Weak signals emerge for Sun TV due to lower OTT spending, ad growth

Muted dividend amid a mountain of cash did not go well with investors

After falling over 3 per cent after its results last week due to lower dividend distribution, the Sun TV Network stock has recovered a bit. In addition to pay out ratio, slower advertising growth compared to peers, market share loss in non-Tamil genres and lower investments in over the top application (OTT) were the other concerns. 

The near term negative view on the stock, according to Naval Seth and Sonali Shah of Emkay Research was the steep reduction in dividend payout to 13 per cent (Rs 5 per share for FY21) as compared to an average of 49 per cent over the last five years, despite cash and cash equivalents of Rs 4,140 crore. The dividend per share in FY20 was Rs 25 which translates to a 72 per cent payout. The other means of rewarding shareholders which is the buyback route was also not adopted leading to the disappointment. 

On the operational front, Sun TV’s advertising growth returned to positive territory after eight quarters of y-o-y decline. However, the company’s growth at 7 per cent trailed Zee Entertainment’s 9 per cent though it had a more favourable base. 

Jaykumar Doshi of Kotak Institutional Equities believes that the underperformance versus peers continued in line with viewership share loss. Star Network has gained significant advertising market share in the recent past and Zee’s advertising growth in the South was also better than Sun, he adds. While its Tamil viewership has been stable, it has lost share in the Telugu and Malayalam genres. After a covid-hit FY21, the company is hoping to hit the FY20 levels in ad revenues this financial year. 

Its investment priorities too aren't to the street’s liking. The company is looking at an investment of Rs 1,200 crore over the next couple of years on movie production. The company is also investing in creating non-fiction shows in Telugu and Malayalam to regain market share. Most analysts highlight the need for the company to step up its investments in the digital arena (OTT) where it has been lagging behind peers. It could lose share given the shift of advertising and subscription to the digital medium. 

Though the stock is not expensive at 13 times FY23 earnings estimates and it has cash equivalent to 20 per cent of its market capitalisation, investors should await trends on the advertising growth front and market share movement across genres before considering an investment.