Sun TV rises 24%; should you buy into the rally?

All charges against the company's promoters in the Aircel-Maxis case are being dropped

The Sun TV Network stock rose 24 per cent on Friday to Rs 683.85 after the Supreme Court-appointed Central Bureau of Investigation (CBI) judge in a special court dropped all charges against the company’s promoters in the Aircel-Maxis case.

 

While the matter did not pertain to the Sun TV business, the promoters, Kalanithi Maran and his brother Dayanidhi Maran, were the key accused. The promoters own 75 per cent in the company. The charges were that Dayanidhi Maran, the then telecom minister, pressured Aircel’s owner to sell 74 per cent stake to Maxis in 2006 and as a quid pro quo Maxis invested in Marans’ DTH venture Sun Direct.

 

Most brokerages have re-rated the stock, given that the key overhang is behind. Jaykumar Doshi of Kotak Institutional Equities Research says this event addresses the key investor concern and frees promoter bandwidth, allowing sharper focus on the business. It merits re-rating, he adds. Analysts at CLSA say the verdict ends a long-standing legal overhang on Sun TV, and comes after the demise of the All India Anna Dravida Munnetra Kazhagam (AIADMK) party chief, which has reduced the political risks.

 

While brokerages are bullish given the recent decision, investors should be wary as there is another CBI case (BSNL) pending. And, a potential appeal in the Supreme Court in the Aircel-Maxis case could change the ruling against the Marans. While the six-year old case did not directly impact the company, Doshi says the company was an indirect casualty (promoter bandwidth constraints/distractions), as Sun did not take any key strategic initiative in the past five years and its execution slipped on TV viewership ratings, as well as on the content monetisation fronts.

 

Sustainability of the stock’s rise will now depend on the company’s advertising revenue growth trends. Ad growth has been weak, as the company reported flat numbers in the first half of FY17, against 17 per cent year-on-year (y-o-y) growth for its peer, Zee Entertainment. This is on the back of loss in market share in the non-Tamil southern markets. However, subscriptions, the other key revenue generator, grew 17 per cent in the first half of the current financial year due to higher revenues from the cable segment. Going ahead, the company should benefit from subscriber growth in Phase III and IV of digitisation. Any moves on digitisation in the company’s core Tamil market would also be a positive. Investors, however, need to keep a tab on these.

 

While analysts have sharply revised upwards their target prices for the stock to Rs 650-700, the scrip is already at the higher end of this range. Also, uncertainty on other cases remain, which could impact the stock. Thus, investors should await correction and strong ad growth levels before making an investment.