Saturday, November 8, 2008


Upgrade to Buy (1M), target price Rs185 — Post a strong Q2FY09 and price
correction of ~65% YTD, we upgrade Sun TV Network (Sun) to Buy/Medium
Risk. Sun TV offers a strong play on regional advertising with leverage to DTH.

 Why we like Sun TV — (a) Dominance in the South Indian market; (b) High
profitability– ~69% EBITDA margins and ~27% RoE; (c) Leverage to DTH – we
expect DTH revenues of Rs1.3b (which have very high margins) in FY10E; (d)
Healthy balance sheet (net cash of ~Rs4b+); and (e) 18% EPS CAGR over
FY08-FY11E trading at ~11.8x FY10E.

 Strong 2Q, but moderate estimates to factor in slowing economy — Ad revenues
grew at a healthy 30% yoy. EBITDA margins were stable at ~75%; net profit
increased 35% yoy. Cable subscription rebounded 20% qoq while DTH revenues
should witness a sharp ramp-up 3Q onwards as billing to new operators starts.
However, we lower our FY10/11 EPS est. by 7/12% to factor in the impact of a
slowing economy on advertising spends. We model 18%, 15% & 12% advertising
revenue growth in the rest of FY09, FY10 & FY11 respectively.

 Value in-line with ZEEL — Sun is better leveraged to ad-revenue growth due to its
strong leadership position in Southern markets vis-à-vis ZEEL – the third most
viewed GEC in its highly fragmented Hindi space. Sun and ZEEL are equally
leveraged to pay-revenue from DTH penetration. We forecast similar EPS CAGRs
over the next 3 years for ZEEL and Sun and value both at 15x FY10E EPS.

 Risks — Increasing competition may affect viewership ratings; impact of rising
costs, which we expect should be compensated by DTH revenues.

Read full report here SUNTV(CITI)