Sun TV: Right signals

New revenue streams, including going pay, will help Sun TV prospects

Despite Sun TV's complete dominance of the market in the south"" it is the largest television broadcaster in Tamil Nadu and Kerala with four Tamil and two Malayalam channels - its revenues grew at just around 7 per cent in FY05 and 12 per cent annualised in FY06.

The pre-tax profit for the nine months ended December 2005 has gone up 68 per cent y-o-y, but adjusting for director's remuneration in FY05, the increase was about 35 per cent.

Sun's channels collectively had the highest audience share of any network in TN (59 per cent) and Kerala for the past three years. Besides, it has a valuable asset in the 2,650 film rights that it owns for Tamil and Malayalam films.

A chunk of the IPO proceeds "" Rs 356 crore - is to be used primarily for its expansion of the radio business, which should contribute 20 per cent of revenues in FY08.

Once the radio business is established and the company has a pan-India presence, it should be able to cross-sell advertisements. New revenue streams include channels in the children and documentary categories, international alliances, and the conversion of the flagship channel into a pay channel.

Sun TV, therefore, would, in all probability perform better than it has in the past, given that consumers can afford to spend more on entertainment. Further, advertising revenues are tipped to grow at around 14-15 per cent annually, for the next few years.

The price band of Rs 730-Rs 875, implies a market capitalisation of Rs 5,037-Rs 6,037 crore. Revenues for FY06 are expected to be Rs 326 crore so the market cap to sales, at the higher end, is around 18.5.

For FY06 estimated revenues of Rs 204 crore, NDTV has a market cap to sales of 7.5, while the ratio for Zee (pre-restructuring) is 6.5. But Sun's EV/EBITDA multiple for FY06 is 28 times, which is higher than 22 times for Zee's and 33 times NDTV's.

Sun's issue, at Rs 875 is priced at a P/E multiple of 23 times FY07, assuming earnings grow by 70 per cent. NDTV trades at a multiple of 30 on estimated earnings growth of 72 per cent in FY07. The growth potential for the sector is huge and Sun is well positioned to capitalise on it.

Ciba Specialty: Wrong exit

As a part of a restructuring exercise by Ciba Specialty worldwide last month, the Indian arm too has divested its textile effects business.

The sale will fetch not less than Rs 122.5 crore to Ciba. Its wholly owned subsidiary, Diamond Dye-Chem, will also sell its textile effects business to Huntsman for a minimum of Rs 43 crore.

The parent's reason for exiting this business was that the demand for these products is weak in the US and Europe, with falling sales and operating margins. It will focus on plastic additives, coating chemicals, and water and paper treatment, which will lead to higher margins.

But in India, the textile dyes and chemicals business accounted for almost a third of the revenues, with a growth of 19 per cent in FY05. India is a large producer of textiles, so Ciba had a ready market too.

Thus, exiting this business is going to affect the company's revenues and profitability as the speciality industrial chemicals division (comprising additives and treatment businesses) has grown only at 6.8 per cent for nine months ended December 2005, compared with the speciality effects chemicals business (textiles and coating chemicals) growing at 15 per cent.

The deal at 0.6 times FY06 revenues seems good for the Indian arm compared with the parent, which will get just 0.25 times CY05 revenues.

Assuming the textile chemical business contributes to a third of the profitability too, the per share value for this business at a third of the stock price works out to about Rs 180, whereas shareholders will receive a pre-tax Rs 92 per share for the sale in Ciba and Rs 32 through Diamond Dye-chem.

The estimated FY06 EPS, including the textile chemical business discounts the share about 17 times. Though investors may earn a hefty dividend, the stock price is unlikely to sustain at current levels.

Bata India: Concrete realty

Bata India has posted a net profit in CY05 after a gap of three years. For the December 2005 quarter, the company has reported an operating profit of Rs 7.96 crore as compared with an operating loss of Rs 19.58 crore in the corresponding previous period.

The turnaround has come about owing to a dip in its material costs, coupled with growth in its net sales.

For instance, adjusted raw material costs declined 22.15 per cent y-o-y to Rs 83.19 crore in the December 2005 quarter and even as a percentage of net sales, material costs fell a staggering 1683 basis points to 43 per cent. The company has been implementing cost reduction strategies, which is working now, say analysts.

The management has repeatedly said that it has been focusing on boosting sales from its own stores and simultaneously rationalising its wholesaler base, in order to better manage its outstanding debtors.

The company is evaluating the option of opening stores in malls across the country, in a bid to accelerate sales growth in the medium term.

The Bata India stock has gained about 30 per cent over the past two months as compared to a 10.5 per cent gain in the CNX Mid-cap Index.

Sentiment for this stock has improved following the turnaround, coupled with the company getting an approval from the West Bengal government to develop the 262-acre Batanagar estate in Kolkata.

With contributions from Shobhana Subramanian and Amriteshwar Mathur