We are withdrawing our rating on Sun TV Network pending clarity on regulatory issues. While the valuations are cheap after the 22% correction, we are no longer able to assign a rating on the stock.
Our past ‘neutral’ rating was based on concerns on the market share loss, offset by relatively cheap valuations.
While we are not changing our estimates, the diversion of management focus due to escalating regulatory uncertainty would impact the business. We continue to model 17% EPS CAGR over FY15-17, based on 10% ad & broadcast revenue CAGR and 14% domestic subscription revenue CAGR. Sun TV currently trades at 12.8x FY16e EPS and 10.8x FY17e EPS — a sharp discount to its historical average P/E of ~24x.
Until now, most of the regulatory issues for Sun TV have been at the promoter level. However, with the possibility of licence cancellation, the issues now seem to be overflowing into business operations. According to media reports, the probe against Sun TV promoters by CBI and ED has led to the ministry of home affairs denying security clearance to Sun TV’s entire bouquet of 33 channels.
While our interaction with the management indicates that Sun TV’s channels have renewals upcoming only in 2021-2023, we note that potential cancellation of its broadcasting licences would lead to Sun TV channels going off-air. We believe that while potential cancellation of Sun TV licences is a low probability event, it’s a high-impact risk.