Sun TV bouncing back

Advertisement growth is likely to improve on hikes, low base and higher economic growth

The Sun TV stock has been an underperformer vis-à-vis the Sensex over the past quarter, gaining about 10 per cent versus 15 per cent of the Sensex, given the pressure on advertising revenue growth, delay in digitisation and higher competition.

While advertisement revenue growth has been under pressure over recent quarters, analysts believe the growth should be in double digits, given the steps taken by Sun to mitigate the Telecom Regulatory Authority of India (Trai) advertisement cap regulations.

Analysts believe the worries on account of regulatory action, competition from state-owned Arasu Cable in Tamil Nadu and fallout of the Sun Direct-Aristo case are overdone. Anand Rathi analysts believe re-rating of the stock is imminent, as the valuation discount vis-à-vis Zee Entertainment is at a multi-year high at 30 per cent, which is likely to narrow.

Most analysts continue to be bullish about the prospects. Bloomberg says, 29 of 32 analysts have a ‘buy’ rating, and their consensus target price of Rs 487 means gains of about 11 per cent from current levels.

The capping of advertising minutes in a programme has been an issue for the company. The subsequent price rise in a slowdown exacerbated the situation, say analysts. Given the Trai recommendations of capping commercial advertisements from 16 minutes an hour to 10 minutes and the steep 19 per cent price rise taken by Sun, the advertising revenues fell four to seven per cent (year-on-year) in the September and December 2013 quarters.

In a weak economy, higher competition in Andhra Pradesh, Karnataka and Kerala translated into lower ad revenues. The company has cut advertisement minutes of its content partners in general entertainment channels (GECs), redistributed inventory in other non-GECs, and increased programming to counter the impact. These were some of the steps which helped the company post a five per cent growth in revenues in the March quarter. What also helped is that Sun has been running an additional two minutes (above the maximum) of advertisements per hour, which is under litigation.

The key medium-term trigger for the stock continues to be the third and fourth phase of digitisation. Sun is best placed to take advantage of this, given its strong leadership position in Tamil Nadu (70 per cent), Andhra Pradesh (38 per cent) and Karnataka (38 per cent). The mandatory digitisation should help Sun improve its subscription revenues. Elara Capital estimates that total subscription revenue has the potential to improve by a factor of five over the medium term.