Sun TV | Low Risk High Gain Stock to Power Your Portfolio

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 SUN TV logoSun TV Networks Ltd. is one stock idea which is available at extremely attractive valuations along with added benefits of it being low risk. In my opinion the business has significantly stable annuity income stream with long term visibility. Whats more is that  the market has not comprehended the gains that the media broadcasters are going to reap especially with the implementation of the digitization policy.

Sun TV is going to experience the full impact of the 1st phase of digitization during the first half of calendar 2013, when Chennai with 2 mn households become paying subscribers. Additionally the 2nd phase of digitization which is to be implemented in the 5 cities of Bangalore, Hyderabad, Mysore, Coimbatore and Vishakhapatnam cumulatively will see 11 mn households become paying subscribers in the calendar year 2013.

(For more information on the digitization policy and its impact please refer our blog article DEN networks – a multi bagger stock idea for India)

In addition the recent TRAI recommendation that state bodies be disallowed from entering the media broadcasting and distribution phase should augur well for Sun TV. Arasu the Tamil Nadu state distribution MSO should no longer be a threat to Sun TV and the company should be able to regain its lost market share and also rebuild its lost advertising revenues.

Keeping in mind the above, we expect Sun TV’s revenues to grow at a CAGR of 14.6% to 2778 crore  while PAT is expected to grow at a slightly faster clip of 15.6% CAGR to Rs 1070 crore over the period FY12-FY15.

Sun TV revenue and profit growth

Strong revenue & profit growth on the cards for Sun TV

I recommend a BUY on the stock with a price target range of between 23x and 29x PE multiples on FY15 earnings giving a target range of Rs 625 – 788 (depending on the  sentiment prevailing in the market).  Historically Sun TVs average PE has been around 23x giving a price target of 625. However, if one were to look at the valuation bands, the stock has often exceeded this PE and traded at much higher multiples.


Sun TV is quoting significantly below historic 1 yr forward valuations

Sun TV Networks Ltd meteoric rise is expected due its

  1. Unique business model,
  2. Strong pull of its SUN TV brand and
  3. Consequent advertising premiums that its gets,
  4. Support from the digitization of the media business which will stop non paying subscribers.
  5. Strong DTH presence
  6. Compelling valuations

Lets explore & understand how each of the above is adding value to its business.

Sun TV’s business model is vastly different from the rest of the industry players.

Unlike other GEC (General Entertainment Channels) players it leases out its prime time slots on 30 minutes basis to third party content producers for a fixed “Broadcast fee.” For this leased prime time, Sun TV maintains two minutes of advertising time with itself while 4 minutes is provided to the lessee for every 30 minutes. Since the time is leased, the content is not “owned” by the company and hence the cost of the content and risks associated are also not borne by it.

In order to ensure that the prime time program is of high quality and TRPs do not erode, Sun TV incorporates certain clauses in its agreements with its prime time lessees which states that

  • If certain level of ratings for the content aired are not maintained  Sun TV has right to change their slot timings or can also stop           telecasting the content.
  • The producer will work exclusively for Sun TV during the period of agreement.
  • After the agreement  expires, the producer cannot telecast that serial on any other network for the next two years.

Moreover ~75% of the non prime time content is sourced in-house out out of which 40-45% is movie based, 8-10% is news and the rest is accounted by game, talk and variety shows which further lowers its production costs.

Sun TV along with its network of 32 channels is a dominant player in the the four key South Indian states of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala (leader in 3 out of 4 markets). The pull of its brand is so strong that even when it was dropped by Arasu Cable (Tamil Nadu state owned cable operator), it continued to maintain its leadership position with marginal impact on it viewership ratings on the back of its continued visibility in Chennai, its availability on DTH platform across Tamil Nadu and presence of piracy, to a certain extent, in the state.

This strong brand pull has enabled Sun TV to charge premium advertising rates as is visible from the self explanatory table shown below


Sun TVs dominant position in southern ad-market

Going ahead, the regional TV ad market growth is likely to outpace the national TV ad market as the potential of growth in consumption of various products is greater in regional markets.  We expect Sun TV’s ad revenue to grow at a CAGR of 11.3% to Rs 1,304.5 crore from  Rs 945.4 crore over the period of FY12-FY15 on the back of improved ad spends and increased visibility in Tamil Nadu

Digitzation to spurt cable subscription revenues and this should boost profitability significantly besides providing long term revenue visibility thus improving valuations.

Prior to passing of the digitization bill the industry was plagued by massive under reporting. It is estimated that this reporting was to the tune of 85%.  Now with digitization, the last mine cable operator (LCO) has effectively lost control and all numbers would be accounted for. Further, if subscribers do not pay their monthly dues their signals will inadvertently be cut off.  Phase I of digitzation is a huge success and as the process is rolled out pan India over the next three to four years, revenues of the media industry and broadcasters will only improve.


Roadmap to digitization for the Indian cable industry


Broadcaster share of revenue to grow significantly

With ~2 mn households in Chennai (~1.3-1.5 mn cable subscribers and ~0.5 mn DTH subscribers) and ~11 mn subscribers in five cities of Phase II (Bangalore, Hyderabad, Mysore, Coimbatore and Vishakhapatnam), Sun TV is expected to be one of the biggest beneficiaries.  We expect cable subscription revenues growing at a CAGR of 30.2% to Rs 360 crore. Along with cable subscription revenues, DTH revenues are also expected to undergo strong traction and  reach Rs 600 crore by FY15 (CAGR of 21.6%).

Overall domestic subscription revenues (DTH + Cable) are expected to grow at a CAGR of  24.6% to `958.3 crore by FY15 from the current FY12 revenues of Rs 495.6 crore with share of subscription revenue expected to increase by a whopping 760 bps to 36%. Our forecast is based on conservative estimates as we believe that in order to ensure smooth implementation of DAS, broadcasters will not rock the boat and will go in for negotiated basis pricing with MSOs in place of a complete revenue per subscriber model.


Sun TV subscription revenues to grow at a CAGR of 25% till FY15

Other businesses like international subscription and movei business to maintain an overall steady state of growth. However the overall subscription mix is expecte to change going forward as shown below


SunTV Revenue Composition to change going forward

Valuations of Sun TV Network Ltd. are compelling with low risk. Recommend a BUY with a target range of Rs 625 – 788 depending upon the market sentiment.

So what do you think of Sun TV? Let us know. Incase you would like to be updated on the future developments in Sun TV please send us an email at or Whatsapp on 9730836363. We would be more than happy to oblige our community of Sun TV investors / traders.

Before investing please make your own thorough analysis or speak to a qualified Certified Financial Planner / Advisor. Also read the disclaimer below.

Disclaimer: This blog is the personal blog of Vinit Bolinjkar. The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither or myself accepts any liability arising out of the above information/articles.

logo Vinit Bolinjkar Head of Research, Ventura Securities Ltd
Vinit Bolinjkar
Winning Trades
| Mobile: +91- 9730836363

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DEN Networks Ltd – multi bagger stock idea for India

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Den Networks Ltd is a low risk high yielding investment strategy idea  for the Indian marketsDEN Networks Ltd is a low risk high returns investment idea for the Indian markets and one of the biggest                 beneficiaries of the Digitization policy. With the Government of India (GoI) determinedly implementing the digitization policy, we believe that the turning point for the struggling cable industry has been reached. The cable industry which was characterized by  drastic  “under  reporting” of subscribers by the LCO (last mile operators) had led to substantial revenue losses not only to the  broadcasters  &  MSO’s  (multi system operators) but also the GoI (in the form of lost taxation). With  Digitization  gradually replacing the analog distribution system, the  entire universe of subscribers will now be uniquely recognized leading to a  multifold  jump in the paying subscribers for MSOs. India’s largest MSO – DEN Networks Ltd is expected to benefit the most.

We rate the stock DEN Networks Ltd as a BUY with a  DCF based target of Rs 210 offering scope for a potential gain of ~71% from the current CMP of  Rs 123. Currently the stock is trading at 21x and 17.5x its estimated earnings for FY13 & FY14 respectively. DEN is one of the few profitable MSO with a leading market share of 12% and a subscriber base of 11mn. We expect revenues to grow multifold as the LCOs will no longer be able to under report  the subscriber base. We expect revenues and earnings to reach Rs 1,280.9  crore and  Rs 93.4  crore in FY14 from the current Rs 714.3 and Rs 14.6 crore in FY12 respectively.

Further once digitization is completed by 2016 (latest in our view), the full benefits would start accruing to the bottom line.  We expect the earnings to be amplified significantly with increase in the ARPUs (current Rs 170/month which is expected to be around Rs 225/month as per the FICCI-KPMG study, uptick in subscriber growth (due to near doubling of the TV house holds by 2016).

Cable TV market in India well penetrated but under reported

Despite 76% penetration as of 2011, the 146 mn TV market is “ under reporting” pay TV subscriptions to the extent of 85% of the Rs 18,000 crore market. The under reporting has been primarily due to the unorganised nature of the cable distribution network which has over 1000 MSOs and nearly , hold your breath, 60,000 LCO’s.

As per the existing structure of broadcasting, the content is passed on to the LCO’s by the MSO’s via cable who further distributes  the channels to the consumers.  This results  in the LCO having singular access to the consumer and the analog system ensures  that there  is  no way for  the MSO  to  have a clear understanding on the number of subscribers who  are enjoying its services.

MSOs to wean control off LCOs post digitizatio

With the implementation of the new Digitization Bill, a radical change will take place.  Use of smart technology (Set Top Box equipped  with a Conditional Access Card  at the customers end &  SMS  –  Subscriber Management System) will ensure that all revenue leakages are plugged and gradually control shifts from LCO to MSO. The full impact of which is expected to be felt from 2016 onwards, post complete seeding of the ecosystem with set top boxes (STBs)

Indian cable industry digitization roll out schedule

Once the roll out is complete we would notice a sea change in the way revenue share between the MSO , broadcaster and LCO are calculated. Also post digitization the MSO would be well entrenched as the controller and the role of the LCO would be relegated to more of a collection and servicing agent.

DEN Networks STB seeding forecast

ARPU’s set to expand post complete rollout of digitization

APRU’s have remained suppressed largely due to high competition among the MSO’s and the unorganized nature of the industry. Even during the phased implementation of digitization, we  do not expect a major surge in ARPU’s as MSO’s and DTH operators are on an expansion spree  for  capturing the same target  audience resulting in competitive  pricing. Post  2016 ARPU’s are expected to improve aided by value added  services and introduction of niche content  and increased HD offerings.

Indian Pay TV industry ARPU evolution

Post digitization, DEN’s entire ~11 mn subscriber base (as against the reported number of ~1.4 mn) is expected to start contributing to the revenues. In the interim we expect DEN’s subscription revenues to grow multifold to `853.8 crore by FY14 from `262.34 crore in FY12.

However placement fee is expected to crash

In the analog regime, channel carrying capacity was constrained to 90-100 channels. This led to a scramble amongst broadcasters to have their channels featured by the MSOs and for securing veiwership they had to pay a carriage fee. Further to have a higher sequential ranking, the broadcasters had to pay a placement fee to the MSOs. Although the subscription revenues were not large the MSO made handsome monies from this placement and carriage fees. Carriage and placement fees presently contribute ~50% of the total revenues for the MSO’s.

Post digitization this is expected to come down. However there is no consensus on the same amongst the various industry stake holders. While DEN Networks Ltd. expects this to remain stable, Hathway Cables expects this to crash quite a bit. We have conservatively built in 50% reduction in this amount for DEN Networks.

Carriage fees  which have so far contributed 47% to the consolidated revenues are expected to decline  to  23% going ahead. We have factored a  drop in carriage fees to  `294  crore in FY14 from  `  327.9 crore in FY12. Given the expected multifold increase in subscription revenues, the drop in carriage revenues will have a minimal impact on total revenues Despite this sharp fall revenues are expected to not be impacted severely as subscription revenues are expected to be extremely strong.

Den Networks Ltd carriage revenues fall sharply

Threat from DTH players misplaced; Game is highly tilted in favour of MSOs

Despite having a presence in ~42 mn Households since inception (2003), we do not expect DTH to completely replace the existing analog distribution system. MSO’s being deeply penetrated in the Phase I and Phase II regions will restrict the churn to DTH operators and with accelerated rollout of digitization, we expect the MSO’s to further consolidate their position. MSO’s clearly outperform DTH on various other parameters as enumerated below.

DTH players not a major threat to MSOs.

DEN Networks Ltd truly a multi bagger in the making

Although the full impact of the revenue benefit would be felt FY2015 onward, nevertheless in the interim, the impact on revenue and profitability is expected to be substantial. Post digitization DEN’s  entire ~11 mn subscriber base (as against the reported number of ~1.4 mn)  is expected to start generating revenues.  We expect DEN’s subscription revenue’s to grow multi fold to `853.8 crore by FY14 from `262.34 crore in FY12.

The strong growth in subscription revenues is incumbent upon the fact that the digitization would roll out in a timely manner as per the time table laid out by the Telecom Regulatory Authority of India (TRAI). Knowing fully well how deadlines are scarcely adhered to in India, we have been conservative in the roll out and built in delays in assuming an extended period for the rollout. Incas the roll out were to be done as per plan then the earnings would be brought forward significantly increasing the appreciation potential. However we have not built this into our model and remains an upside risk to our estimates.

Longer term consolidation of the industry to benefit DEN Networks Ltd significantly

As has been the global trend for pay tv, the same is expected to play out in India over the current decade. This will lead to the emergence of a few organized and well capitalized players over the next few years.  Consolidation will also enable MSO’s to have a better bargaining power with broadcasters resulting in improved margins and thus better returns  to the investors.

Global trends indicate that post digitzation the market tends t consolidate

DEN being one of the major players which has grown the inorganic way is best placed to benefit from consolidation.

Post consolidation if international trends were to prevail in India also then we could expect similar improvement in the subscription margins which would improve the profitability and earnings of Indian companies dramamtically.

Margins of global cable operators is indicative of good times for the Indian cable industry in the medium term

Financials to improve sharply over the next two years. After which the growth is to be even steeper

We expect the paying subscriber base to reach 3.9  mn by FY14 from the current 1.4  mn. On the back of the increased paying subscribers revenues are expected  to almost double to  Rs 1,280.9  crore by FY14 from  Rs 714.3  core in FY12, while earnings are expected to leapfrog to  Rs 93.4  crore from  Rs 14.6  crore in FY12 despite higher depreciation from  newly seeded STB’s and interest cost. However the full benefit of digitization will be felt only FY15 onwards.

DEN networks is indeed a low risk high yielding investment opportunity

Valuing DEN  Networks Limited on a single stage DCF basis we recommend a BUY with a price objective of  Rs 210  representing an upside potential of  ~71% from the CMP of Rs 123 over the next 18 months. DEN Networks is truly a low risk high yielding investment opportunity for the Indian markets.

For a better and detailed understanding one can download for free the complete report on DEN Networks.

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Disclaimer: The views expressed in this article are entirely my own and do not reflect the views of my employer. This report is neither an offer nor a solicitation to purchase or sell securities. The information and views expressed herein are believed to be reliable, but no responsibility (or liability) is accepted for errors of fact or opinion. Writers and contributors may be trading in or have positions in the securities mentioned in their articles. Neither or myself accepts any liability arising out of the above information/articles.

Vinit Bolinjkar Head of Research, Ventura Securities Ltd
Tel: | Mobile: 0 9730836363

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