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SUN TV NETWORK
PRICE: RS.305 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.342 FY12E P/E: 13.7X
Sun TV's 1QFY12 results were a disappointment, with lackluster revenue
(+3.1%, y/y), and PAT growth (+9.8% y/y). Short/ medium term outlook on
earnings appears weak, both on account of weaker industry environment
(advertising revenues) and on account of adverse developments in the
analogue cable market of Tamil Nadu (subscription revenues). We cut our
FY12/FY13 EPS estimates for the company ~7%. Even so, we believe that
long-term prospects of the company remain sound, and valuations are
attractive (13.7x FY12 PER, 2.7% dividend yield with upside risks). We set a
price target of Rs 342 with a six-month investment view (FY12-end), and
advice investors to ACCUMULATE.
n Weak 1QFY12 results indicate a moderation of Sun TV outperformance:
Sun TV's 1QFY12 results are an indication of weakening drivers of industry outperformance,
in so far as advertising revenues of the company are concerned.
Even as one concedes that soft growth is a mirror of industry-wide weakness,
past trend had suggested that Sun TV could be well-ahead of peers in any environment,
due to cost advantages offered to the advertiser (lower cost to reach a
given number of people).
n Reasons to believe analogue revenues may decline into negative growth
territory in FY12/FY13, other subscription streams seeing lackluster
growth: Arasu cable is set to launch operations, and has, as per media reports,
invited local cable operators and MSOs to join. Past attempts by another government
indicate that Sun TV can suffer substantial setbacks in Tamilnadu analogue
revenues. DTH revenues of the company have been weak, perhaps on account
of weaker take-up of DTH in southern states.
n Near-Term earnings growth to be weak: We cut our earnings estimates by
6.9%/7.5% for FY12E/FY13E, on the back of cuts in: 1/ advertising revenues, 2/
analogue subscription revenues. We now see 15% growth in FY12 earnings.
n Over the long-term, Sun TV remains our preferred pick to play the Indian
broadcasting story: Due to strong (viewership) track record in four of India's
states/ languages, we believe Sun TV Network remains the best bet over the
long-term to play the India broadcasting story. Advertising revenues for the company
over the long term shall, we believe, continue to outperform industry
growth, albeit at a slower pace than we had earlier estimated. We also think
that competitive position of the company's channels provide greater confidence
in making long-term projections about revenue growth, as compared with other
boradcasters.
n Certain adverse news-flow could persist in the medium - term, hurt nearterm
prospects: Charges made against Sun TV Pictures COO Mr. Hansraj
Saxena are, as per management, likely to be dropped by the end of this week.
However, charges relating to Mr. Dayanidhi Maran, a relative of the promoter,
relating to spectrum allocation are likely to continue having a negative impact on
the Sun TV stock in the medium term (six months to one year, in our opinion).
n Strong Upsides likely over the long-term, maintain ACCUMULATE- If one
were to ignore completely the controversy surrounding Mr. Dayanidhi Maran and
the potential impact on Sun TV Network, we believe the stock would be valued,
with reasonably conservative assumptions, at Rs 489. We set a medium-term (6
- months) price target at a 30% discount to our fair value computation, that is Rs
342 (prior price target Rs 338). We maintain ACCUMULATE with an intent to
buy modestly at CMP. We recognize the strong value proposition in Sun TV, and
would be aggressive buyers at: 1/ lower price points (>10% declines), and 2/
improving sentiment on Sun TV, on news-flow relating with Mr. Dayanidhi
Maran on the Sun Direct deal.
n Downside risks include: 1/ further weakening in India's advertising environment,
2/ faster and stronger growth than anticipated of Arasu Cable/ any adverse
regulation with regard to cable operations in Tamil Nadu, 3/ further negative
news-flow relating with Sun Pictures/ Sun Direct/ any other relating with the
political situation in Tamil Nadu.
1QFY12 results and management commentary
Sun TV's 1QFY12 were well below our expectations both at the topline and the
bottom-line. The company reported lower revenues from movies (-400mn), and soft
growth in advertising (4% y/y), while subscription revenues remained flat (as expected),
leading to the negative revenue and PAT surprise
We are disappointed by the weak advertising revenue growth for the quarter. While
there has been a general slowdown in national advertising, we were hopeful that
Sun TV shall tide over the same on account of: 1/ lower CPT versus Hindi channels
enabling a substitution effect, 2/ high proportion of local advertising (~1/3 of advertising
revenues of Sun TV) which would be less affected, and 3/ rate hikes implemented
on the company's channels.
However, the results demonstrate that Sun TV's outperformance on these accounts
may have plateaued; the same was also aired in management comments that implied
that the base effect shall be difficult to surmount. The management said that
while rate increases had been passed on to the advertisers in the GEC channels, the
company was finding it difficult to pass on rate increases in non-GEC segments.
Sun TV management has nonetheless expressed hope that festive season advertising
shall ramp up revenues in the later part of the year, and full year advertising growth
shall be in the range of 12%-15%, aided by new channels that Sun TV intends to
launch. While not providing details on the genres that the company intends to enter,
Sun TV management has said that 6 channels would be launched in the current
year, starting with a Malayalam kids genre channel next month.
Subscription revenue growth has been lackluster. While analogue revenues can
hardly be expected to rise substantially, DTH revenue growth has been well weaker
than the industry for the past few quarters. The management pointed to technical
issues that have impacted the growth of Sun TV in this regard, but refrained from
providing aggressive targets for the coming years.
In terms of international revenues, Sun TV continues to believe that new agreements
that the company has entered into in multiple locations shall help ramp up
international revenues to Rs 800 mn in the current year (conservative guidance,
given that the quarter registered revenues of ~Rs 200mn).
On the issue of the COO of Sun Pictures, Mr. Hansraj Saxena, the company said that
the person was handing the cases in an individual capacity, and 2 cases pertaining
to the same have been resolved. Sun TV expects that the remaining cases pertaining
to Sun Pictures COO shall be resolved in the next week.
Related with Sun Pictures is also the issue of content acquisitions and expenses, and
expectations of the company on the same. Sun TV management has said that it has
not witnessed any difficulty in the recent past, with regard to movie acquisition, and
does not expect matters to change significantly in Tamil Nadu in the next few quarters.
The Tamil Nadu (TN) government is likely to re-launch Arasu Cable, the MSO that
would be sponsored by the state, and could impact the Sun Group's dominance in
cable market of Tamil Nadu. In the management's understanding, TN C&S market
has about 14-15mn subscribers, of which 3.25mn are DTH subscribers, and
Sumanagali cable (a promoter-group company) has 3.5-4mn subscribers. As per
management, Arasu is yet to launch off operations in a big way, although senior
officials in the same have been appointed. We note that media reports have said
that Arasu has invited cable operators to join.
The management indicated that dividend payout may continue to be in the range of
45-50%, following the Rs 2.5/ share dividend payout that was made by Sun TV in
the quarter. As such, payout rise may take the dividend yield in the range of 3%-
3.5% for the year, at CMP.
Outlook and Valuation
We moderate our expectations on advertising revenues for the company, largely in
FY13 (FY12 estimates, at 8.8%, are below management guidance, and we think,
are conservative enough, even after the weak performance in the current quarter.
We also reduce estimates for FY12/FY13 on account of lower realization from analogue
subscribers in Tamil Nadu (following the Arasu relaunch), as well as lower
realizations from DTH subscribers (following regulation changes).
We believe content expenses shall not change meaningfully, even as there seems a
great degree of dissatisfaction with the price paid by Sun TV. Given strong
viewership of Sun TV, we believe that it would be difficult for competitors to monetize
the movies, if they were to acquire them at a higher cost. Other expenses are
likely to remain in the range of prior estimates.
We believe that over time, the stock shall perform strongly. The company's four
GECs continue to be in strong competitive position. We believe a fair amount of
competitive advantage of the company emerges from content that the company has
acquired over the years (Sun TV acquires over 300 movies in a year, and has a significant
movie library), as well as a strong understanding of audience tastes. WE thus
think that the company's lead positions are sustainable. In the particular case of
Tamil Nadu, too, we think that the sheer dominance of the channels (Sun TV, K TV,
in the GEC and movie spaces respectively) is a protection to arbitrary action by state
government (due to viewer pull, option to migrate to DTH). We believe there is a
strong case for buying Sun TV on account of the relative likelihood of the company's
channels occupying lead positions in the respective markets for significant periods
into the future. While short/ medium term worries have potential to have a negative
impact on the stock, we believe there is a definite case for accumulating the stock
at CMP, while awaiting more significant buying opportunities as stock declines (we
would see a decline of 10% or so as a significant correction), and/ or clarity emerges
on the role that Sun TV Group (Sun Direct in specific) can be assigned in the alleged
irregularities relating to distribution of spectrum. We maintain ACCUMULATE for
now, with a six-month price target of Rs 342.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
SUN TV NETWORK
PRICE: RS.305 RECOMMENDATION: ACCUMULATE
TARGET PRICE: RS.342 FY12E P/E: 13.7X
Sun TV's 1QFY12 results were a disappointment, with lackluster revenue
(+3.1%, y/y), and PAT growth (+9.8% y/y). Short/ medium term outlook on
earnings appears weak, both on account of weaker industry environment
(advertising revenues) and on account of adverse developments in the
analogue cable market of Tamil Nadu (subscription revenues). We cut our
FY12/FY13 EPS estimates for the company ~7%. Even so, we believe that
long-term prospects of the company remain sound, and valuations are
attractive (13.7x FY12 PER, 2.7% dividend yield with upside risks). We set a
price target of Rs 342 with a six-month investment view (FY12-end), and
advice investors to ACCUMULATE.
n Weak 1QFY12 results indicate a moderation of Sun TV outperformance:
Sun TV's 1QFY12 results are an indication of weakening drivers of industry outperformance,
in so far as advertising revenues of the company are concerned.
Even as one concedes that soft growth is a mirror of industry-wide weakness,
past trend had suggested that Sun TV could be well-ahead of peers in any environment,
due to cost advantages offered to the advertiser (lower cost to reach a
given number of people).
n Reasons to believe analogue revenues may decline into negative growth
territory in FY12/FY13, other subscription streams seeing lackluster
growth: Arasu cable is set to launch operations, and has, as per media reports,
invited local cable operators and MSOs to join. Past attempts by another government
indicate that Sun TV can suffer substantial setbacks in Tamilnadu analogue
revenues. DTH revenues of the company have been weak, perhaps on account
of weaker take-up of DTH in southern states.
n Near-Term earnings growth to be weak: We cut our earnings estimates by
6.9%/7.5% for FY12E/FY13E, on the back of cuts in: 1/ advertising revenues, 2/
analogue subscription revenues. We now see 15% growth in FY12 earnings.
n Over the long-term, Sun TV remains our preferred pick to play the Indian
broadcasting story: Due to strong (viewership) track record in four of India's
states/ languages, we believe Sun TV Network remains the best bet over the
long-term to play the India broadcasting story. Advertising revenues for the company
over the long term shall, we believe, continue to outperform industry
growth, albeit at a slower pace than we had earlier estimated. We also think
that competitive position of the company's channels provide greater confidence
in making long-term projections about revenue growth, as compared with other
boradcasters.
n Certain adverse news-flow could persist in the medium - term, hurt nearterm
prospects: Charges made against Sun TV Pictures COO Mr. Hansraj
Saxena are, as per management, likely to be dropped by the end of this week.
However, charges relating to Mr. Dayanidhi Maran, a relative of the promoter,
relating to spectrum allocation are likely to continue having a negative impact on
the Sun TV stock in the medium term (six months to one year, in our opinion).
n Strong Upsides likely over the long-term, maintain ACCUMULATE- If one
were to ignore completely the controversy surrounding Mr. Dayanidhi Maran and
the potential impact on Sun TV Network, we believe the stock would be valued,
with reasonably conservative assumptions, at Rs 489. We set a medium-term (6
- months) price target at a 30% discount to our fair value computation, that is Rs
342 (prior price target Rs 338). We maintain ACCUMULATE with an intent to
buy modestly at CMP. We recognize the strong value proposition in Sun TV, and
would be aggressive buyers at: 1/ lower price points (>10% declines), and 2/
improving sentiment on Sun TV, on news-flow relating with Mr. Dayanidhi
Maran on the Sun Direct deal.
n Downside risks include: 1/ further weakening in India's advertising environment,
2/ faster and stronger growth than anticipated of Arasu Cable/ any adverse
regulation with regard to cable operations in Tamil Nadu, 3/ further negative
news-flow relating with Sun Pictures/ Sun Direct/ any other relating with the
political situation in Tamil Nadu.
1QFY12 results and management commentary
Sun TV's 1QFY12 were well below our expectations both at the topline and the
bottom-line. The company reported lower revenues from movies (-400mn), and soft
growth in advertising (4% y/y), while subscription revenues remained flat (as expected),
leading to the negative revenue and PAT surprise
We are disappointed by the weak advertising revenue growth for the quarter. While
there has been a general slowdown in national advertising, we were hopeful that
Sun TV shall tide over the same on account of: 1/ lower CPT versus Hindi channels
enabling a substitution effect, 2/ high proportion of local advertising (~1/3 of advertising
revenues of Sun TV) which would be less affected, and 3/ rate hikes implemented
on the company's channels.
However, the results demonstrate that Sun TV's outperformance on these accounts
may have plateaued; the same was also aired in management comments that implied
that the base effect shall be difficult to surmount. The management said that
while rate increases had been passed on to the advertisers in the GEC channels, the
company was finding it difficult to pass on rate increases in non-GEC segments.
Sun TV management has nonetheless expressed hope that festive season advertising
shall ramp up revenues in the later part of the year, and full year advertising growth
shall be in the range of 12%-15%, aided by new channels that Sun TV intends to
launch. While not providing details on the genres that the company intends to enter,
Sun TV management has said that 6 channels would be launched in the current
year, starting with a Malayalam kids genre channel next month.
Subscription revenue growth has been lackluster. While analogue revenues can
hardly be expected to rise substantially, DTH revenue growth has been well weaker
than the industry for the past few quarters. The management pointed to technical
issues that have impacted the growth of Sun TV in this regard, but refrained from
providing aggressive targets for the coming years.
In terms of international revenues, Sun TV continues to believe that new agreements
that the company has entered into in multiple locations shall help ramp up
international revenues to Rs 800 mn in the current year (conservative guidance,
given that the quarter registered revenues of ~Rs 200mn).
On the issue of the COO of Sun Pictures, Mr. Hansraj Saxena, the company said that
the person was handing the cases in an individual capacity, and 2 cases pertaining
to the same have been resolved. Sun TV expects that the remaining cases pertaining
to Sun Pictures COO shall be resolved in the next week.
Related with Sun Pictures is also the issue of content acquisitions and expenses, and
expectations of the company on the same. Sun TV management has said that it has
not witnessed any difficulty in the recent past, with regard to movie acquisition, and
does not expect matters to change significantly in Tamil Nadu in the next few quarters.
The Tamil Nadu (TN) government is likely to re-launch Arasu Cable, the MSO that
would be sponsored by the state, and could impact the Sun Group's dominance in
cable market of Tamil Nadu. In the management's understanding, TN C&S market
has about 14-15mn subscribers, of which 3.25mn are DTH subscribers, and
Sumanagali cable (a promoter-group company) has 3.5-4mn subscribers. As per
management, Arasu is yet to launch off operations in a big way, although senior
officials in the same have been appointed. We note that media reports have said
that Arasu has invited cable operators to join.
The management indicated that dividend payout may continue to be in the range of
45-50%, following the Rs 2.5/ share dividend payout that was made by Sun TV in
the quarter. As such, payout rise may take the dividend yield in the range of 3%-
3.5% for the year, at CMP.
Outlook and Valuation
We moderate our expectations on advertising revenues for the company, largely in
FY13 (FY12 estimates, at 8.8%, are below management guidance, and we think,
are conservative enough, even after the weak performance in the current quarter.
We also reduce estimates for FY12/FY13 on account of lower realization from analogue
subscribers in Tamil Nadu (following the Arasu relaunch), as well as lower
realizations from DTH subscribers (following regulation changes).
We believe content expenses shall not change meaningfully, even as there seems a
great degree of dissatisfaction with the price paid by Sun TV. Given strong
viewership of Sun TV, we believe that it would be difficult for competitors to monetize
the movies, if they were to acquire them at a higher cost. Other expenses are
likely to remain in the range of prior estimates.
We believe that over time, the stock shall perform strongly. The company's four
GECs continue to be in strong competitive position. We believe a fair amount of
competitive advantage of the company emerges from content that the company has
acquired over the years (Sun TV acquires over 300 movies in a year, and has a significant
movie library), as well as a strong understanding of audience tastes. WE thus
think that the company's lead positions are sustainable. In the particular case of
Tamil Nadu, too, we think that the sheer dominance of the channels (Sun TV, K TV,
in the GEC and movie spaces respectively) is a protection to arbitrary action by state
government (due to viewer pull, option to migrate to DTH). We believe there is a
strong case for buying Sun TV on account of the relative likelihood of the company's
channels occupying lead positions in the respective markets for significant periods
into the future. While short/ medium term worries have potential to have a negative
impact on the stock, we believe there is a definite case for accumulating the stock
at CMP, while awaiting more significant buying opportunities as stock declines (we
would see a decline of 10% or so as a significant correction), and/ or clarity emerges
on the role that Sun TV Group (Sun Direct in specific) can be assigned in the alleged
irregularities relating to distribution of spectrum. We maintain ACCUMULATE for
now, with a six-month price target of Rs 342.
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