Sun TV: Risk-reward favourable

Amid expectations of improving growth in ad revenues, inexpensive valuations, most analysts positive

After surging nearly 10 per cent on Tuesday, the Sun TV Network stock is back to square one. While it had lost a per cent on Wednesday, volatility was highest on Thursday when it made a new 52-week high of Rs 438. However, as news reports suggesting an AIADMK win started flowing in, the stock fell 13.2 per cent. At Rs 371, it now trades closer to April levels.

Most exit polls had predicted a DMK win in Tamil Nadu, triggering a surge in the stock. Sun TV is promoted by DMK chief M Karunanidhi's grand-nephew Kalanithi Maran and a DMK win would have blown off a lot of clouds over the company, said analysts.

One, a victory could have reduced the intensity with which the central police pursues cases against the promoters, believes Bijal Shah, analyst at IIFL. Second, subscription revenues would have got a boost as digitisation in the state is delayed due to pending litigation in the Madras High Court. Notably, state-owned Arasu Cable TV Corporation is still awaiting a digital cable licence. Aashish Upganlawar, analyst at Elara Capital, believes digitisation could double Sun TV's subscription revenues. Thanks to the monopolistic situation enjoyed by Arasu in the state, Sun group's Sumangali Cable is seeing pressure.

With the recent hope rally behind, investor focus will again shift to the company's core operating performance, which is expected to remain healthy. Advertising revenues, which form half of Sun TV's revenues, are likely to grow 13 per cent over the next two years as viewership is likely to stabilise. Notably, this metric had lagged behind that of peers such as Zee and the sector over FY12-16 due to loss of market share in non-Tamil states amid heightened competition. The company, though, has maintained its leadership position, with 75 per cent network market share in the Tamil genre, and ad revenue growth remains immune to the election outcome. By Bloomberg consensus estimates, Sun TV's consolidated earnings are likely to grow at 14 per cent in FY17. This, along with high operating margins (68 per cent), healthy return ratios (20 per cent plus) as well as cash flow generation, are some reasons most analysts are bullish.

Valuations of 14 times FY17 estimated earnings are also inexpensive, and at less than half of Zee Entertainment's 30 times. However, Sun's earnings growth expectations for FY17 is also lower than Zee's 24 per cent. On the whole, the Sun TV stock seems to adequately capture most concerns and lower growth.