Sun TV IPO

Sun TV was launched in 1993 by Kalanithi Maran and was one of India's first regional satellite television channels. It is the principal radio and television broadcaster in Tamil Naidu and Kerala, and has, thereby, become one of the leaders in the television business in India.

Sun TV's multi-system cable operation, SCV, has been hived off to Kal Cables Private Limited, a group company.

Sun TV offers four Tamil language channels including its flagship Sun TV, and two Malayalam channels including Surya TV. Approximately 75% of the programmes broadcast are produced in-house, and the remaining acquired from independent producers. Its other Tamil channels include Sun News, a 24-hour Tamil movie channel KTV, and a 24-hour music channel Sun Music. Surya TV and Kiran TV, its two Malayalam channels, have programming format similar to its Tamil channels.

Sun TV's radio business comprises three 24-hour radio stations in Chennai, Coimbatore and Tiruvenveli in Tamilnadu, and Visakhapatanam in Andhra Pradesh through its affiliate Udaya TV. The existing as well as the 41 new licenses obtained by the company under the new FM Phase II policy will in future be operated by subsidiaries Kal Radio and South Asia FM.

The IPO will raise Rs 603 crore at the top end of the price band. The proceeds of the issue will be used to beef up its two subsidiaries Kal Radio and South Asia FM, launch three more regional television channels and construct its own corporate office. Investments will also be made in setting up studio facilities and up-linking infrastructure, purchasing new equipment and upgrading the existing ones for its Radio Business.

The issue will constitute only 10% of the fully diluted post-issue paid-up capital.

Strengths

• When it comes to couch potatoes, Chennai tops the list. People in Chennai watch television for an average of 19 hours a week or approximately 162 minutes a day, compared with people in Delhi who watch TV for 15 hours a week, Mumbai 15.7 hours and Kolkata 16.1 hours, according to a Television Audience Measurement (TAM) survey. Around 90% of the viewers in Chennai watch only regional channels such as Sun TV and Vijay TV. Sun TV's top show, 'Kolangal', fetch unheard of television rating points (TRPs) in the range of 23 and 26. TRPs for Star Plus's best shows vary between 15 and 20.
• Sun TV's four Tamil channels held a combined audience share of 71.2% in the nine months ended December 2005 compared with a 5% share of its closest competitors in the Tamil Naidu region. The company's two Malayalam channels hold a combined market share of 32.1% compared with a combined 25.9% market share of its closest competitors in Kerala. Thus, Sun TV enjoys a dominating presence in these states and can command premium rates and a lion's share of electronic advertisement revenue.
• Flagship Sun TV channel is becoming a pay channel in the coming months at a subscription rate of Rs 20 per subscriber per month, which will open up a new growth avenue. In the short term, however, it can adversely affect its audience share and advertisement revenue.
• Sun TV is the only company to start making profit in its radio business from the first year of operations due to its dominating position. In the nine months ended December 2005, the radio business contributed around 9% to the top line of the company.

Weaknesses 

• Sun TV has made an investment of Rs 177.36 crore in procuring 41 FM licences to operate in 45 (including the existing four) cities across India, and intends to invest around Rs 213.42 crore to develop and launch these new FM stations. While the company has a strong brand name and sustainable growth in the southern region, it does not have any presence in the other parts of India, specially in the north and east. Scope for synergies is also limited.
• The three new regional channels that Sun TV is going to launch by 2007, at an estimated cost of Rs 113.38 crore, will reduce the margin in the short term. No details of these have been given. Their gestation period will be longer if they are launched in any other part of the country but the south.
• The group has preferred to retain the related media and publication businesses in unlisted entities. The listing company's business will be television broadcasting in two states and operating FM radio stations around the country.

Valuation

Zee TV is the nearest comparable company to Sun TV. Zee TV's revenue model includes other businesses besides broadcasting television. Currently, Zee Telefilms is trading around 32 times its FY 2005 EPS. On the basis of its nine-month annualised EPS of Rs 4.7, it is trading at PE of around 50. However, the PE reflects its recent restructuring proposal and the temporary dip in this year's earning.

From FY 2003-05, Sun TV has shown a steady financial performance, with its revenue and net profit recording a CAGR of 10% to Rs 290.31 crore and Rs 77.97 crore in the year ended March 2005. In the nine months ended December 2005, the company has already surpassed both the top line and bottom line of FY 2005. With a growth in revenue of 12% to Rs 243.31 crore and a 2,100 basis-point expansion in the operating profit margin, the net profit grew by 78% to Rs 102.36 crore in the nine months ended December 2005.

Ahead of IPO, promoters paid themselves a dividend of Rs 185 crore and withdrew the entire cash balance as of March 2005. Now the IPO is to raise finances for new FM radio and TV channels, which are bound to pressurize the very high margin of Sun TV.

On a post-issue equity of Rs 68.8 crore and face value Rs10, FY 2005, EPS works out to Rs 11.3. Based on this, PE stands at 77.2 and 64.41 at the price band of Rs 875 and Rs 730. However, on an annualised nine-month EPS of Rs 19.8, PE works out to around 44 and 37 at the upper and lower price band, respectively. While visibility from the new businesses is not clear, the existing business has enough growth potential in a favourable economic environment. With only 10% equity being issued and foreign and domestic funds ready to pay premium valuations for quality media stocks, the pricing could not have been cheaper.

Sharekhan Investor's Eye

NIIT Technologies 
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs296
Current market price: Rs204

Better times ahead

Key points

• Restructuring gains: Given the initiatives taken to restructure its business model, NIIT Technologies Ltd (NTL) has emerged as a niche mid-cap information technology (IT) service player with focus on key industry verticals. The specialisation and an enhanced range of service offerings are likely to result in a higher growth rate of 15% in its revenues over the two-year period of FY2006-08.
• Enhanced profitability: The restructuring exercise has resulted in a marked improvement in its profitability over the last two years. Going forward, the margins are estimated to improve further on the back of the expected turn-around in its business process outsourcing (BPO) business and the improvement in the operational metrics like the offshore-onsite mix and higher sales efficiency. Consequently, its earnings are estimated to grow at a CAGR of 24% during F2006-08.
• Decent dividend yield: In spite of the capital expenditure to build the new development facilities, the company has a comfortable cash position. This is likely to prompt the management to announce another year of liberal dividend pay-out. It had given a dividend of 55% (or Rs5.5 per share) during the last fiscal which amounts to a decent dividend yield of 2.7%.
• Attractive valuations: At the current valuations of 7.6x its FY2008 estimated earnings and 3x FY2008 enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA), NTL is one of the cheapest stocks in the mid-cap IT space. It is likely to get re-rated on the back of the estimated improvement in its earnings growth rate and the possible sale of a 25% stake held in it by NIIT Ltd (NIIT) to a strategic investor. We recommend a Buy on NTL with a price target of Rs296.

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SECTOR UPDATE

Cement 

Rising on the earnings expressway
The cement demand in India has witnessed a strong growth in FY2006, with a YTD growth at 10.6% year on year (yoy), much higher than our expectation of an 8% growth, driven by the buoyant demand from the housing sector and the government's increasing focus on infrastructure projects. Going forward, we expect the cement demand to continue growing at 8% yoy in FY2007 and FY2008 driven by the continued focus on housing and infrastucture. We believe the capacity additions announced so far are not enough to meet the estimated incremental demand of approximately 22 million tonne. This in turn will result in a further reduction in the supply overhang and possibly a deficit situation by the end of FY2007. Hence we expect that cement prices will continue to march upwards in the absence of capacity addition and higher capacity utilisation. Hence the outlook for FY2007-2008 remains positive for the sector. 

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VIEWPOINT

Essel Propack 

Entering new territory
Essel Propack is acquiring an 85% stake each in Tacpro Inc, USA and Avalon Medical Services Pte Ltd, Singapore. Both the companies are promoted by an Indian American, Nitin Matani, and his associates. These companies manufacture medical devices and their key products include cardiovascular catheters and balloon catheters. Catheters are basically tubes made of high quality polymers, which are inserted in the human body at the time of the surgery. Both the companies are original equipment manufacturers (OEMs) and sell their products to companies like Abbot, Bard, Med Source and Boston Sys which own the intellectual property rights (IPR). The average realisations for these products range between $75 and $100 per unit for Tacpro. The customers who own the IPR in turn sell the same for an amount ranging between $400 and $3,500 per unit.