28 June 2011

Sun TV Network - Increased Risks, but Few Fundamental Changes;Morgan Stanley

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Sun TV Network Ltd
Increased Risks, but Few
Fundamental Changes; OW
What's Changed
Price Target  Rs545.00 to Rs434.00
EPS for F11,F12e and F13e  By 9.6%, 0.8% and -0.2%
We maintain our Overweight rating and largely
retain our fundamental valuation, but reduce our
price target due to sentiment issues from negative
news flow and the potential for greater competition
in Tamilnadu.  Our price target implies 26% upside.
Risks have increased … 1) Speculative news flow on
SUN’s possible connection with the current CBI
investigation into India telecoms continues (Economic
Times, June 3rd, 2011).  2) There is also uncertainty
around government policy in Tamilnadu following the
recent change of government.  A negative outcome from
either of these events could cause the stock to fall.
… we remain buyers: We do not attempt to call the
outcome of the CBI investigation, but clearly it will weigh
on sentiment towards the stock. We think SUN’s
dominance in Tamilnadu can continue, despite the
change in government, as a result of the entry barriers it
has created – (a) its track record of understanding
viewer preferences; and (b) good control over
distribution platforms, both DTH as well as cable via
group companies. The potential gains from ongoing
digitization in the next 2-3 years outweigh the risk from
potential policy changes, in our view.
Reducing price target: Our fundamental valuation falls
by 12% to Rs.482. Also we have applied a notional 10%
discount to that value in order to reach our price target of
Rs434 as a result of negative sentiment surrounding the
investigation. We raise F12 earnings estimates slightly
due to higher cable and advertising revenues in F11.
The stock has corrected ~12% over the past seven
weeks. We forecast an EPS CAGR of 17% for F11-F13e
and note the stock trades at a discount of 19% to ZEEL,
vs. a historical average premium of 17%.

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