Sun 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.
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 Networks Ltd meteoric rise is expected due its
- Unique business model,
- Strong pull of its SUN TV brand and
- Consequent advertising premiums that its gets,
- Support from the digitization of the media business which will stop non paying subscribers.
- Strong DTH presence
- 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
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.
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.
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
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 firstname.lastname@example.org 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 http://winningtrades1.com or myself accepts any liability arising out of the above information/articles.
|Vinit Bolinjkar Head of Research, Ventura Securities Ltd|
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