Bank of America on Sun TV Network

Bank of America resumes coverage on Sun TV Network with a Buy’ rating and a target price of Rs 480. The target price is based on 24x FY12E in line with 2-year earnings CAGR. The `Buy’ rating takes into account:

(1) strong earnings CAGR of 24% during FY10E-12E driven by faster growth in advertising spends in regional markets and strong growth in subscription revenues,

(2) Sun TV’s leadership position in the south Indian market, making it more resilient to an economic downturn versus peers and

(3) premium valuations are sustainable given higher margins and return ratios.

With Sun TV offering a bouquet of 20 channels and occupying the top slot in terms of market share in three - Tamil Nadu, Karnataka and Andhra Pradesh - of the four regions, it remains the prime choice for media planners. Given its leadership position and premium pricing, its revenue stream is more resilient to a downturn in the macro economy than peers. The stock is trading at a premium of 15% to peers such as ZEE, and is sustainable given superior margins and return ratios. We forecast strong 24% earnings CAGR during FY10-12E.

SUN TV Network

DTH Subscriber Base Grows To 4 M, Regional Advertising Posts Impressive Growth

SUN TV Network has been one of the better-performing stocks in the media sector during the current rally. In the past three months, the stock has been up 17% while the Sensex clocked returns of just around 3% during the period. The company justified the stock surge by reporting better-than-expected earning growth during the September 2009 quarter.

Sun TV reported a 20.54% growth in its net profit during the September 2009 quarter at Rs 130.56. Its income from operations rose to Rs 320.3 crore this quarter from Rs 237.8 crore in the corresponding quarter last year. For the halfyear ended September 30, 2009, the company posted a net profit of Rs 250.36 crore, up 18.74% as against Rs 210.85 crore in year-ago period.

Sun TV continues to dominate the South India television market with the highest share in top 100 programmes and has maintained its leadership position despite growing competition. Its revenue growth has been led by higher subscription revenue from DTH and strong regional advertising growth. Its DTH subsidiary, Sun Direct DTH, subscriber base grew to four million at the end of the second quarter. On the international subscription front, the Chennai-based company has made a shift from per subscriber versus to fixed fee model. The company is looking for an overall growth of about 15% in its topline and 40% growth in net profit during the year ending March 2010.

According to the management, one of its companies in the radio business has become EBIDTA positive and it expects other companies in the radio business to be EBIDTA positive by the next year. At its current market price, the stock is trading at around 29 times its net profit during trailing 12 months. The stock should command a premium to other broadcasting companies in the current environment taking into account its dominance in the southern market, its encouraging performance during the slowdown and higher revenue visibility compared to others.