Rising competition impacting its pricing power and ad revenue growth has been lagging major peers
At Rs 342, the stock trades at 15 times its FY16 earnings estimate, a steep discount to Zee Entertainment’s 27 times. Analysts say the discount is due to increasing competition, the cap on advertisement, structural issues and the pendingCBI enquiry.
The key growth metric is an uptick in the advertising business, half its revenue. However, ad revenue growth has been inconsistent, falling in the September and December quarters of 2013-14 and recovering a bit in the March quarter. For the June 2014 quarter, Sun reported flattish ad revenue growth; on the other hand, the sector’s grew 13 per cent, on the back of a shift to Hindi news channels on account of the general elections.
Market share losses in two key markets, Karnataka and Andhra Pradesh, where peers are investing heavily, as well as low inventory utilisation, also led to the poor performance. What went wrong in FY14 was the rise in ad rates to compensate for the reduced inventory due to the cap imposed by the Telecom Regulatory Authority of India (Trai, on advertising in each hour of a programme), which severely impacted volumes.
Chief Financial Officer S L Narayanan says the advertisement market was impacted by several “unprecedented” changes on available inventory. A change in rates has been put through; it took some time to settle in the market. Hence, there was some volatility in revenue growth but this is now back to normal.
Yet, the company was not able to improve its ad revenue growth, despite reverting to the 15 minutes an hour schedule in the June quarter. While there is a stay on the Trai order, if the ad cap of 12 minutes an hour is implemented, it will dent Sun’s revenue growth.
Improvement in ad spending is key for Sun. Analysts at BNP Paribas estimate double-digit growth will return in FY16 (eight per cent in FY15), as there are signs of increased spending on marketing in key sectors such as consumer goods, automobiles, telecom and e-commerce. The management, in a recent analysts’ conference call, was hopeful of ad revenue recovery in FY16, with a growth uptick of 15-20 per cent.
Says Narayanan, “Revenue is driven by business confidence. If the economy is growing, everybody would be spending.” The confidence comes in the backdrop of an increase in spending by fast moving consumer goods companies, who bring 55 per cent of revenue for Sun TV. A third of this is from regional brands, all of which are doing well.
What will hamper progress for the company, which dominates viewership in the four southern states, is rising competition. According to IDFC Securities’ analysts, Sun TV’s all-India market share has almost halved in five years. While it retains the top slot in Tamil Nadu, it has lost share in Andhra and Karnataka, where its peers are investing heavily. This is putting pressure on Sun, which is not able to pass on the price increases fully.
The other major contributor to the top line is subscription revenue, which grew 26 per cent in FY14 and should get a fillip from digitisation. Sun, with about eight million subscribers, hopes the revenue from the direct-to-home (DTH) segment would maintain a positive momentum in the coming years.
Narayanan says that digitisation is a huge plus for the company, as it will increase subscription revenue. Currently, a majority of the revenue generated in television is through advertisements, followed by subscription. Strong growth in DTH and the digital cable segment would result in a rise in subscription revenue (15-plus per cent annually) over the years to come, it is hoped.