Sun TV: Eyeing an ad spend recovery

While increasing competition is impacting its pricing power, ad revenue growth has been lagging peers such as Zee Entertainment

The Sun TV Network scrip is down 16% over the last one year on account of slowing advertising revenues, increasing competition and overhang of the CBI charge-sheet against the company's promoter. 

 

Extension of deadline for implementation of digitisation (phase III to end-2015 and phase IV to end-2016) has also meant that gains from the subscription segment (30% of revenues) are likely to be delayed further. 

 

The stock at Rs 342 is trading at 15 times its FY16 estimates, a steep discount to Zee Entertainment's 27 times. Analysts say that the discount is due to increasing competition, cap on advertisement, structural issues and pending CBI enquiry on the promoters, which will keep share price under check.

 

The key growth metric for Sun TV is its advertising business, which accounts for half of its revenues. However, ad revenue growth has been inconsistent and volatile, falling in the September and December quarters of FY2014 and recovering a bit in the March quarter. Even for June 2014 quarter, while Sun reported flattish ad revenue growth, the industry grew 13% on the back of a shift to Hindi news channels on account of general elections. 

 

Sun Group's Chief Financial Officer S L Narayanan says that advertisement market has been impacted by several "unprecedented" changes on available inventory. Change in tariff, which has been put through, took some time to settle in the market. Hence, there was some volatility in the company's revenue growth, but now it is back to normal, he says.

 

Market share losses in two key markets of Karnataka and Andhra Pradesh where peers are investing heavily as well as low inventory utilisation also led to the poor performance by Sun TV. What went wrong for the company in FY2014 was the hike in ad rates to compensate for the reduced ad inventory due to TRAI imposed cap which severely impacted volumes.

 

Despite reverting back to the 15 minute per hour schedule in the June 2014 quarter, it was not able to improve its ad revenue growth. As of now there is a stay on the TRAI order, but if the ad cap of 12 minutes per hour is implemented it will dent Sun's revenue growth going ahead.

 

While the ad cap will be a negative if it goes through, improvement in ad spends hold key for Sun. Analysts at BNP Paribas estimate double-digit growth to come back in FY16 (8% in FY15) as there are signs of increased marketing spends in key sectors such as consumer, auto, telecom and e-commerce. The management in a recent call was hopeful of an advertisement revenue recovery in FY16, with a growth uptick of 15-20%.

 

Says Narayanan, "Revenue is driven by business confidence, if the economy is growing then everybody would be spending, but if the economy is growing at around 5% then the propensity to spend will be impacted." 

 

Echoing the view of analysts, Narayanan's confidence comes in the backdrop of increase in spends by FMCG players, who brings 55% of revenue for Sun TV, with one third coming from regional brands all of whom are doing well.

 

What will hamper progress of the company, which is a market leader and dominates viewership in the four southern states, is increasing competition. According to IDFC Securities' analysts, Sun TV's all-India market share has almost halved in five years. While it retains the top slot in Tamil Nadu, it has lost share in Andhra Pradesh and Karnataka where its peers are investing heavily. This is putting pressure on Sun, which is not able to pass on the price hikes fully.

 

The other major topline contributor is subscription revenues, which grew 26% in FY14 and should get a fillip from digitisation. Sun TV has indicated that the digitisation and addressability for cable television would help. Sun, which has about eight million subscribers, hopes that the revenue from the DTH space would maintain a positive momentum in the coming years.