 "Sun TV: Positive macros, operational worries")
The Sun TV Network scrip shed nearly 11 per cent in only four trading sessions (December 10-16), extending the 8.5 per cent fall on Friday, after reports that the promoters were questioned by the government's enforcement directorate on the controversial Aircel-Maxis deal.
The stock has recovered some of the losses but the overhang of the case is likely to last a while. Also, while there is potential for the business prospects to improve, led by higher advertisement and subscription revenues, there are some concerns. Analysts at Kotak Securities, while increasing their target price for the scrip to Rs 390 on improvement in economic sentiment and the TV cable environment, both long-term positives, highlight a worrying competitive scenario.
Sun TV dominates the Tamil Nadu market. However, in the other key Telugu, Kannada and Malayalam markets, its dominance/position has reduced significantly over recent years. In Karnataka, for instance, the company's lead is down from twice a couple of years ago to 1.2 times. In Andhra, it is number three, with a 30 per cent gap between it and the leader. In Kerala, the gap between the channel (number two in the market) and the market leader has increased.
Kotak also highlights risks such as imposition of the 10+2 rule (no more than 10 minutes per hour of commercial advertisements and up to two minutes per hour of a channel’s self-promotional programmes) across channels. And, potential for higher capital spending (movies and other content), especially if ratings do not pick up significantly in the coming quarters.
The positives for Sun TV, which is into broadcasting (television and radio) and movie production & distribution, among others (owner of Indian Premier League cricket team Sunrisers Hyderabad), are on account of two key sources of revenue, which are expected to perk.
The first is that advertising growth for the media sector is likely to move up on higher spending by fast-moving consumer goods (FMCG) companies. The latter might see their gross margins move up after the recent fall in commodity costs, especially crude oil. As the sector accounts for 45 per cent of advertising on television, any increase in ad spends will boost revenues for broadcasters such as Sun. Credit Suisse analysts believe the boost from FMCG companies could lead to an improvement from the current expectation of 10-15 per cent advertising revenue growth to 25 per cent in FY16.
The other trigger, albeit an indirect one, is the improvement in subscription revenue. The increase in prices of channel packs by MSOs (multi-system operators) by about 15 per cent will also lead to higher subscription revenue for broadcasters such as Sun, and decrease the price gap between direct-to-home (DTH) and cable subscribers.
Further, any gain from ongoing digitisation will also lead to volume/value growth. While the Sun group (Sun TV’s promoter) has 10 million DTH consumers, it has 44 million cable subscribers, of which a little over 90 per cent receive analogue signals. However, the reduction of pricing gap between Sun's DTH (Arpu or average revenue per user is Rs 40/month) and analogue (Arpu of Rs 4) subscribers, coupled with digitisation, indicates strong (subscription) revenue potential for the network, according to UBS analysts. The research firm has a target of Rs 485.
The amount of gain, however, will depend on the market share Sun is able to cough up in its key markets. And, on the pace of digitisation, uneven for the sector.
According tor Bloomberg, a majority of analysts polled in the past one month were positive on the stock (now at Rs 358), with an average target price of Rs 414.
The stock has recovered some of the losses but the overhang of the case is likely to last a while. Also, while there is potential for the business prospects to improve, led by higher advertisement and subscription revenues, there are some concerns. Analysts at Kotak Securities, while increasing their target price for the scrip to Rs 390 on improvement in economic sentiment and the TV cable environment, both long-term positives, highlight a worrying competitive scenario.
Sun TV dominates the Tamil Nadu market. However, in the other key Telugu, Kannada and Malayalam markets, its dominance/position has reduced significantly over recent years. In Karnataka, for instance, the company's lead is down from twice a couple of years ago to 1.2 times. In Andhra, it is number three, with a 30 per cent gap between it and the leader. In Kerala, the gap between the channel (number two in the market) and the market leader has increased.
Kotak also highlights risks such as imposition of the 10+2 rule (no more than 10 minutes per hour of commercial advertisements and up to two minutes per hour of a channel’s self-promotional programmes) across channels. And, potential for higher capital spending (movies and other content), especially if ratings do not pick up significantly in the coming quarters.
The positives for Sun TV, which is into broadcasting (television and radio) and movie production & distribution, among others (owner of Indian Premier League cricket team Sunrisers Hyderabad), are on account of two key sources of revenue, which are expected to perk.
The first is that advertising growth for the media sector is likely to move up on higher spending by fast-moving consumer goods (FMCG) companies. The latter might see their gross margins move up after the recent fall in commodity costs, especially crude oil. As the sector accounts for 45 per cent of advertising on television, any increase in ad spends will boost revenues for broadcasters such as Sun. Credit Suisse analysts believe the boost from FMCG companies could lead to an improvement from the current expectation of 10-15 per cent advertising revenue growth to 25 per cent in FY16.
The other trigger, albeit an indirect one, is the improvement in subscription revenue. The increase in prices of channel packs by MSOs (multi-system operators) by about 15 per cent will also lead to higher subscription revenue for broadcasters such as Sun, and decrease the price gap between direct-to-home (DTH) and cable subscribers.
Further, any gain from ongoing digitisation will also lead to volume/value growth. While the Sun group (Sun TV’s promoter) has 10 million DTH consumers, it has 44 million cable subscribers, of which a little over 90 per cent receive analogue signals. However, the reduction of pricing gap between Sun's DTH (Arpu or average revenue per user is Rs 40/month) and analogue (Arpu of Rs 4) subscribers, coupled with digitisation, indicates strong (subscription) revenue potential for the network, according to UBS analysts. The research firm has a target of Rs 485.
The amount of gain, however, will depend on the market share Sun is able to cough up in its key markets. And, on the pace of digitisation, uneven for the sector.
According tor Bloomberg, a majority of analysts polled in the past one month were positive on the stock (now at Rs 358), with an average target price of Rs 414.