising CAGR between FY2011-13E, (2) ~22% subscription CAGR between FY2011-13E led
by turnaround in Sun Direct and (3) risk weight (WACC) of 13.5% (100 bps higher versus the
12.5% for our coverage to capture potential unknowns). The 80% market share in Tamil Nadu
may be impacted by political risk (loss of DMK in elections, resurgence of AIADMK) but high
market share (30-50%) in other markets (no political linkages) underscored the robust business
model of the company. New competition and rising fragmentation in the broadcasting market
concerns all legacy broadcasters (business risk). Sun TV stock is valued at 12X FY2012E and 10X
FY2013E EPS estimates.
Arguments and counter-arguments — a brief summary
We are not in a position to verify the basis of the reported allegations or the clarifications offered
by the company. To sum up the news-flow that is over-riding fundamentals: (1) Central Bureau of
Investigation’s (CBI’s) inquiry into the tenure of Mr. Dayanidhi Maran, brother of Mr. Kalanidhi
Maran (Sun TV promoter), as Telecom Minister, (2) allegations of corruption in the issue of 2G
telecom licenses issued by Telecom Ministry during this period, (3) links of beneficiaries with Sun
Network companies (Sun Direct and South Asia FM, subsidiary of Sun TV Network) and (4) alleged
benefit to Sun TV by BSNL, national telecom operator.
The company has responded to some of these allegations: (1) any comment on the CBI enquiry is
not possible since the matter is sub-judice, (2) Mr. Dayanidhi Maran has no holding in any of the
Sun Network companies, (3) the Sun Direct transaction pre-dates the tenure of Mr. Dayanidhi
Maran (MoU signed in 1997) as Telecom Minister, (4) the use of BSNL telecom lines for telecast of
Sun TV channels is technically not feasible (company uses satellites) and (5) the company uses
paid-for optic fiber lines for its own communication needs. Additionally, we present an analysis of
the Astro-South Asia FM (SAFM) deal, since Sun TV was listed at the time of this transaction.
Arguments and counter-arguments
We reiterate that we are in no position to verify the basis of the reported allegations or the
clarifications offered by the company. We provide a summary of allegations made by various
media reports against Sun Network and the responses of the company to the same.
Allegations related to the tenure of Mr. Dayanidhi Maran, brother of Mr. Kalanidhi Maran
(promoter of Sun Network), as telecom minister in the Government of India (between
Feb-2004 to May-2007), including the issue of 2G licenses issued to various telecom
companies during this period.
The company cannot comment on the CBI enquiry in this regard since the matter is
sub-judice. More important, notwithstanding the personal relationship between Mr.
Dayanidhi and Kalanidhi Maran, Mr. Dayanidhi Maran has no equity holding or stake
otherwise (including as director or as management) in any of the Sun Network
companies. Sun Network is owned and operated by Mr. Kalanidhi Maran and any
alleged link with Mr. Dayanidhi Maran is speculative.
Allegations related to circumstantial evidence linking the investment by Astro All Asia Plc
(a large Malaysia-based DTH operator), into Sun Direct (the DTH arm of Sun Network and
sister company of Sun TV Network) with investment by Maxis Telecom (a large Malaysiabased
telecom operator and sister company of Astro) into Aircel (a large telecom operator
in India, which was granted 2G telecom licenses by DoT during the time when Mr.
Dayanidhi Maran was Telecom Minister).
Again, the company did not wish to comment on the matter concerning the Maxis
Telecom-Aircel deal, noting that it did not have any role to play in the same and it
also cannot comment since the entire 2G telecom license matter is sub-judice.
However, the company notes that linking the Astro-Sun Direct deal with Maxis-Aircel
is incorrect since Sun Network had signed an MoU with Astro in 1997 for Sun Direct
(DTH operations of Sun Network) and pre-dates the tenure of Mr. Dayanidhi Maran
as Telecom Minister. The MoU could not become operational at that time since the
Government of India did not allow DTH operations at that time.
The relationship of Sun TV Network with Astro is also legacy one since Astro is the
largest DTH operator in Malaysia, which has a large Tamil-speaking population. Sun
TV Network has been beaming its channels on the Astro platform for a long period
of time, again pre-dating the tenure of Mr. Dayanidhi Maran as Telecom Minister.
This relationship is what brought Astro and Sun Network together in starting the Sun
Direct DTH service in India.
Various media reports have also highlighted the premium paid by Astro for its stake
(20%) in Sun Direct whereas the promoter Mr. Kalanidhi Maran invested at face
value into the company. We note that Sun Direct DTH platform was not operational
when Astro has made the investment into the company. The company noted that
there were multiple considerations to be taken into account when valuing the
premium for a stake-sale, including an established brand name (Sun) in the southern
markets of India, on-ground execution capability as well as a deep understanding of
the Indian broadcasting market.
Another alleged link, of greater relevance to Sun TV Network (the listed company),
pertains to Astro’s investment in South Asia FM (SAFM), the FM radio subsidiary of Sun
TV Network. We present our own analysis of the same since Sun TV was a listed company
and we had commented at length on the transaction (see our note “FY2009 annual
report analysis; SAFM capital infusion” dated September 17, 2009).
Exhibit 6 presents our own analysis of the SAFM transaction, where Astro increased
its stake in the company to 20% from 7% previously. We highlight that Sun TV also
invested in SAFM at the same time at similar valuation to Astro (at face value of Rs10
per share). We have verified that the share capital of SAFM (~Rs4.7 bn; from page
106 of the Sun TV FY2010 annual report) and it matches with out estimated share
capital (466 mn shares of Rs10 face value). Sun TV had also converted ICDs to SAFM
(~Rs1.3 bn) into CCPS (Compulsorily Convertible Preference Shares). Sun TV’s
investments into SAFM were to maintain Astro’s stake in SAFM <20%, the
maximum FDI allowed in FM radio in India.
Last but not the least is the allegation of undue benefit to Sun TV from BSNL, the national
telecom operator, by making available telecom lines free of cost to Sun TV for use in its
broadcasting operations (distribution).
The company noted that it is using satellites for its broadcasting operations in India
as well as internationally. Additionally, the company does use some fiber optic
infrastructure for its communication as well as domestic distribution needs but the
same is paid-for by the company at market rates.
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