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STOCK IDEA Sun TV Network
Recommendation: Buy
Price target: Rs515
Current market price: Rs367 Sun rises in the south Key points -
Dominant force, undisputed leader of south India: Sun TV Network (Sun TV) is the undisputed leader in the south Indian entertainment market (Tamil Nadu, Andhra Pradesh, Karnataka and Kerala), India's biggest regional entertainment market with strong viewership market share in the regional broadcasting market (Tamil Nadu: 68%, Andhra Pradesh: 38%, Karnataka: 41%). With 32 out of the total 66 TV channels present in the market, a leading viewership share (it is the leader in three out of the four markets) and a 30% market share of the total south Indian advertisement market, Sun TV enjoys a dominant position in the south Indian broadcasting market. On the other hand, its premium positioning and low-cost de-risked business model have helped the company to maintain a very healthy operating profit margin (OPM) corridor of 70%, EBIT margin of 51% and dividend pay-out of more than 50%. -
Digitisation benefits yet to accrue, huge upside potential: Among the key stakeholders of the TV industry, TV broadcasters are expected to be the prime beneficiaries of the mandatory digitisation process initiated by the government. The broadcasters would benefit from higher subscription revenues as the declaration of the increase in the number of subscribers would happen at the least incremental capital expenditure (capex). With the government likely to speed up the process of digitisation in Chennai and the smooth transition in the other key markets (Bengaluru, Hyderabad, Coimbatore, Mysore and Vishakhapatnam) under phase-II, the subscriber base is estimated at 4.77 million. The actual benefits are likely to be seen beyond FY2015 with almost a six-fold increase in the ARPU of the cable subscribers from Rs4 currently to Rs15-20 (post-DAS regime). The full DAS regime will provide incremental potential upside of around Rs650-750 crore to the subscription revenues, driven by (a) an improvement in subscriber reporting (under-reporting is rampant currently); (b) a four- to five-fold increase in the ARPU from the current levels; and (c) an increase in broadcasters' ARPU share with an improvement in subscriber reporting. -
Healthy earnings with strong return ratios: We expect Sun TV to deliver a 16% compound average growth rate (CAGR) in the stand-alone top line over FY2013-16, led by a 20% CAGR in the subscription revenues (ex full impact of the digital addressable system [DAS] regime) and an 11% CAGR in advertisement revenues. We have built a margin decline of 140 basis points over FY2013-16 and expect the net income to grow at a CAGR of 15% over FY2013-16. We expect the return on equity (RoE) to improve to 28% by FY2016 and the dividend pay-out to remain healthy at around 53% of the consolidated net income. In our estimates, we have not incorporated the full potential upside from the DAS regime and the profit, if any, from the company's Indian Premier League (IPL) franchisee in FY2015. -
Valuation-deserves re-rating, illuminating future prospects: Given the potential improvement in the operating environment in view of the huge upside potential from the DAS regime and a gradual uptick in the advertisement spending, the future prospects for Sun TV, which has a dominant market position and integrated business model with presence over broadcasting, movies and radio, seem to be favourable. On the other hand, despite a change in the political regime and increasing competition, Sun TV has managed to remain the leader in its key market which allays the fear that the company may be losing its dominant position. At the current market price of Rs367, the stock trades at 18.2x, 15.5x and 13.4x based on the earnings estimates for FY2014, FY2015 and FY2016 respectively. At the current levels, the stock is trading at a discount of around 35% to its historical one-year forward price-earning ratio (PER) and that of 33% to Zee Entertainment Enterprises Ltd (ZEEL; which is much higher than the three-year average discount of 16%). Sun TV enjoys an industry-leading margin profile, leadership position in its key market, strong dividend pay-out, and healthy balance sheet and return ratios. Hence, it deserves a much better valuation. We value Sun TV at 21.5x FY2015E earnings, our target multiple is based on a 25% discount to ZEEL. We initiate coverage on Sun TV with a Buy rating and price target of Rs515.
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