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India: Media
Equity Research
Risk-reward still not favorable; reiterate Neutral
Reiterate Neutral on Sun TV despite stock price correction
With this note, we transfer the coverage of Sun TV, Dish TV, and Zee to Sachin
Salgaonkar from Ishan Sethi. While Sun TV’s ytd stock price decline (-38% vs.
Sensex -9%) has rendered its valuations attractive (it currently trades close to
the low end of its historical P/E and EV/EBITDA range), we believe the
overhang led by increased political uncertainty may overshadow
fundamentals in the near term. We wait for clarity on further updates on the
2G-related investigation and the impact from a possible change in competitive
dynamics led by a change in political regime in Tamil Nadu.
Healthy revenue/EBITDA growth likely factored in by consensus
We expect Sun TV’s viewership share to remain stable in the medium term led
by a strong content library and exclusive telecast rights of 8,500+ movie titles.
Backed by a 5%-43% yoy increase in ad rate hikes (effective April 2011) and
ongoing improvement in digitization, we expect Sun TV’s revenue/EPS to grow
by 9%/11% yoy in FY12E. However, we note that Bloomberg consensus is
modeling a 12%/17% FY11-FY14 revenue/net profit CAGR (largely in line with
our estimates of 13%/16%), and we see limited upside surprise potential.
Scenario analysis suggests risk-reward balanced
Our scenario analysis implies 35% downside in a bear-case and 34% upside in a
bull-case scenario, implying balanced risk-reward at current levels. In our bearcase
scenario, we assume that competitive action and cable TV reforms in Tamil
Nadu would lead to 13%/30% lower revenues/EPS (vs. our base-case) in FY13E
as subscription revenues decline and the company spends more to retain subs.
In our bull-case scenario, we assume Sun TV is able to defend its share and pass
on further ad rate hikes. Coupled with higher DTH traction, we assume Sun TV is
able to achieve faster-than-expected margin improvement in our bull-case
scenario, leading to 8%/12% higher revenue/EPS (vs. our base-case) in FY13E.
Retain Neutral rating and target prices on Zee and Dish TV
We maintain our Neutral rating and 12-m TPs of Rs46 and Rs135 on Dish TV
(DCF-based) and Zee (P/E-based), respectively. Our FY12E/FY13E EPS for Sun
TV increases by 9.9%/18.0%. With this transfer of coverage, we also change
our valuation methodology on Sun TV to DCF (from P/E), and our new 12m TP
is Rs370 (from Rs393); we reiterate our Neutral rating on Sun TV. We also
introduce FY14E EPS for Sun TV and Dish TV.
Sun TV: Overhang from negative news flow may overshadow
fundamentals in the near term; maintain Neutral
We remain Neutral on Sun TV with a revised 12-month DCF-based target price of Rs370
(from Rs393, P/E-based). While the ytd stock price decline (-38% vs. Sensex -9%) has
rendered Sun TV’s valuations attractive (it currently trades close to the low end of its
historical P/E and EV/EBITDA range), we believe the overhang led by increased political
uncertainty may overshadow fundamentals in the near term. We wait for clarity on further
updates on the 2G-related investigation and the impact from a possible change in competitive
dynamics led by a change in political regime in Tamil Nadu.
Investment thesis
Strong franchise and content library provides competitive edge and pricing power:
We expect Sun TV’s viewership share to remain stable in the medium term led by its strong
content library and an exclusive telecast rights of 8,500+ movie titles. We expect Sun TV’s
revenue/EPS to grow by 9%/12% yoy in FY12E driven by a 5%-43% yoy increase in ad rate
hikes (effective April 2011) and ongoing improvement in digitization.
However, growth appears to be largely factored in: We note that Bloomberg consensus
is modeling a 12%/17% FY11-FY14 revenue/net profit CAGR (largely in line with our
estimates of 13%/16%). We note that our FY12E/FY13 EPS are largely in line with consensus,
and we see limited upside surprise potential.
Despite steep correction, we await clarity before turning more positive: Sun TV is
trading at a 47%/50% discount to its historical avg. P/E and EV/EBITDA of 29.0X/14.2X
following a 38% ytd decline in the stock (vs. Sensex -9%) led by (1) overhang of a potential
investigation into Sun TV’s group companies relating to reported irregularities; and (2) the
impact of potential increase in competition in Tamil Nadu led by recent state government
announcement on “nationalization of cable TV.”
We believe Sun TV’s strong content should help it retain viewership share, but await datapoints
(such as quarterly results) supporting Sun TV’s resilience before turning more
positive. Our scenario analysis implies a 35% downside in a bear-case and 34% upside in a
bull-case scenario. We therefore view the risk-reward as balanced and reiterate our Neutral
rating.
Analyzing key risks
Potential nationalization of cable TV in Tamil Nadu: The new state government of Tamil
Nadu announced on June 3 that it will revive the Arasu Cable TV Corp (a state-owned
multiple system operator (MSO)) and nationalize private cable TV operations in the state
without affecting the interest of last-mile local cable operators (LCOs). Further, as per
media reports (Times of India, June 23), the state government announced that it expects
Arasu Cable TV Corp to be functioning within a month, and will offer all local channels for
Rs100/month to city residents and at a lower rate to rural consumers. The article further
stated that the government is in the process of finalizing a draft for the cable TV policy,
which would be announced soon.
GS view: We note that cable TV operators in India are regulated by the Telecom
Regulatory Authority of India (TRAI) and not by state governments. Hence, there is still no
clarity on any potential nationalization of cable TV by the state. However, we believe any
aggressive pricing adopted by Arasu TV could lead to a loss of subscription revenue for
Sun TV if it loses market share or drives other cable operators to reduce rental fees to
match Arasu’s lower rates. Assuming a 30%/50% lower analog subscription revenue (led by
potentially lower tariffs/sub) in FY12E/FY13E, our FY12E total revenue/EPS would decline
by 3.2%/4.4% and 5.1%/6.8% in FY13E.
Potential CBI investigation of former telecom minister: As per media reports (The
Economic Times, May 21), the brother of Sun TV’s promoter and India’s former telecom
minister are facing potential investigation by the Central Bureau of Investigation for a deal
involving Sun Group’s DTH business. According to the reports, the promoter of Malaysiabased
Maxis Group invested over Rs6bn in Sun Direct TV (via group company Astro)
allegedly in exchange for 14 telecom licences awarded to Aircel (Maxis’ Indian telecom
subsidiary). Sun TV, in its exchange filings, has denied involvement in any irregularities,
and stated that it has not been served with any legal notices thus far.
GS view: While any potential investigation does not directly impact Sun TV’s revenues, a
worst-case scenario that could include a substantial fine for Sun Direct TV could impact
Sun TV’s financials.
Scenario analysis implies 35% downside/34% upside in bear/bull
cases
In our base-case scenario, we assume that Sun TV continues to show a healthy growth
rate and is able to maintain its viewership share. We estimate Sun TV to spend about
Rs6.5bn in FY12E/FY13E for capacity additions and purchase of movie rights.
In our bear-case scenario, we assume cable TV reforms in Tamil Nadu would lead to a loss
of Sun TV’s revenue. In addition, we assume that Sun TV will spend more on acquiring
content to retain viewership and thereby increase its marketing expenses. We estimate this
could lead to lower yoy revenue growth and margin contraction, and estimate
FY12E/FY13E revenues to be lower by 8%/13% (vs. our base-case). As a result, our
FY12E/13E EPS reduces by 18%/30% and our implied value reduces to Rs215 per share.
In our bull-case scenario, we assume Sun TV is able to retain viewership and maintain
rentals due to better quality of service despite increased competition. We assume ad-rate
hikes continue to drive ad revenue growth and better-than-expected DTH traction helps
subscription revenues. As a result, Sun TV is able to achieve faster-than-expected margin
improvement leading to 4%/8% higher revenues (vs. our base-case) and 7%/12% higher
EPS in FY12E/13E. Accordingly, our bull-case implied value increases to Rs445.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India: Media
Equity Research
Risk-reward still not favorable; reiterate Neutral
Reiterate Neutral on Sun TV despite stock price correction
With this note, we transfer the coverage of Sun TV, Dish TV, and Zee to Sachin
Salgaonkar from Ishan Sethi. While Sun TV’s ytd stock price decline (-38% vs.
Sensex -9%) has rendered its valuations attractive (it currently trades close to
the low end of its historical P/E and EV/EBITDA range), we believe the
overhang led by increased political uncertainty may overshadow
fundamentals in the near term. We wait for clarity on further updates on the
2G-related investigation and the impact from a possible change in competitive
dynamics led by a change in political regime in Tamil Nadu.
Healthy revenue/EBITDA growth likely factored in by consensus
We expect Sun TV’s viewership share to remain stable in the medium term led
by a strong content library and exclusive telecast rights of 8,500+ movie titles.
Backed by a 5%-43% yoy increase in ad rate hikes (effective April 2011) and
ongoing improvement in digitization, we expect Sun TV’s revenue/EPS to grow
by 9%/11% yoy in FY12E. However, we note that Bloomberg consensus is
modeling a 12%/17% FY11-FY14 revenue/net profit CAGR (largely in line with
our estimates of 13%/16%), and we see limited upside surprise potential.
Scenario analysis suggests risk-reward balanced
Our scenario analysis implies 35% downside in a bear-case and 34% upside in a
bull-case scenario, implying balanced risk-reward at current levels. In our bearcase
scenario, we assume that competitive action and cable TV reforms in Tamil
Nadu would lead to 13%/30% lower revenues/EPS (vs. our base-case) in FY13E
as subscription revenues decline and the company spends more to retain subs.
In our bull-case scenario, we assume Sun TV is able to defend its share and pass
on further ad rate hikes. Coupled with higher DTH traction, we assume Sun TV is
able to achieve faster-than-expected margin improvement in our bull-case
scenario, leading to 8%/12% higher revenue/EPS (vs. our base-case) in FY13E.
Retain Neutral rating and target prices on Zee and Dish TV
We maintain our Neutral rating and 12-m TPs of Rs46 and Rs135 on Dish TV
(DCF-based) and Zee (P/E-based), respectively. Our FY12E/FY13E EPS for Sun
TV increases by 9.9%/18.0%. With this transfer of coverage, we also change
our valuation methodology on Sun TV to DCF (from P/E), and our new 12m TP
is Rs370 (from Rs393); we reiterate our Neutral rating on Sun TV. We also
introduce FY14E EPS for Sun TV and Dish TV.
Sun TV: Overhang from negative news flow may overshadow
fundamentals in the near term; maintain Neutral
We remain Neutral on Sun TV with a revised 12-month DCF-based target price of Rs370
(from Rs393, P/E-based). While the ytd stock price decline (-38% vs. Sensex -9%) has
rendered Sun TV’s valuations attractive (it currently trades close to the low end of its
historical P/E and EV/EBITDA range), we believe the overhang led by increased political
uncertainty may overshadow fundamentals in the near term. We wait for clarity on further
updates on the 2G-related investigation and the impact from a possible change in competitive
dynamics led by a change in political regime in Tamil Nadu.
Investment thesis
Strong franchise and content library provides competitive edge and pricing power:
We expect Sun TV’s viewership share to remain stable in the medium term led by its strong
content library and an exclusive telecast rights of 8,500+ movie titles. We expect Sun TV’s
revenue/EPS to grow by 9%/12% yoy in FY12E driven by a 5%-43% yoy increase in ad rate
hikes (effective April 2011) and ongoing improvement in digitization.
However, growth appears to be largely factored in: We note that Bloomberg consensus
is modeling a 12%/17% FY11-FY14 revenue/net profit CAGR (largely in line with our
estimates of 13%/16%). We note that our FY12E/FY13 EPS are largely in line with consensus,
and we see limited upside surprise potential.
Despite steep correction, we await clarity before turning more positive: Sun TV is
trading at a 47%/50% discount to its historical avg. P/E and EV/EBITDA of 29.0X/14.2X
following a 38% ytd decline in the stock (vs. Sensex -9%) led by (1) overhang of a potential
investigation into Sun TV’s group companies relating to reported irregularities; and (2) the
impact of potential increase in competition in Tamil Nadu led by recent state government
announcement on “nationalization of cable TV.”
We believe Sun TV’s strong content should help it retain viewership share, but await datapoints
(such as quarterly results) supporting Sun TV’s resilience before turning more
positive. Our scenario analysis implies a 35% downside in a bear-case and 34% upside in a
bull-case scenario. We therefore view the risk-reward as balanced and reiterate our Neutral
rating.
Analyzing key risks
Potential nationalization of cable TV in Tamil Nadu: The new state government of Tamil
Nadu announced on June 3 that it will revive the Arasu Cable TV Corp (a state-owned
multiple system operator (MSO)) and nationalize private cable TV operations in the state
without affecting the interest of last-mile local cable operators (LCOs). Further, as per
media reports (Times of India, June 23), the state government announced that it expects
Arasu Cable TV Corp to be functioning within a month, and will offer all local channels for
Rs100/month to city residents and at a lower rate to rural consumers. The article further
stated that the government is in the process of finalizing a draft for the cable TV policy,
which would be announced soon.
GS view: We note that cable TV operators in India are regulated by the Telecom
Regulatory Authority of India (TRAI) and not by state governments. Hence, there is still no
clarity on any potential nationalization of cable TV by the state. However, we believe any
aggressive pricing adopted by Arasu TV could lead to a loss of subscription revenue for
Sun TV if it loses market share or drives other cable operators to reduce rental fees to
match Arasu’s lower rates. Assuming a 30%/50% lower analog subscription revenue (led by
potentially lower tariffs/sub) in FY12E/FY13E, our FY12E total revenue/EPS would decline
by 3.2%/4.4% and 5.1%/6.8% in FY13E.
Potential CBI investigation of former telecom minister: As per media reports (The
Economic Times, May 21), the brother of Sun TV’s promoter and India’s former telecom
minister are facing potential investigation by the Central Bureau of Investigation for a deal
involving Sun Group’s DTH business. According to the reports, the promoter of Malaysiabased
Maxis Group invested over Rs6bn in Sun Direct TV (via group company Astro)
allegedly in exchange for 14 telecom licences awarded to Aircel (Maxis’ Indian telecom
subsidiary). Sun TV, in its exchange filings, has denied involvement in any irregularities,
and stated that it has not been served with any legal notices thus far.
GS view: While any potential investigation does not directly impact Sun TV’s revenues, a
worst-case scenario that could include a substantial fine for Sun Direct TV could impact
Sun TV’s financials.
Scenario analysis implies 35% downside/34% upside in bear/bull
cases
In our base-case scenario, we assume that Sun TV continues to show a healthy growth
rate and is able to maintain its viewership share. We estimate Sun TV to spend about
Rs6.5bn in FY12E/FY13E for capacity additions and purchase of movie rights.
In our bear-case scenario, we assume cable TV reforms in Tamil Nadu would lead to a loss
of Sun TV’s revenue. In addition, we assume that Sun TV will spend more on acquiring
content to retain viewership and thereby increase its marketing expenses. We estimate this
could lead to lower yoy revenue growth and margin contraction, and estimate
FY12E/FY13E revenues to be lower by 8%/13% (vs. our base-case). As a result, our
FY12E/13E EPS reduces by 18%/30% and our implied value reduces to Rs215 per share.
In our bull-case scenario, we assume Sun TV is able to retain viewership and maintain
rentals due to better quality of service despite increased competition. We assume ad-rate
hikes continue to drive ad revenue growth and better-than-expected DTH traction helps
subscription revenues. As a result, Sun TV is able to achieve faster-than-expected margin
improvement leading to 4%/8% higher revenues (vs. our base-case) and 7%/12% higher
EPS in FY12E/13E. Accordingly, our bull-case implied value increases to Rs445.
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