While valuations of Sun TV and SpiceJet have turned attractive after the recent fall, experts say negative news flow will keep the two stocks under pressure.
The stock prices of Sun TV and SpiceJet on June 2 fell 28 per cent and 16 per cent, respectively, due to negative news flow about the company and its promoters. Although the Sun TV scrip has recovered quite a bit (11.7 per cent over the last two days) after the company denied the allegations, SpiceJet’s stock is up 2 per cent. Political headwinds remain the key risk for both stocks, but considering fundamentals and valuations, these appear strong.
The Sun TV scrip, at 14 times 2011-12 earnings, is trading at a 30 per cent discount to its historic valuations, while SpiceJet is available at an attractive 9 times its 2011-12 earnings. Experts, however, advise caution, as they believe the negative news flow will continue to weigh on the two stocks in the short term. Investment advisor S P Tulsian believes investors should exit the stock whenever there is a technical bounce. “Investors should not make valuation calls for such stocks and wait for the dust to settle down before taking exposure.”
| FINANCIALS | ||||
| in Rs crore | Sun TV | SpiceJet | ||
| Q4 FY11 | FY11 | Q4 FY11 | FY11 | |
| Net Sales | 550 | 2,013 | 759 | 2,934 |
| % chg YoY | 40.4 | 39.0 | 35.6 | 34.5 |
| Ebitda* | 383 | 1,577 | 49.7 | 544 |
| % chg YoY | 16.0 | 45.0 | -53.0 | 30.8 |
| Net profit | 196 | 769 | -58.6 | 101 |
| % chg YoY | 19.3 | 48.0 | – | 64.7 |
| P/E FY11 (x) | – | 15.5 | – | 14.0 |
| P/E FY12 E (x) | – | 14.4 | – | 9.0 |
| E: Estimates * excludes rentals for SpiceJet Source: Religare Capital Markets, Angel Broking | ||||
SUN TV: NEAR-TERM CONCERNS
The key issues for Sun TV are the revival of a rival cable network in Tamil Nadu, investments by Malaysian telecom company Maxis in promoter-owned company Sun Direct, and allegations of misuse of BSNL facilities by it. UBS Securities India’s Nupur Agarwal, in a note on the company after the price fall, says Sun TV remains fundamentally strong, but the recent allegations as well as the new government in Tamil Nadu have created negative sentiment and could put further pressure on Sun TV’s stock price.
Religare Capital Markets analysts Ballabh Modani and Ankur Periwal believe the initiatives of the new state government to offer subsidised cable services could have adverse implications for the company. They believe that the company’s domestic non-DTH subscription revenues over 2010-11 to 2012-13 are likely to drop by 15 per cent. Non-DTH subscription revenues for Tamil Nadu are at Rs 80 crore for 2010-11, which is 16 per cent of subscription revenues and 4 per cent of the overall revenues.
SPICEJET: EXPANSION, MACRO HEADWINDS
SpiceJet is likely to face a challenge in its efforts to raise fresh capital to fund its expansion due to the political fallout. The company plans to raise $200-250 million to fund the purchase of 11 aircraft in the current financial year. Part of the funding for the expansion could come from the shares pledged by the promoter (17 per cent of total equity capital), believe analysts. While the company registered a net profit for 2010-11, analysts are circumspect about the company’s as well as the sector’s prospects, due to high fuel costs and stiff competition. Angel Broking analyst Sharan Lillaney has a cautious view on the sector because of high ATF prices. Since SpiceJet could not raise ticket prices and pass on the costs to consumers due to stiff competition, it posted a loss of Rs 70 crore at the profit before interest, depreciation, tax (PBIDT) level in the March quarter. Full service players like Air India have been offering attractive rates to improve their load factors. This has led to profit pressure for peers like SpiceJet, Jet and Kingfisher.
OUTLOOK
Though Sun TV recorded a 40 per cent revenue growth in the March quarter, its operating profit margins declined 1,460 basis points to 69 per cent due to higher employee costs and other overheads. One percentage point is equal to 100 basis points. On account of the company’s lower DTH, non-DTH and ad revenue growth, Religare analysts have revised their 2012-13 earnings per share estimates downwards by 8.3 per cent to Rs 24. The research company believes the scrip, which has always traded at a premium on account of southern market leadership, business model and higher return ratios to the nearest peer, Zee Entertainment, is unlikely to get similar valuations going ahead, unless political headwinds clear off completely.
SpiceJet is likely to turn in a profit for 2011-12, but, given the competition, its expansion plans and high fuel prices, analysts are skeptical about its ability to maintain a high passenger load factor and profitability.
