Sun TV: Valuations turn attractive

Stock price correction a good opportunity to buy given steep discount to Zee Entertainment and strong medium term prospects

The Sun TV stock has corrected 18.5% since its November highs on the back of poor September quarter results and muted advertising revenue growth going ahead.

The key issue for the company has been the drop in advertising revenues which constituted over 60% of revenues in FY13 and recorded a growth of 7.57% in that fiscal.

Advertising revenues fell 5% in the September quarter to Rs 268 crore post the Telecom Regulatory of India (Trai) regulations capping the advertisements per hour.

Advertising minutes fell from 18 minutes an hour in the second half of FY13 to 10 minutes per hour currently. With advertisers unwilling to increase rates, Sun TV is unable to compensate the low advertising volumes with higher prices. The pain is likely to last for a couple of quarters and Sun will look to the subscription revenues to improve revenue growth.

Analysts have cut their FY14 advertising growth estimates from 8% to 2%. The delay in digitisation in Tamil Nadu is another concern area for Sun TV in the near term. Though there is near-term pain most analysts have a buy given the attractive valuations.

At current levels it is trading at a 35-40% discount to Zee and does not fully reflect the digitisation gains which will come from higher subscriber revenues. Say Jatin Chawla and Akshay Saxena of Credit Suisse, “At 17 times FY15 earnings (40% discount to Zee), Sun's valuations are attractive.”

Better subscription revenue growth

With advertising revenues muted, a larger share of revenues are likely to come from subscription growth especially in Tier II cities. Ankit Kedia of Centrum Research expects analog subscription revenues to continue to grow at a healthy pace of 43% in FY14, propelled by Phase-II markets, and incremental revenues from North and West of India.

This segment grew 45% in the September quarter. While the ongoing digitisation especially in Hyderabad and Visakhapatnam is likely to reflect in coming quarters, the recent Trai statement asking multisystem operators to implement the digital access system in Chennai is also a positive for the company.

Kedia estimates that this measure will turn Sun TV into a pay channel from being free-to-air and offer revenue upside of Rs 2.5 crore per month. In addition to this, he estimates that revenues from DTH segment are likely to increase by 20% in FY14 on the back of 9.6 million subscribers and ARPU increase to Rs 40.