The Hindu Business Line : Sun TV Network: Hold

While the growth story is intact, current valuations are rich. The progress of the conditional access system will also play a role in determining subscription revenue growth.

A scene from Kolangal... One of Sun's successful soaps.

Shareholders can retain their exposure in the stock of Sun TV Network (Sun TV). We re-visit the stock after our `invest' recommendation during its IPO (Initial Public Offer) last April. Sun TV continues to trade at a substantial premium to its offer price of Rs 875.

The market took a fancy to the stock immediately upon listing and this has sustained since then. The developments, post-offer, such as the inclusion of the group's Kannada and Telugu channels under the Sun TV fold, have cemented its premium positioning in the media space.

The stock trades at a price-earnings multiple of 50 times its annualised per share earnings of 2006-07. The current valuations capture a fair degree of the growth potential and we feel that the stock is richly valued.

The growth story is largely intact, with the network lining up new channel launches for FY-08. It remains a dominant player across the four southern States and is well-placed to take on competition from such new entrants as Star and Zee.

We would, however, watch its progress in the radio business as it forays into the North where it faces competition from Radio Mirchi (Entertainment Network) and Big FM (Adlabs). The progress of the Conditional Access System (CAS) will also play a role in determining subscription revenue growth.

Rising strength

Some of the key developments, post-offer, that have lent strength to the stock are:

A richer bouquet: At the time of its IPO, only the Tamil channels — Sun TV, Sun News, Sun Music and KTV — and Malayalam offerings — Surya and Kiran — were available.

The company has since decided to merge with itself the five Telugu channels under the Gemini banner and the four Kannada channels under the Udaya banner. The flagship channels of Gemini and Udaya also enjoy a dominant presence in their respective markets.

With 15 channels under its fold that tap viewers across all the southern States, Sun TV is the top choice for content providers.

With the southern States accounting for a significant share of regional TV advertising, the combined entity will be an attractive option for investors. This has been largely factored in the stock price.

The 30 per cent expansion in the equity base that will arise from the merger is likely to be earnings-accretive.

Operating margins of the combined entity may, however, dip, although they are still likely to be at robust 70 per cent levels.

Sun TV goes pay: Margins might yet get a fillip, however, from the stronger subscription revenue that will come in from the current quarter onwards, with the network's flagship channel, Sun TV, turning pay (except in Chennai where it remains free-to-air).

Better declaration rates from new platforms such as DTH will drive subscription revenues.

Most of its channels are now pay. With Asianet close at its heels in Kerala, Sun is likely to wait for the viewership gap to widen before it shifts its flagship Malayalam channel Surya channel to pay mode. So far, switching to pay mode has not involved any sacrifices on the advertising revenue front for Sun TV.

Such a move by broadcasters has rarely impacted viewership in non-CAS areas, as viewers have been often forced to pay higher rentals even for channels they did not wish to watch.

Though a way off, it would be interesting to note Sun TV's strategy should CAS be extended to other cities in the South or across Tamil Nadu, where it enjoys its strongest viewership.

While people may be willing to pay for Sun's channels, the initial investment for a set-top box may still be a stumbling block.

Unless CAS makes significant inroads into cable and satellite homes in Tamil Nadu (so far, there has been little offtake for set top boxes in Chennai), the network may again choose to air its channels for free as it has in Chennai. Its strategy may also depend on the success of Sun Direct, the group's DTH service, in penetrating the CAS market.

Ad rate hike: With a dominant presence across markets, Sun TV is well-placed to milk the rising trend in advertising spends.

After a gap of two years, Sun TV announced an across-the-board advertisement rate hike of between 5 per cent and 25 per cent with effect from January.

Additional growth avenues

So far, the offer proceeds have mainly been deployed in its radio business, which is being operated through its subsidiaries. Suryan FM has licences to operate 44 radio stations, mainly in smaller cities.

While Suryan is likely to be more successful in the South, where it has a strong understanding of the market, its foray into the North Indian market is likely to be more challenging.

It recently entered Bangalore, Hyderabad and Jaipur markets. Suryan does not have licences to operate stations in Delhi, Mumbai and Kolkata where in any case it would have encountered stiff competition in Radio Mirchi.

A failure to make a mark in the North could pose a drag on earnings growth and this segment would merit watching. Sun TV has also lined up for launch in fiscal 2008 channels for children, sports and documentaries. The channels are likely to be free-to-air initially.

If the launches go on stream to schedule, the channels should begin to make a contribution to revenues and cash flows from FY-09.

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