Sun TV: Positive macros, operational worries

Expectations of advertising recovery and subscription growth are positives while weakening competitive position is a worry

The Sun TV Network scrip shed nearly 11 per cent over the last four trading sessions extending the 8.5 per cent fall on Friday after reports that the promoters were questioned by the enforcement directorate in relation to the Aircel-Maxis deal. While the overhang of the case is likely to last for a while, prospects could improve on higher advertisement and subscription revenues. 

Analysts at Kotak Securities while increasing the target price to Rs 390 on improving economic sentiment/cable environment which are long term positives highlight the worrying competitive scenario. While it dominates the Tamil Nadu market, in other key markets of Telugu, Kannada and Malayalam the company's dominance/position has reduced significantly over the past few years. In Karnataka, the company's lead is down from twice a couple of years ago to 1.2 times, in Andhra, it is number three with a 30 per cent gap between it and the leader, while in Kerala the gap between the Sun TV's channel (number two in the market) and the market leader has increased. The research firm also highlights risks such as the imposition of 10+2 rule across channels and potential for higher capital spending (movies and other content) especially if ratings do not pick up significantly in the coming quarters.

The positives are on account of the two key sources of revenue which are expected to perk up going ahead.

Advertising growth for the media sector is likely to move up on higher spending by FMCG companies. Consumer companies may see their gross margins move up post the recent fall in commodity costs especially crude oil. Given that the sector accounts for 45 per cent of advertising on television, any increase in ad spends will boost revenues for broadcasters.

Credit Suisse analysts believe that the boost from FMCG companies could lead to improvement from the current expectations of 10-15 per cent advertising revenue growth to 25 per cent in FY16. This should improve prospects of Sun TV as it gets 60 per cent of its ad revenues (higher than sector average) from the FMCG space. The research firm has a target of Rs 450 on the stock. Economic slowdown and higher competition meant that the company recorded revenue growth of 1.7 per cent in FY14 and is expected to end the current fiscal at 5 per cent.

The other trigger is the improvement in subscription revenues. The increase in prices of channel packs by MSOs by about 15 per cent will enhance susbcription revenues for broadcasters and decrease the price gap between DTH and cable subcribers.  Further any gains from ongoing digitisation will also lead to volume/value growth. While Sun has 10 million DTH consumers, over 90 per cent of its 44 million subscribers receive analogue signals. However, the reduction of pricing gap between Sun's DTH (ARPU Rs 40) and analogue (ARPU Rs 4) subscribers coupled with digitisation indicates strong revenue potential for the company, according to UBS analysts. The research firm has a target of Rs 485.