Sun TV rerating rests on capital allocation spin, maintaining ad revenue

IPL valuation bump-up limits downside in stock

Brokerages have upgraded the stock of broadcaster Sun TV Network on multiple triggers. Expectations of a stable advertising (ad) revenue growth performance, valuation uptick due to the recent Indian Premier League (IPL) auctions, and attractive valuations have led to positive views on the stock, which hit a 52-week low of Rs 402.55 on the BSE before closing 0.9 per cent up at Rs 412.35.

An operational trigger would be the reversal of ad revenue growth underperformance. Sun TV is gaining market share in the Tamil genre from Zee Tamil over the past three/four quarters. 

Say Jaykumar Doshi and Umang Mehta of Kotak Securities, “Sun Network’s stable-to-improving viewership for the first time after five to seven years of share loss augurs well and should result in ad revenue growth performance in line with the industry.”

While shrinking ad budgets for large spenders, such as the fast-moving consumer goods sector, is a worry, the company expects ad revenue growth to improve by single digits in 2022-23 (FY23), with incremental gains coming from higher ad spends by local advertisers. This segment accounts for a third of ad revenue.

There could be an upside to these estimates if the consumer sector starts to improve spending on the back of easing raw material prices. While deferment of the implementation of the new tariff order (NTO 2.0) to November could lead to uncertainty, analysts expect the same to aid growth in domestic subscription revenue in the second half of FY23.

The other trigger is the higher valuation for the IPL franchise, given the threefold jump in  television and digital rights of the 2023-27 cycle to Rs 48,400 crore.

Sun TV Network owns the Sunrisers Hyderabad franchise and should benefit from the higher auction price for the forthcoming period.

Says Balaji Subramanian of IIFL Research, “Assuming 45 per cent distribution of the central pool by Board of Control for Cricket in India to the franchisees, we expect Sun’s IPL revenue to rise to Rs 660 crore annually from 2023-24 (FY24), compared with Rs 380 crore (pre-pandemic).”

He expects net profit from the IPL for the franchisee to double to Rs 300 crore annually.

Even as brokerages have increased their target price for the stock, the stock may not rerate, given certain concerns. These include corporate governance issues and lack of investments in core businesses.

While the stock trades at an attractive 6x forward estimates, excluding IPL value, IIFL Research points out the reduced dividend payout ratio (and discontinued earnings calls) and lack of adequate investments in over-the-top original content may limit rerating. At the consolidated level, the stock is trading 8x its FY24 earnings estimates.