Back in 1992, so the story goes: Kalanithi Maran sought Zee TV's permission to use its transponder time when the channel was off air.
He believed Zee would not object because it would be recovering some of its rentals, but for some reason, Zee did not agree. So, Maran worked out a deal with ATN and went on to launch Sun TV.
In these thirteen years, he has built up a business that would be the envy of any broadcaster: Sun's channels command the highest audience shares in all the four southern states and viewership ratings for Sun TV during prime time in Tamil Nadu are way above those for Star Plus or Sony Entertainment (source TAM).
"We have a share of 70 per cent in the television market in Tamil Nadu and a 91 per cent listenership share in radio," claims the ebullient 40-year-old chairman.
Today, Sun TV is roughly one-fifth of the size of Zee. Its revenues for FY06 should hit Rs 325 crore compared with Zee's Rs 1,505 crore. But if its initial public offering (IPO) goes through, Sun's market capitalisation will be around Rs 5,000-6000 crore or half of Zee's Rs 10,000 crore.
They also believe Maran's political connections have helped but concede that the model is well thought out. Maran is now planing a foray into DTH through a group company, which would give him even greater control over the distribution.
Leveraging the group's distribution business Topline should grow faster
Surprisingly enough, the topline growth in FY05 was an unimpressive 7 per cent.
For a broadcaster which, through its four Tamil channels, has enjoyed the highest audience share among all networks (including national networks) in Tamil Nadu for the past three years "� 59 per cent "� and the highest audience in Kerala too, sales at Rs 290.3 crore did not reflect much pricing power.
For FY06, Sun should see a smarter increase of 12 per cent to around Rs 325 crore, though that too is disappointing.
Analysts, however, are betting big on the future in anticipation of larger revenues from advertising in a strong environment. Besides, with subscription revenues kicking in, sales, they believe, should grow 75 per cent in FY07 and 45 per cent in FY08.
Sure enough, the environment, today, is far better. Rajesh Jain, director, KPMG, says "The advertising pie for television is growing faster than before and consumers can afford to spend more on entertainment and are willing to do so."
So, Sun should command better pricing power, given its already high market share and the fact that it operates in the fairly affluent states of Tamil Nadu and Kerala.
Analysts estimate the ad spend for the Tamil and Malayalam C&S TV markets at Rs 350 crore and Rs 100 crore in FY05 respectively. Despite this, it is hard to see the topline touching Rs 835 crore in the next couple of years, analysts predict.
Going pay should pay off
What will drive revenues is Sun's plan to make its remaining free-to-air channels, including its flagship channel Sun TV, pay channels. Maran says Sun TV will be priced between Rs 15 and Rs 20, and believes reporting by cable operators will rise from the current 20 per cent to at least 35-40 per cent.
Industry watchers believe that the pay TV opportunity in Tamil Nadu and Kerala is large and will increase with the arrival of new platforms like DTH. The number of cable TV households is around 12 million and the estimated size of the cable subscription revenue market is around Rs 2,500 crore.
Besides, the average cable monthly subscriptions are in line with the national average of Rs 175-200 and the possible size of the pay TV market assuming a 15 per cent share for broadcasters is around Rs 380 crore.
Sun's pay TV revenues in FY05 were Rs 40 crore and since its programmes command a high viewership, cable operators would be willing to carry the channels.
Analysts expect its pay TV revenues to touch Rs 220 crore by FY08. The other opportunity lies in the overseas markets, where there is a large affluent Indian population. Sun does not earn cable revenues since the business is housed in a group company.
The DTH venture, too, will be set up in a group entity since regulations do not allow DTH in a broadcasting company. However, there will be indirect benefits since the same promoter controls all the businesses.
Content "� a big strength
Sun has built up a large library of around 2,600 films, in Tamil and Malayalam, which has helped it retain its prime position. Besides, it continues to buy rights for films.
"We have the first right of refusal with most film producers," claims Maran. The company believes in both outsourcing content and producing content in-house, for which it has built studio facilities.
Producers making content for Sun have to enter into an exclusive arrangement with the company and cannot produce serials or programmes for any other channels.
They typically purchase a time slot (say half an hour) on the channel and sell a portion of the air time "� usually four minutes, the remaining air time of three minutes being marketed by Sun.
Given that producers also need to sell air time, they would look for channels with high viewerships, which Sun offers.
Tuning in to the radio
Advertising revenues from FM radio are tipped to grow multifold from Rs 300 crore at present to at least Rs 1,000 crore by 2010, according to KPMG's Jain. Industry experts say the share of radio in total advertisment revenues should grow to at least 5.5 percent from the current 2.3 per cent.
At present, Sun TV runs three radio stations "� in Chennai, Coimbatore and Tirunelveli. Maran says the company will retain 45 licences in all "� in Phase II; Sun TV won licences for all nine A-category cities and for 21 out of 22 south Indian cities.
The gameplan is to run 22 stations in the south and 23 stations in the north. They would be up and running by the year-end. Sun's strength lies in its ownership of film music rights for a large number of films.
The management is hoping to garner advertisements from local retailers and restaurants, which would typically not use television or print "� 85 per cent of radio revenues are from local advertisements.
Revenues from Tirunelveli "� a small, C-category town with a population of 0.41 million "� amounted to Rs 2.8 crore in FY05 and Rs 1.3 crore in H1FY06. From Coimbatore, Sun is estimated to have earned Rs 5.6 crore in FY05 and Rs 3.2 crore in H1FY06.
Valuations are a big bet on the future
The price band of Rs 730-875 implies a market capitalisation of Rs 5,037-6,037 crore for Sun. Compare this with Rs 10,000 crore for Zee, which has a similar business model except that it has distribution but no radio business.
Revenues for Zee were Rs 584 crore versus Rs 218 for Sun in the nine months to December 2005. Its market cap to sales (FY06), at the higher end of the price band, is around 18.5, while for Zee it is 6.5. Sun's EV/EBITDA multiple for FY06 is 28 times compared with Zee's 40 times.
Sun's programmes are popular. Going ahead it should gain from higher advertisement reveneus. Zee, on the other hand, while seeing better viewership ratings, is unlikely to see increased pricing power.
Analysts believe Sun's earnings will grow at 48 per cent compared with 6-10 per cent for Zee between FY05 and FY08, given that its pay TV revenues will grow faster. While the numbers are not impossible to achieve, given the potential for growth, Sun may take longer than time estimated to get there.
