Valuations, digitisation gains keep Sun TV stock in demand

Since Feb stock is down by steep 25% due to adverse sentiment post DMK pullout at the Centre

The Sun TV stock is up 10% over the last two days on expectations of a stable advertising revenues and higher subscription growth. The stock has seen a series of analyst upgrades that highlight future prospects as well as attractive valuations.

Since February the stock is down by a steep 25% due to the adverse sentiment post the DMK pullout at the Centre. At the current price (Rs 391) the stock is trading at 18.6 times its FY14 earnings estimates of about Rs 21.The valuations are at a 10-15% discount to the three year forward P/E multiple.

Given the attractive valuations, over 75% of the analysts according to Bloomberg have a buy rating.  The price targets for the stock is in the range of Rs 470-Rs 500, an upside of 20% to 27%.

Ad revenues still robust

Sun TV is expected to record a double digit advertising revenue growth in the March quarter. Revenue growth is also expected to come in at a healthy 12%, the second highest growth rate (December quarter was the best with 20%) in the last three years, say Anand Rathi’s Yogesh Kirve and Rajesh Zawar.

They say that a high exposure to non-macro sensitive sectors (FMCG/regional companies), increasing competition among advertisers and a content deal with Arasu (Tamil Nadu cable operator) are the reasons for revenue growth. About 90% of its advertising revenues are expected to come from FMCG and local companies.

It is its exposure to regional markets that has helped it to outperform its peers. Says Jatin Chawla of Credit Suisse Securities, “The increasing importance of regional advertising and Sun’s dominance of regional markets mean that whilst the television advertising industry has experienced a 12% annual growth in the past five years, Sun has been able to grow 500bps higher than the industry.”  

Subscription gains

The ongoing digitisation process is likely to enhance Sun TV revenues both due to the higher volumes as well as revenues. Out of the 38 cities to be covered in phase 2, Sun TV has a strong presence in five important ones:  Hyderabad, Bangalore, Vishakhapatnam, Mysore and Coimbatore. About 4 millon subscribers (for the sector) are expected to be added in these cities. Higher digitisation is expected to boost subscription revenues (currently at 33% of  revenues) for the company.

Says Chawla of Credit Suisse Securities, “We expect Sun’s domestic subscription revenues to experience a 30% annual growth for the next three years.” Further, average revenue per user from digital cable should also increase from the current Rs 5 to about Rs 25 post digitisation, estimate analysts. DTH ARPUs for the company, in comparison are at Rs 39. Given the ARPU difference more than 70% of TV subscription revenues comes from DTH, even though the cable subscriber base is four times that of DTH. Motilal Oswal’s Shobit Khare expects the digitisation upside to be at Rs 170 per share.