What is on offer is only a truncated version of the Sun Network. Sun TV will own only the television channels in Tamil and Malayalam; the group's strong franchise in Telugu and Kannada under the Gemini/Teja and Udaya/Ushe banners respectively will remain privately-owned businesses.
Sun TV will have ownership of the FM radio business in which it has a strong presence in Chennai, Coimbatore and Tirunelveli, and has also bagged licences to operate in 41 new territories. We take a positive view of the offer, as the growth prospects appear bright.
The principal risks to our recommendation are the possibility of Sun TV's hefty investments in FM radio acting as a drag on profitability beyond the expected period of two-three years and the perceived political affiliations of the promoter group that could create difficult situations, the most recent one being the planned takeover by the Tamil Nadu government of private cable networks including that owned by the Sun TV group.
Though this stock is likely to attract institutional investor interest, FIIs can buy only up to 20 per cent of the equity. This cap does not matter at this stage, as the floating stock will be only 10 per cent.
This low floating stock may not, however, hamper liquidity, as a similar situation has prevailed in the case of TCS and Wipro, to name a couple of prominent players. Yet, any move by the promoter group to offload a part of its stake at a later date will be a positive.
So, too, will be any plan to bring the Telugu and Kannada operations under the Sun TV fold, to present investors with a single banner to play the entertainment sector in South India.
The offer is stiffly priced. A tendency to capitalise on the bullish undertone in the equity market is evident in the pricing.
Sun TV has also a fixed a wide band of Rs 730-875 for the offer.
At the lower end of the band, the price-earnings multiple is about 30 times the likely FY-07 per-share earnings. We would have been comfortable with this pricing, but for the risks from the planned big-ticket investments in the FM radio business.
In this backdrop, we will be more comfortable if the final price is fixed at the lower end of the price band. It will provide a greater degree of cushion for investors, lead to a robust aftermarket for the stock and also compensate for the enhanced risk profile due to the FM radio business.
Despite our comfort with the lower end of the band, it may be appropriate to bid at the cut off price. This will give investors a good chance of securing allotment.
Our `invest' call does not take into account the likely price patterns on listing and is a long-term view. The factors that underpin the recommendations are detailed in the accompanying story.
Offer details: Sun TV is offering 6.9 million shares. It will mobilise Rs 500-600 crore, depending on the final pricing. Lead managers to the offer are Kotak Mahindra Capital Company and DSP Merrill Lynch. The book-built offer opens on April 3 and closes on April 7.