Strong forecast, digitisation are positives for Sun TV

Near-term ad revenue growth, however, could be affected by demonetisation

Given the political developments in Tamil Nadu, the Sun TV Network stock has been volatile over the past few trading sessions, gaining 13 per cent over two trading sessions earlier before giving up some gains on Tuesday. While these could be kneejerk reactions, developments on the fundamentals side indicate road ahead.

To start with, the company's ad revenue growth has been muted so far in FY17. It was just three per cent in September quarter while June quarter saw a fall of three per cent, translating into a flat performance for the first half of the financial year. Ad revenues account for about 55 per cent of total revenues of Sun TV; the rest comes from subscription. Going ahead, analysts are cautious about advertising growth over the next few months given demonetisation, but the management has maintained a 10 per cent advertising revenue growth forecast for FY17, implying a strong double-digit growth in second half of the financial year.

Sun TV Network

What could help Sun achieve its ad revenue growth target is improvement of its ratings in the Telugu market. Analysts, however, believe that 25-30 per cent of advertisers being local (which will be impacted by the cash crunch) and slowdown in jewellery ad spends, among others, advertising revenues could fall 8-10 per cent. 

Subscription revenues came in strong, with 18 per cent growth from cable, while direct-to-home platform grew 15 per cent year on year in September quarter. Given Sun's top position in the Telugu market, the company could witness an increase in prices in this market. Sun's Gemini TV is the largest Telugu channel, with a market share of 27 per cent, and with Gemini Movies, it has 36 per cent share in the overall Telugu market. For the Kannada market, Sun is looking at new launches to improve its position. Currently, its Udaya channel is the fifth largest, with a market share of 12 per cent. In its other two markets, it dominates the Tamil one (Sun TV) with a 59 per cent share, but is a distant second in the Kerala market (Surya TV) with a 15 per cent share. What could add to subscription revenues is digitisation, which according to the management, could lead to a doubling of existing revenue base of about Rs 1,000 crore. One area the Street would like clarity on is use of cash (Rs 1,630 crore or about nine per cent of its market value). Sun has so far not declared any dividend, but its management has indicated it will give out a final dividend. 

On the whole, while there are triggers, investors should await clarity on steps towards cash use and the advertising growth number for December quarter. The stock is trading at 16 times its FY18 net profit estimate.