Saturday, April 20, 2013

Sun TV: Digitisation gains, valuations keep stock in demand
Large chunk (55%) of its revenues comes from sale of advertising space on these channels, while 30% comes from subscription fees
The Sun TV stock is up 10 per cent over the past two days on expectations of healthy growth in advertising revenues (even as the economic environment remains weak) and higher subscription growth. The stock has seen a series of analyst upgrades that highlight future prospects, as well as attractive valuations.

Since February the stock has been down 25 per cent due to the adverse sentiment after the DMK pullout at the Centre. At the current price (Rs 391), the stock is trading at 18.6 times its FY14 earnings estimates of about Rs 21 a share. The valuations are at a 10-15 per cent discount to the three-year forward price to earnings (P/E) multiple. Sun TV owns 32 regional channels and dominates Tamil Nadu, Andhra Pradesh, Kerala and Karnataka. A large chunk (55 per cent) of its revenue comes from sale of advertising space on these channels, while 30 per cent comes from subscription fees. Given the business prospects and attractive valuations, 75 per cent of analysts, according to Bloomberg, have a buy rating. The price targets are Rs 470-500, indicating an upside of 20-27 per cent.

Robust ad revenues
Sun TV is expected to record a double-digit advertising revenue growth in the March quarter. Revenue growth is also expected to come in at a healthy 12 per cent, the second highest growth rate (the December quarter was the best, with 20 per cent) in the past three years, say Anand Rathi’s Yogesh Kirve and Rajesh Zawar. They say a high exposure to non-macro sensitive sectors such as fast-moving consumer goods (FMCG) and regional companies, increasing competition among advertisers and a content deal with Arasu (the Tamil Nadu government cable operator) are the reasons.

About 90 per cent of its advertising revenues are expected to come from FMCG and local companies. It is Sun’s exposure to regional markets that has helped it to outperform peers. Says Jatin Chawla of Credit Suisse Securities, “The increasing importance of regional advertising and Sun’s dominance of regional markets mean that whilst the television advertising industry has experienced 12 per cent annual growth in the past five years, Sun has been able to grow 500 basis points higher than the industry.” 

The trend could continue, given rate increases by Sun TV. S L Narayanan, chief financial officer for the Sun Group, says, “Advertising revenues are expected to grow in the 12-15 per cent range (annually) over the next three years. We have had a good run in the last couple of quarters and if demand improves, we could look at a rate hike in the second half of the current financial year.”

Subscription gains
The ongoing digitisation process is likely to enhance Sun TV’s subscription revenues, both due to the higher volumes and fees. Of the 38 cities to be covered in phase-2, Sun TV has a strong presence in five important ones — Hyderabad, Bangalore, Vishakhapatnam, Mysore and Coimbatore. About four million subscribers (for the sector) are expected to be added in these cities alone.

Higher digitisation is expected to boost subscription revenues (currently 33 per cent of total revenues) for the company. Says Chawla of Credit Suisse Securities, “We expect Sun’s domestic subscription revenues to experience a 30 per cent annual growth for the next three years.” The current subscriber base is 34 million (eight mn DTH and 24 mn cable subscribers).

Apart from increase in subscriber base, average fee per user per month (Arpu) for Sun (from cable-based customers) should also increase from the current Rs 5 to about Rs 25 after digitisation, estimate analysts. Subscription fees (Arpu) from DTH customers in comparison are Rs 39. While the ARPU difference is huge, about 70 per cent of subscription revenues come from DTH, though the cable subscriber base is four times the latter. With digitisation gaining pace, expect cable subscriber revenues (Arpu) to rise sharply.

Sun’s Narayanan says overall subscription revenues are likely to grow at a faster rate in the coming quarters on the back of the ongoing digitisation. And, will account for a larger share of the overall revenues by March 2015, when the migration from analogue networks is likely to be completed. Motilal Oswal’s Shobit Khare expects the digitisation upside to be at Rs 170 per share.

Courtesy: Business Standard