Sun TV: Still shining

India’s most profitable broadcaster Sun TV, with operating margins at nearly 75 per cent, could see its growth momentum slowing in a difficult operating environment.

Revenues for the September 2008 quarter grew 22 per cent driven by a rise in advertising revenues of 30 per cent. However, given the slowing economy, it’s unlikely this will exceed 18 per cent for the rest of the year and could even taper off to 15 per cent next year, if things get worse. Nevertheless, even if Sun’s viewership ratings are affected somewhat because of the competition — Star, Eenadu and Zee News — being the market leader in the south, it will certainly be better off than its competitors. Moreover, pay revenues, driven by the high- margin DTH business, should improve further — they were up 20 per cent sequentially. Sun now has 2.3 million DTH subscribers and revenues from overseas too have been picking up. The Tamil kids channel has done well and the company plans to launch a similar product in other languages such as Malayalam.

The broadcaster, which has forayed into filmed entertainment through Sun Pictures, plans to focus on 4-5 small budget movies every year. Having launched one film, it is targeting annual revenues in the region of Rs 40 crore. Sun’s radio business, with 42 radio stations, continues to incur losses and is expected to break even sometime in the year to March 2010.

Sun is expected to end the current year with revenues of Rs 1,100 crore and a net profit of Rs 404 crore. While earnings should grow by a strong 24 per cent this year, the increase is likely to taper off to 18 per cent in the year to March 2010 given a slowing economy. There could be some pressure points in the form of higher losses from the radio operations and expenses in the filmed entertainment venture. As such, at a price to earnings (P/E) of 15 times estimated FY09 earnings, the stock isn’t too expensive but doesn’t also offer too much cushion for any downside.