Initiating Coverage | Media Initiating Coverage | Media Initiating Coverage | Media Initiating Coverage | Media Initiating Coverage | Media Please refer to important disclosures at the end of this report Sun TV Networks (STNL) is a leader in 3 out of the 4 lucrative southern TV markets through its bouquet of 20 channels across genres. We have modeled in 23.5%, 24.9% and 25.3% CAGR in top-line, core EBIT (post amortisation) and earnings respectively, for STNL, over FY2010-12E. We also estimate STNL's cash balance to swell to a whopping Rs10bn (~Rs33 per share) in FY2012E. At Rs402, the stock is trading at 19.4x FY2012E Earnings. We initiate coverage on the stock with a Buy e initiate coverage on the stock with a Buy e initiate coverage on the stock with a Buy e initiate coverage on the stock with a Buy e initiate coverage on the stock with a Buy recommendation and T recommendation and T recommendation and T recommendation and T recommendation and Target P arget P arget P arget P arget Price of Rs497 based on 24x P/E FY2012E EPS rice of Rs497 based on 24x P/E FY2012E EPS rice of Rs497 based on 24x P/E FY2012E EPS rice of Rs497 based on 24x P/E FY2012E EPS rice of Rs497 based on 24x P/E FY2012E EPS. STNL Ad Revenues to outpace Regional Ad growth, we peg 19% CA STNL Ad Revenues to outpace Regional Ad growth, we peg 19% CA STNL Ad Revenues to outpace Regional Ad growth, we peg 19% CA STNL Ad Revenues to outpace Regional Ad growth, we peg 19% CA STNL Ad Revenues to outpace Regional Ad growth, we peg 19% CAGR: GR: GR: GR: GR: During FY2010-12E, we expect STNL's standalone Ad revenues to register 19.3% CAGR, ahead of the 13.9% CAGR estimated in Regional advertising during the period, driven by:1) absorption of rate hikes (ad rates hiked 5-33% across channels), 2) increased traction in niche Kids/Comedy channels, and 3) strong management focus on utilising inventory during off-peak hours and new weekend programming. Multiple levers led by DTH to aid 37% CA Multiple levers led by DTH to aid 37% CA Multiple levers led by DTH to aid 37% CA Multiple levers led by DTH to aid 37% CA Multiple levers led by DTH to aid 37% CAGR in Subscription Revenues: GR in Subscription Revenues: GR in Subscription Revenues: GR in Subscription Revenues: GR in Subscription Revenues: During FY2010-12E, we expect STNL to register a robust 37% CAGR in overall Subscription revenues aided by: 1) strong 58% CAGR in DTH revenues on the back of 28% CAGR in DTH subscribers and rise in ARPUs to Rs40, and 2) 20% CAGR in Analogue revenues aided by restructuring of distribution business and Malayalam channels (Surya TV, Kiran TV) turning pay, effective from April 1, 2010. Radio losses to reduce, Radio losses to reduce, Radio losses to reduce, Radio losses to reduce, Radio losses to reduce, Endhiran Endhiran Endhiran Endhiran Endhiran the wild card in FY2011E the wild card in FY2011E the wild card in FY2011E the wild card in FY2011E the wild card in FY2011E: : : : : Beyond broadcasting, we believe reduction in operating losses aided by revenue traction and cost curtailment in Radio subsidiaries, Kal and SAFM (we have modeled in near breakeven in FY2012E at operating level) and contribution from big budget movie, Endhiran (slated for release in 2HFY2011E, we have factored in Rs175cr revenue from movie distribution/production in FY2011E and 20-25% EBIT Margins from Endhiran) will be the key factors to watch out for. June 22, 2010 Sun TV Network Sun TV Network Sun TV Network Sun TV Network Sun TV Network BUY BUY BUY BUY BUY Sunny days ahead CMP Rs402 Target Price Rs497 Stock Info Shareholding Pattern (%) Sector Media Market Cap (Rs cr) 15,852 Beta 0.6 52 Week High / Low 453/210 Avg. Daily Volume 111,434 Face Value (Rs) 5 BSE Sensex 17,750 Nifty 5,317 Reuters Code SUNTV.BO Bloomberg Code SUNTV@IN Promoters 77.0 MF / Banks / Indian FIIs 4.9 FII / NRIs / OCBs 8.1 Indian Public / Others 10.0 Abs. (%) 3m 1yr 3yr Sensex 1.9 23.9 22.7 Sun TV (3.0) 68.9 (1.3) Investment Period 12 Months Chitrangda K Chitrangda K Chitrangda K Chitrangda K Chitrangda Kapur apur apur apur apur +91 22 4040 3800 Ext: 323 Email: [email protected]Source: Company, Angel Research Key Financials (Consolidated) Y/E March (Rs cr) Y/E March (Rs cr) Y/E March (Rs cr) Y/E March (Rs cr) Y/E March (Rs cr) FY2009 FY2009 FY2009 FY2009 FY2009 FY2010E FY2010E FY2010E FY2010E FY2010E FY2011E FY2011E FY2011E FY2011E FY2011E FY2012E FY2012E FY2012E FY2012E FY2012E Net Sales Net Sales Net Sales Net Sales Net Sales 1,039 1,039 1,039 1,039 1,039 1,453 1,453 1,453 1,453 1,453 1,978 1,978 1,978 1,978 1,978 2,217 2,217 2,217 2,217 2,217 % chg 19.5 39.8 36.2 12.0 Net P Net P Net P Net P Net Profit rofit rofit rofit rofit 368 368 368 368 368 520 520 520 520 520 712 712 712 712 712 816 816 816 816 816 % chg 12.7 41.2 36.9 14.6 OPM (%) 70.9 75.1 75.7 76.1 EPS (Rs) EPS (Rs) EPS (Rs) EPS (Rs) EPS (Rs) 9.3 9.3 9.3 9.3 9.3 13.2 13.2 13.2 13.2 13.2 18.1 18.1 18.1 18.1 18.1 20.7 20.7 20.7 20.7 20.7 P/E (x) 43.0 30.5 22.3 19.4 P/BV (x) 9.3 8.4 6.7 5.4 RoE (%) 21.6 28.0 33.0 30.6 RoCE (%) 30.2 39.8 46.8 43.7 EV/Sales (x) 12.0 8.6 6.3 5.6 EV/EBITDA (x) 16.9 11.4 8.3 7.4 Anand Shah Anand Shah Anand Shah Anand Shah Anand Shah +91 22 4040 3800 Ext: 334 Email: [email protected]
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Please refer to important disclosures at the end of this report
Sun TV Networks (STNL) is a leader in 3 out of the 4 lucrative southern TV marketsthrough its bouquet of 20 channels across genres. We have modeled in 23.5%,24.9% and 25.3% CAGR in top-line, core EBIT (post amortisation) and earningsrespectively, for STNL, over FY2010-12E. We also estimate STNL's cash balance toswell to a whopping Rs10bn (~Rs33 per share) in FY2012E. At Rs402, the stock istrading at 19.4x FY2012E Earnings. WWWWWe initiate coverage on the stock with a Buye initiate coverage on the stock with a Buye initiate coverage on the stock with a Buye initiate coverage on the stock with a Buye initiate coverage on the stock with a Buyrecommendation and Trecommendation and Trecommendation and Trecommendation and Trecommendation and Target Parget Parget Parget Parget Price of Rs497 based on 24x P/E FY2012E EPSrice of Rs497 based on 24x P/E FY2012E EPSrice of Rs497 based on 24x P/E FY2012E EPSrice of Rs497 based on 24x P/E FY2012E EPSrice of Rs497 based on 24x P/E FY2012E EPS.....
STNL Ad Revenues to outpace Regional Ad growth, we peg 19% CASTNL Ad Revenues to outpace Regional Ad growth, we peg 19% CASTNL Ad Revenues to outpace Regional Ad growth, we peg 19% CASTNL Ad Revenues to outpace Regional Ad growth, we peg 19% CASTNL Ad Revenues to outpace Regional Ad growth, we peg 19% CAGR:GR:GR:GR:GR: DuringFY2010-12E, we expect STNL's standalone Ad revenues to register 19.3% CAGR,ahead of the 13.9% CAGR estimated in Regional advertising during the period,driven by:1) absorption of rate hikes (ad rates hiked 5-33% across channels),2) increased traction in niche Kids/Comedy channels, and 3) strong managementfocus on utilising inventory during off-peak hours and new weekend programming.
Multiple levers led by DTH to aid 37% CAMultiple levers led by DTH to aid 37% CAMultiple levers led by DTH to aid 37% CAMultiple levers led by DTH to aid 37% CAMultiple levers led by DTH to aid 37% CAGR in Subscription Revenues: GR in Subscription Revenues: GR in Subscription Revenues: GR in Subscription Revenues: GR in Subscription Revenues: DuringFY2010-12E, we expect STNL to register a robust 37% CAGR in overall Subscriptionrevenues aided by: 1) strong 58% CAGR in DTH revenues on the back of 28%CAGR in DTH subscribers and rise in ARPUs to Rs40, and 2) 20% CAGR in Analoguerevenues aided by restructuring of distribution business and Malayalam channels(Surya TV, Kiran TV) turning pay, effective from April 1, 2010.
Radio losses to reduce, Radio losses to reduce, Radio losses to reduce, Radio losses to reduce, Radio losses to reduce, Endhiran Endhiran Endhiran Endhiran Endhiran the wild card in FY2011Ethe wild card in FY2011Ethe wild card in FY2011Ethe wild card in FY2011Ethe wild card in FY2011E: : : : : Beyond broadcasting,we believe reduction in operating losses aided by revenue traction and costcurtailment in Radio subsidiaries, Kal and SAFM (we have modeled in near breakevenin FY2012E at operating level) and contribution from big budget movie, Endhiran(slated for release in 2HFY2011E, we have factored in Rs175cr revenue from moviedistribution/production in FY2011E and 20-25% EBIT Margins from Endhiran) willbe the key factors to watch out for.
June 22, 2010
Sun TV NetworkSun TV NetworkSun TV NetworkSun TV NetworkSun TV Network BUYBUYBUYBUYBUY
Key Financials (Consolidated)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr) FY2009FY2009FY2009FY2009FY2009 FY2010EFY2010EFY2010EFY2010EFY2010E FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E
During FY2010-12E, we peg STNL's standalone Ad revenues (excluding Radio) to
grow at 19.3% CAGR (management has guided for 17-18% yoy growth in advertising
in FY2011E), ahead of 13.9% CAGR in Regional advertising during the period, driven
by: 1) absorption of rate hikes (9-33% hike in ad rates in Tamil channels and 5-16%
in other channels effective January 2010), 2) increased traction from niche kids/comedy
channels (Adhitya TV, Khushi TV, Navvulu TV, Chintu TV and Ushe TV) launched in
1QFY2010, 3) strong focus of management on utilising inventory during off-peak
hours and new weekend programming, and 4) uptick in the economy (higher ad
spends from the FMCG sector in specific, which contributes ~80% of STNL's
advertisement revenues). While the ad-rate hike absorption will be a primary driver
for high advertisement revenues, we expect the ad-revenue growth to peak out in
1QFY2011 (with the culmination of the base effect) and dip into mid-teens by 3Q and
4QFY2011.
We highlight that during the last several quarters, STNL has posted high growth rates
(in the range of 35-45%) in advertising revenue, partially aided by low base, showing
strong resilience to: 1) increasing competition in its Telugu, Kannada and Malayalam
markets, and 2) shift in advertising flow towards sports properties like IPL - Season 3.
We have modeled in a 19.3% CAGR in
STNL's standalone Ad revenues driven by
rate hikes, improved inventory utilisation
and traction in new channels
We expect ad-revenue growth to peak out
in 1QFY2011with culmination of base effect
STNL has shown strong resilience to
intensifying competition and shift in
advertisement flow towards sports; however,
a change in the same carries downside risks
to our estimates
June 22, 2010 6
Sun TV Network | Initiating Coverage
Exhibit 10: High Per Capita Income and Urban Population make South a lucrative marketPPPPPer Capitaer Capitaer Capitaer Capitaer Capita GrowthGrowthGrowthGrowthGrowth TTTTTotal Potal Potal Potal Potal Popopopopop Urban P Urban P Urban P Urban P Urban Popopopopop % of Urban% of Urban% of Urban% of Urban% of Urban
Multiple levers led by DTH to aid 37% CAGR in Subscription
During FY2010-12E, we expect STNL to register a robust 37% CAGR in its overallSubscription revenues (including international) and higher 42% CAGR in domesticSubscription revenues aided by: 1) strong 58% CAGR in DTH revenues on the back of28% CAGR in DTH subscribers and rise in ARPU to Rs40 (due to revised bouquet ratesat Rs52/month as reported in 4QFY2010), and 2) 20% CAGR in Analogue revenuesaided by restructuring of distribution business and Malayalam channels (Surya TV,Kiran TV) turning pay effective April 1, 2010.
Strong 58% CAGR in DTH and 20% CAGR
in Analogue revenues to drive 42% CAGR
in domestic Subscription revenues over
FY2010-12E
Exhibit 15: STNL's Domestic Subscription Revenues to double over next two yearsFY2007FY2007FY2007FY2007FY2007 FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010EFY2010EFY2010EFY2010EFY2010E FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E #####FY10-12EFY10-12EFY10-12EFY10-12EFY10-12E
TV Subscription Market Industry EstimatesTV Subscription Market Industry EstimatesTV Subscription Market Industry EstimatesTV Subscription Market Industry EstimatesTV Subscription Market Industry Estimates
C&S TV Households (mn) 70 78 86 95 104 112 8.6
Growth (% yoy) 12.9 11.4 10.3 10.5 9.5 7.7
C&S TV Penetration (%) 62.5 66.1 69.9 73.6 77.0 79.4
Higher ARPUs and Subscribers to aid 58% CAGR in DTH revenues
During 4QFY2010, the company reported a subscriber base of 6mn and a sharp
uptick in DTH realizations to Rs35-36/month (Rs26-27/month) on account of 5 new
niche channels turning pay adding to the company's ARPUs (new channel bouquet
available at Rs52/month). Hence, we have modeled in 58% CAGR in DTH Subscription
revenues over FY2010-12E, driven by - 1) yoy growth of 33% and 23% for
FY2011-12E in the Subscriber base to 7.7mn and 9.5mn respectively, 2) significant
52% yoy increase in ARPU to Rs40/month (Rs26/month) in FY2011E.
However, we note that ~60% of the DTH revenues for STNL come from its sister
concern Sun Direct, which has accepted the revised bouquet driving this sharp up-tick
in DTH revenues. Nonetheless, STNL continues to offer its original bouquet. However,
the stickiness of other operators to the same and non-confirmation of 4QFY2010
ARPU trend carries downside risks to our estimates.
Malayalam channels and distribution re-jig to boost Analogue revenues
Post the significant dip in Analogue subscription revenues in FY2009 due to power
cuts in Tamil Nadu, launch of new distributors (Arasu, Royal Cable) and Sun Direct
(cable operators boycotted the launch of DTH by cutting declaration levels), STNL has
renewed its focus and restructured its Distribution business with two separate teams,
the first focusing on South Indian operations and International business, and the second
focusing on expanding the company's bouquet to the North, West and Eastern markets
in India.
Moreover, on February 2010, STNL announced that its Malayalam channels Surya TV
and Kiran TV would become pay channels from April 1, 2010. According to
management, the non-CAS cable rates for the said channels, as a bouquet, would be
Rs20.3/month and CAS cable rates would be Rs5.4/channel/month. We highlight
that this move has come post its key competitor, Asianet, turning pay. We estimate that
the Malayalam market has ~4mn C&S households and have modeled in an initial
addition of 1.5mn subscribers in FY2011E with an ARPU of Rs15/month for STNL.
Hence, we expect incremental addition of Rs20-25cr to STNL's Subscription revenues
in FY2011E on account of the Malayalam channels turning pay.
We expect the Analogue subscription revenues to register 20% CAGR over
FY2010-12E, with 34% yoy growth in FY2011E itself on a low base (inclusion of
Malayalam subscription revenues)
Management upbeat on International subscription, we defer
In contrast to management guidance of sharp improvement in International subscription
revenue (program license fees), we have conservatively modeled in 5% CAGR over
FY2010-12E, owing to: 1) lack of traction in the same since several quarters, 2) changed
regulations for Pay TV in the South-East Asian countries of Malaysia and Singapore,
and 3) currency fluctuation risks. However, the distribution re-jig done by the company
(STNL has floated a wholly-owned subsidiary, Sun TV Network Europe in the UK to
distribute and broadcast its channel in UK and Europe) poses an upside risk to our
estimates.
4QFY2010 registered a sharp revision in
DTH ARPUs to Rs36/month aided by
addition of 5 niche channels and a new
bouquet priced at Rs52/month
Non-confirmation of 4QFY2010 ARPU trend
carries downside risks to our estimates
Re-jig of Distribution and renewed focus on
domestic Subscription augurs well for STNL's
Analogue Subscription revenues
We expect incremental addition of
Rs20-25cr to STNL's Subscription revenues
in FY2011E on account of Malayalam
channels turning pay
In contrast to management guidance, we
have conservatively modeled in 5% yoy
growth in Sun's International subscription
revenues in our FY2011-12E estimates
June 22, 2010 9
Sun TV Network | Initiating Coverage
Sun Pictures - Betting big on Endhiran
Sun entered the Movie business in September 2008 through subsidiary, Sun Pictures,
and has so far distributed 12-15 films, most of which have been successful and earning
an estimated 15-20% Return on Capital Employed. Going ahead, we have modeled
in an outlay of Rs70-80cr for FY2011-12E for distribution of 10-12 movies annually.
STNL recently entered into movie production with its high budget movie, Endhiran
(estimated budget for the movie is Rs100cr+), starring the southern superstar Rajnikant
and Bollywood's Aishwarya Rai. The movie is expected to be released in 2HFY2011in
three languages, viz. Tamil, Telugu and Hindi. Given the star cast and cutting edge
production techniques used in this movie, we expect it to register returns of 20-25% at
the EBIT level. Management has indicated that this is a one-off venture, and the company
would be focusing only on the distribution business in the future.
For FY2011E, we estimate STNL revenues from movie distribution (including release
of Endhiran) to increase 150% yoy to Rs175cr (Rs70cr) and then taper down to Rs110cr
in FY2012E, as effects of revenue traction from Endhiran wanes.
Radio - to reach near break-even at operating level by FY2012E
Sun operates 44 radio stations in total and has two subsidiaries Kal Radio (Kal) and
South Asia FM (SAFM) with stake of 97.8% and 59.2% respectively. STNL has entered
into a strategic tie-up to broadcast its own radio channels under the Red FM brand
(holds 48.9% stake in Red FM), operating at 93.5MHz. Consequently, S FM or Suryan
FM was re-branded into Red FM across 38 cities (except for the ones in Tamil Nadu) in
India.
Endhiran slated for release in 2HFY2011E
is expected to register returns of 20-25% at
EBIT level. We estimate a 150% yoy growth
in Movie revenue for FY2011E to Rs175cr,
tapering down to Rs110cr in FY2012E
Exhibit 16: Consolidated Radio losses to moderate to Rs37cr in FY2012EY/E MarchY/E MarchY/E MarchY/E MarchY/E March FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010FY2010FY2010FY2010FY2010 FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E
Cost of RevenuesCost of RevenuesCost of RevenuesCost of RevenuesCost of Revenues 77 77 77 77 77 111 111 111 111 111 119 119 119 119 119 138 138 138 138 138 153 153 153 153 153 13.3 13.3 13.3 13.3 13.3 Drop as % of sales as incremental revenue from Ad rate hike
% of Sales 8.8 10.7 8.2 7.0 6.9 and DTH, Model absolute growth of ~13%
Staff CostStaff CostStaff CostStaff CostStaff Cost 96 96 96 96 96 116 116 116 116 116 134 134 134 134 134 201 201 201 201 201 231 231 231 231 231 31.4 31.4 31.4 31.4 31.4 Spike in FY11 as we model higher Pay to MD in FY11-12E
% of Sales 11.0 11.1 9.2 10.1 10.4 and Staff costs for new team set-ups
MD's Pay 65 74 74 125 141 38.1 In FY10, MD's Pay remained at FY09 levels, We model FY11
% of Sales 7.5 7.1 5.1 6.3 6.4 Pay at usual 10% of PBT
Other Staff Costs 26 28 42 56 68 27.9 Modeled in 28% CAGR rise in Staff costs due to new team
% of Sales 3.0 2.7 2.9 2.9 3.1 set-ups in distribution and new channels
Radio Staff Costs 5 13 18 19 21 9.4 To rise moderately at 9% CAGR as all stations are now
% of Radio Sales 51.0 40.7 31.0 27.5 25.0 operational and strong cost focus
SG&A ExpensesSG&A ExpensesSG&A ExpensesSG&A ExpensesSG&A Expenses 41 41 41 41 41 54 54 54 54 54 75 75 75 75 75 107 107 107 107 107 106 106 106 106 106 19.119.119.119.119.1 Modeling in 19% CAGR to support new launches, FY11 to
% of Sales 4.7 5.2 5.2 5.4 4.8 see spike due to Endhiran release
Other ExpensesOther ExpensesOther ExpensesOther ExpensesOther Expenses 59 59 59 59 59 22 22 22 22 22 34 34 34 34 34 35 35 35 35 35 40 40 40 40 40 8.48.48.48.48.4 To register significant moderation due to lower losses in Radio
Margins to sustain, we peg consolidated Earnings CAGR at 25%
During FY2010-12E, we expect EBITDA Margins to hover between 75-76% levels
aided by significant reduction in Radio losses (to achieve near break-even in FY2012E
at operational level) and higher operating leverage (as majority of incremental
top-line growth will be driven by ad rate hike and higher subscription revenues).
However, higher SG&A expenses (Endhiran release in FY2011E) and spike in MD's
pay (low base) to the usual 10% of PBT is likely to restrict Margin expansion.
In terms of core EBIT margins (including amortisation costs for films and distribution
rights), we expect STNL to sustain margins at ~59% in FY2011E, before expanding by
130bp yoy in FY2012E due to higher amortisation charges on the back of release of
Endhiran in FY2011E.
On a consolidated basis, we expect STNL's earnings to register 25.3% CAGR over
FY2010-12E driven largely by strong top-line growth and stable Margins.
June 22, 2010 13
Sun TV Network | Initiating Coverage
Source: Company, Angel Research
Exhibit 21: FCF to triple boosting cash balance Exhibit 22: RoE to sustain, RoIC to rise to 47%
Source: Company, Angel Research
(Rs
cr)
(38)
110
202
463
721
430365
435
581
1,036
(200)
-
200
400
600
800
1,000
1,200
FY08 FY09 FY10 FY11E FY12E
Free Cash Flow Cash Balance
2422
28
33
31
36
27
36
4547
-
5
10
15
20
25
30
35
40
45
50
FY08 FY09 FY10 FY11E FY12E
RoE RoIC
(%)
Debt-free Balance Sheet, Cash to swell to ~Rs10bn in FY2012E
STNL has a strong zero debt balance sheet and cash balance of ~Rs435cr as on
FY2010. Moreover, despite modeling heavy capex (including movie acquisition costs)
in the range of Rs420-440cr for FY2011-12E (in line with management guidance), we
expect STNL's cash balance to swell to a whopping Rs10bn or ~Rs33/share in FY2012E
accounting for almost 34% of capital employed. We attribute the jump in cash balance
to strong rise in free cash flow (almost tripling over FY2010-12E) on strong earnings
growth. As result, we expect STNL's RoE to sustain at 28-31% levels and RoIC to rise to
47% (36% in FY2010).
June 22, 2010 14
Sun TV Network | Initiating Coverage
Key Concerns
Delay/difficulty in absorption of rate hikes: Delay/difficulty in absorption of rate hikes: Delay/difficulty in absorption of rate hikes: Delay/difficulty in absorption of rate hikes: Delay/difficulty in absorption of rate hikes: We have modeled in a steady 19.3%
CAGR in STNL's standalone advertising revenues over FY2010-12E aided by absorption
of rate hikes (9-33% hike in ad rates in Tamil channels and 5-16% in other channels
effective Jan 2010). Any delay/difficulty to pass the same to advertisers on account of
competitive pressures, slowdown in GDP or other unforeseen factors would entail
downside risks to our estimates.
FFFFFall in DTH ARPUs beyond Rs35-40/month:all in DTH ARPUs beyond Rs35-40/month:all in DTH ARPUs beyond Rs35-40/month:all in DTH ARPUs beyond Rs35-40/month:all in DTH ARPUs beyond Rs35-40/month: During 4QFY2010, the company
reported a subscriber base of 6mn and a sharp uptick in DTH realisations to
Rs35-36/month (Rs26-27/month) on account of 5 new niche channels turning pay
(new channel bouquet available at Rs52/month). Hence, we have modeled in 58%
CAGR in DTH Subscription revenues over FY2010-12E, driven by - 1) growth of 33%
and 23% for FY2011-12E in the Subscriber base to 7.7mn and 9.5mn respectively,
2) significant 52% yoy increase in ARPU to Rs40/month (Rs26/month) in FY2011E.
Hence, non-confirmation of 4QFY2010 ARPU trend carries significant downside risks
to our estimates.
Delay/failure of big budget Delay/failure of big budget Delay/failure of big budget Delay/failure of big budget Delay/failure of big budget EndhiranEndhiranEndhiranEndhiranEndhiran::::: STNL is slated to release its first big budget
movie, Endhiran (estimated budget of Rs100cr+), starring the southern superstar
Rajnikant and Bollywood's Aishwarya Rai. For FY2011E, we estimate revenues from
movie distribution (including release of Endhiran) to increase 150% yoy to Rs175cr
(Rs70cr) with Endhiran expected to register 20-25% returns at the EBIT level. Any
delays in the release of movie or the movie tanking at the box office would dent our
revenue and earnings estimates.
June 22, 2010 15
Sun TV Network | Initiating Coverage
Exhibit 24: Sun TV Business Model - Spans Broadcasting, Radio and Movies
59.2%
Subsidiary
97.8%
SubsidiaryDivision of
STNL
Sun TV Network20 television channels across 4 southern states & 3 FM radio stations
South Asia FM Kal RadioSun Pictures
23 licenses focusedon northern, eastern
& western region
Production/distribution of movies insouthern region
Comedy Adithya TV Navvulu TV Ushe TVSource: Company, Angel Research
Company Background
Headquartered in Chennai, STNL was incorporated in December 1985 and listed in
April 2006. STNL, promoted by Kalanithi Maran, belongs to the Sun Network Group,
which is straddled across the media value chain, viz. Broadcasting, Radio, Films, Cable
distribution, DTH and Print Media. STNL is India's leading media conglomerate with
20 TV channels with a significant presence in the south (leader in three of the four
southern states - operates in Tamil Nadu, Andhra Pradesh and Karnataka).
Beyond television broadcasting, the company has a strong presence in radio
broadcasting (has a total of 44 FM licences) via its two subsidiaries - Kal FM (98%
stake) and SAFM (59% stake) and strategic tie-up with Red FM. Moreover, STNL entered
the movie business in September 2008 through its subsidiary, Sun Pictures and has so
far distributed 12-15 films. The company is also slated to release its first in-house
production, Endhiran during 2HFY2011.
June 22, 2010 16
Sun TV Network | Initiating Coverage
Unique low-cost business model keeps cost off STNL's books
STNL operates on "Sponsored Revenue model", wherein it leases out its time slots to
third party content producers for a fixed fee (termed as broadcast fee in P&L). In
return, the content producers have the right to about 4mins of advertising inventory
per half an hour, while STNL gets 2mins of this half an hour slot. Since the content
aired on STNL channels are not owned by STNL, the cost of content and the risks of
recouping the cost lie with the producer.
Moreover, the company also produces a large amount of content aired in the
non-prime time slots in-house, which furthers lowers its production costs. The company's
in-house production team sources around 75% of its daily content requirement
in-house, out of which 40-45% is movie based, 8-10% is news and the rest is accounted
by game, talk and variety shows. Further, the company has exclusive contracts with
artistes and anchors as part of its talent retention strategy.
STNL leads movie broadcasting via its largest movie library
STNL has a strong movie library comprising more than 8,500 titles, with rights across
all the four major South Indian languages. Apart from having an extensive movie
library, STNL purchases around 90% of all movie releases in these languages. The
company employs various strategies such as airing free trailers of movies prior to
release, through its wide range of channels. Consequently, the producer contracts
satellite rights to STNL at lower rates, resulting in lower acquisition costs for the company.
Usually, Sun pays Rs1-1.5cr for acquiring satellite rights and recovers the same in the
first two runs of the movie. In the southern market, screening of movies on satellite
channels is allowed only after 1-3 years of the theatrical release. Movies and
movie-related content attracts significant viewership in down south. As a result, STNL
earns around 25% of its advertising revenues from movies aired on dedicated channels
in each market.
Foray into niche channels like Kids and Comedy genre
Apart from the various GEC channels, STNL also broadcasts dedicated movie channels,
kids and infotainment channels and comedy channels (refer Exhibit 23). Foray into
these niche categories and entertaining selective TV viewers was a bold move.
Nonetheless, the move has paid well for the company - Chutti TV, the Tamil children
entertainment channel has ~5% market share and contributes ~3% to Sun's revenues.
For its kid's channels, Sun has exclusive tie ups with the content providers (tied up with
Disney India in December 2009 and DQ Entertainment in June 2010), wherein Sun
buys exclusive rights to cartoons and then dubs them in four languages. Operating
costs involved are confined to dubbing costs. This scale and low-cost model ensures
that these niche channels do not cause any significant margin dilution. STNL's comedy
channels also work on a similar low-cost model wherein clips from the movies in Sun's
library are telecast, keeping production costs minimal.
June 22, 2010 17
Sun TV Network | Initiating Coverage
Profit & Loss Statement (Consolidated) Rs croreY/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr) FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010EFY2010EFY2010EFY2010EFY2010E FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E
PPPPPAAAAAT after MI (Reported)T after MI (Reported)T after MI (Reported)T after MI (Reported)T after MI (Reported) 327 327 327 327 327 368 368 368 368 368 520 520 520 520 520 712 712 712 712 712 816 816 816 816 816
ADJADJADJADJADJ. P. P. P. P. PAAAAATTTTT 327 327 327 327 327 368 368 368 368 368 520 520 520 520 520 712 712 712 712 712 816 816 816 816 816
Balance Sheet (Consolidated) Rs croreY/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr) FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010EFY2010EFY2010EFY2010EFY2010E FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E
Key RatiosY/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr)Y/E March (Rs cr) FY2008FY2008FY2008FY2008FY2008 FY2009FY2009FY2009FY2009FY2009 FY2010EFY2010EFY2010EFY2010EFY2010E FY2011EFY2011EFY2011EFY2011EFY2011E FY2012EFY2012EFY2012EFY2012EFY2012E
VVVVValuation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)aluation Ratio (x)
P/E (on FDEPS) 48.5 43.0 30.5 22.3 19.4
P/CEPS 45.3 38.9 26.9 19.7 17.1
P/BV 10.9 9.3 8.4 6.7 5.4
Dividend yield (%) 0.6 0.6 1.9 1.2 1.4
EV/Sales 14.3 12.0 8.6 6.3 5.6
EV/EBITDA 20.8 16.9 11.4 8.3 7.4
EV / Total Assets 7.9 6.8 6.1 4.9 4.1
PPPPPer Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)er Share Data (Rs)
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