Poor connection for Sun TV investors even as firm gets tougher on content

Persistent weakness in advertising revenue, challenging outlook may drag company's earnings

Shares of Sun TV Network fell close to 7 per cent on Tuesday after reporting worse-than-ex­pected results in the October-December (Q3) period. The stock recovered a bit before closing with a loss 4.4 per cent.

Advertising revenue in Q3 declined 10 per cent over the corresponding quarter of FY20 to Rs 311 crore, compared to industry average of 4-5 per cent growth. This marks the eighth consecutive quarter of contraction in advertising revenue for the company.

Sun TV believes the under-performance was because of weak advertising spend by local retailers, who contribute significantly to revenues, and fewer movie releases. Local advertisers contributed around 30 per cent to ad revenues. Additionally, the company lost viewership share in Tamil prime-time general entertainment channel (GEC). “Sun’s underinvestment in the core TV business has led to continued loss of ad market share. Sun Network has lost leadership in the South to Star, and at this rate Sun TV could also cede leadership to Star Vijay,” said analysts at Kotak Institutional Equities.

In a bid to regain some lost ground, the company plans on investing aggressively on content and aims to return to its FY20 ad revenue base in the upcoming financial year, which may translate into significant margin compression going forward, said ICICI Securities in a recent note. The Street is also closely monitoring the company's plans on the digital front. However, consistent delays in launching new content in the past and stiff competition from players like Amazon Prime and Zee5 have kept sentiment under check. 

Against this backdrop, analysts at Centrum Broking have cut their earnings estimates by 5.2 and 7.5 per cent for FY22 and FY23 and downgraded the stock from "accumulate" to “reduce”. 

Healthy cash flow with a cash balance of Rs 3,000 crore and a high dividend yield of 4.8 per cent as of March 2020 are some of the key positives. At 14x its FY22 estimated earnings, the stock trades at a considerable discount to its historical average of around 20x. However, in the absence of any meaningful recovery in advertising growth and positive momentum in the digital space, investors are better off looking at other opportunities, say experts.