Investor's Eye
[December 03, 2013] | | |
| Summary of Contents
STOCK IDEA Sun TV Network
Recommendation: Buy
Price target: Rs515
Current market price: Rs367 Sun rises in the south Key points -
Dominant force, undisputed leader of south India: Sun TV Network (Sun TV) is the undisputed leader in the south Indian entertainment market (Tamil Nadu, Andhra Pradesh, Karnataka and Kerala), India's biggest regional entertainment market with strong viewership market share in the regional broadcasting market (Tamil Nadu: 68%, Andhra Pradesh: 38%, Karnataka: 41%). With 32 out of the total 66 TV channels present in the market, a leading viewership share (it is the leader in three out of the four markets) and a 30% market share of the total south Indian advertisement market, Sun TV enjoys a dominant position in the south Indian broadcasting market. On the other hand, its premium positioning and low-cost de-risked business model have helped the company to maintain a very healthy operating profit margin (OPM) corridor of 70%, EBIT margin of 51% and dividend pay-out of more than 50%. -
Digitisation benefits yet to accrue, huge upside potential: Among the key stakeholders of the TV industry, TV broadcasters are expected to be the prime beneficiaries of the mandatory digitisation process initiated by the government. The broadcasters would benefit from higher subscription revenues as the declaration of the increase in the number of subscribers would happen at the least incremental capital expenditure (capex). With the government likely to speed up the process of digitisation in Chennai and the smooth transition in the other key markets (Bengaluru, Hyderabad, Coimbatore, Mysore and Vishakhapatnam) under phase-II, the subscriber base is estimated at 4.77 million. The actual benefits are likely to be seen beyond FY2015 with almost a six-fold increase in the ARPU of the cable subscribers from Rs4 currently to Rs15-20 (post-DAS regime). The full DAS regime will provide incremental potential upside of around Rs650-750 crore to the subscription revenues, driven by (a) an improvement in subscriber reporting (under-reporting is rampant currently); (b) a four- to five-fold increase in the ARPU from the current levels; and (c) an increase in broadcasters' ARPU share with an improvement in subscriber reporting. -
Healthy earnings with strong return ratios: We expect Sun TV to deliver a 16% compound average growth rate (CAGR) in the stand-alone top line over FY2013-16, led by a 20% CAGR in the subscription revenues (ex full impact of the digital addressable system [DAS] regime) and an 11% CAGR in advertisement revenues. We have built a margin decline of 140 basis points over FY2013-16 and expect the net income to grow at a CAGR of 15% over FY2013-16. We expect the return on equity (RoE) to improve to 28% by FY2016 and the dividend pay-out to remain healthy at around 53% of the consolidated net income. In our estimates, we have not incorporated the full potential upside from the DAS regime and the profit, if any, from the company's Indian Premier League (IPL) franchisee in FY2015. -
Valuation-deserves re-rating, illuminating future prospects: Given the potential improvement in the operating environment in view of the huge upside potential from the DAS regime and a gradual uptick in the advertisement spending, the future prospects for Sun TV, which has a dominant market position and integrated business model with presence over broadcasting, movies and radio, seem to be favourable. On the other hand, despite a change in the political regime and increasing competition, Sun TV has managed to remain the leader in its key market which allays the fear that the company may be losing its dominant position. At the current market price of Rs367, the stock trades at 18.2x, 15.5x and 13.4x based on the earnings estimates for FY2014, FY2015 and FY2016 respectively. At the current levels, the stock is trading at a discount of around 35% to its historical one-year forward price-earning ratio (PER) and that of 33% to Zee Entertainment Enterprises Ltd (ZEEL; which is much higher than the three-year average discount of 16%). Sun TV enjoys an industry-leading margin profile, leadership position in its key market, strong dividend pay-out, and healthy balance sheet and return ratios. Hence, it deserves a much better valuation. We value Sun TV at 21.5x FY2015E earnings, our target multiple is based on a 25% discount to ZEEL. We initiate coverage on Sun TV with a Buy rating and price target of Rs515.
THEMATIC REPORT Closure of switch call from HUL to Colgate-Palmolive India with absolute gain of 10% Key points -
Close switch call with around 10% absolute return and 5% outperformance compared with the Nifty: Within the initiation period of two months our Switch Idea to shift from Hindustan Unilever Ltd (HUL) to Colgate-Palmolive India (Colgate; released on September 24, 2013) has given a positive return of about 10% till date while the broader market has moved up by 5% in the same period. In the past two months, the stock price of HUL has corrected by 10% because of the persistent slowdown in the premium categories. The stock has also been affected by the concerns voiced by the parent company, Unilever, over HUL's lower growth in the emerging markets in the near term. On the other hand, Colgate's stock price has remained stable on the bourses despite the hovering concern over the sustenance of its market share in the domestic toothpaste market. In recent times, its market share has been threatened by the entry of a multinational, ie Procter & Gamble, and the aggression shown by the other players in the toothpaste segment. Thus, with 10% absolute return in less than two months and about 5% outperformance over the broader market indices, we close our switch call because of the belief that the downside in the HUL stock price is capped at the current levels. -
HUL's trading premium over Colgate has narrowed down to 14%: Two months ago, HUL was trading at a valuation premium of 34% to Colgate, which had prompted us to come out with a Switch Idea along with the fundamental reasoning. In the past two months the valuation premium has narrowed down to 14% providing a limited risk-reward ratio from the current levels. The drop in the valuation premium of HUL over Colgate can be attributed to a double-digit drop in HUL's stock price. -
HUL to find support around the current levels: HUL is currently trading at about 32x its FY2015E earnings, which is nearing our one-year target multiple of 30x. Though it will take some time for the company to see a substantial improvement in the financial performance, but we do not see the stock price dropping significantly from the current levels. On the other hand, the management of the company has enhanced its focus and taken decisive steps to improve the sales volume of the company in the coming quarters. Consequently, any improvement in the sales volume growth of the domestic consumer business of HUL would give a sentimental boost to the stock price.
SECTOR UPDATE Automobiles Volumes skid post festive season Auto volumes decline post festive season
After the end of the festive season in October 2013, the automotive volumes continued their declining trend. Most of the companies reported a volume decline in November 2013. The challenging macro economic environment in the form of lower economic growth, firm interest rates and increase in the fuel prices continue to weigh on the demand. M&M tractor segment and Hero Motocorp outperform; Tata Motors and Eicher Motors underperform
In the challenging environment, Mahindra & Mahindra's (M&M) tractor division outperformed its automotive peers by registering a double digit growth. Adequate rainfall with an increase in minimum support prices (MSP) have maintained a double digit growth for the tractor segment. Similarly, Hero Motocorp outperformed with a mid single digit growth in sales mainly aided by a higher demand for scooters. Tata Motors underperformed by reporting the lowest sales in the last three years. While the volumes of the commercial vehicle segment had been impacted by subdued economic growth, the lack of new product launches has dented the passenger vehicle volumes. Similarly, Eicher Motors underperformed with volumes declining by 37% on a weak demand for medium and heavy commercial vehicles (MHCV). FY2014 to end on a weak note; expect recovery in FY2015
In year-to-date (YTD) FY2014 period (April to October 2013), the sales of most of the automotive segments (excluding two wheelers) has declined on year-on-year (Y-o-Y) basis. While the commercial vehicle sales has declined in double digits, the passenger vehicle sales has shown a mid single digit decline. With not much improvement in the economic scenario, we expect the sales to remain subdued in the remaining four months as well. We expect a recovery in the volumes in FY2015 on the back of improvement in the economic growth, easing of interest rates and low base created by the current slowdown phase.
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Regards,
The Sharekhan Research Team | |
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