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SUN TV NETWORK (Industry: Media & Entertainment, Sector: Broadcasting ) Date: Nov 4, 2013 Current Price: INR 423.25 (as on 31.10.13) Recommendation: BUY Exchange: NSE Ticker: SUNTV Upside: 21% Target Price: INR 511

Key Stock Statistics Make hay while the ‘SUN’ shines Price INR 423.25 Buy Recommendation - We issue a buy recommendation for SUN TV Network Face Value INR 5 with a target price of 511 which is an upside of 21% over the CMP. SUN TV looks certain to consolidate its position as the largest TV broadcasting company in South Shares Outstanding 394.08 mn India. Radio business will grow but is still pretty small compared to TV advertising Free Float Market Cap 41,393.7 mn and subscription. The company is also looking to revitalize the film distribution business. 52 wk range (INR) 311 - 494.90 Strong Revenue Stream - SUN TV has robust a revenue stream backed by a Beta 0.96 strong business model. Its subscription revenues will receive a major boost due to Free Float 25% implementation of digitization norms. Its DTH subscriber base is forecasted to grow from ~9 million presently to over 14 million by 2017 with ARPU rising by Avg Daily Volumes 129,107 (LTM) nearly 60% over the same period. SUN TV has hiked rates sufficiently to compen- sate for TRAI’s 10+2 min/hr ad cap regulation. Ad revenues are driven primarily 2013 Dividend Yield 2.43% by FMCG ad spending. Source: NSE, Bloomberg Solid Financials - SUN TV has sound financials with the top-line expected to grow to INR 34,443 million and bottom-line to INR 12,758 million by FY17. Profit mar- Performance vis-à-vis market gins will remain stable at the current levels. The company’s free cash flow is expected to grow from INR 4,961 million in FY13 to INR 8,736 million in FY17.

Preferable over Peers – The company’s P/E valuation discount is at an all time high compared to its closest peer (~37%). We expect this to narrow as SUN TV has more headroom for subscription revenue growth in both domestic and over- seas markets.

IPL Business Needs to be Watched Out For - IPL business would exert a drag on the margins in the short run. The company made a loss of INR 300 million in FY13 from this segment. While the management expects this to breakeven by FY15, the revenues from this business needs to be watched out given its highly unpredictable nature.

Political and Legal Overhang Remains - Promoters of SUN TV are affiliated to Shareholding Pattern a strong regional party and effects of this risk were manifested in FY12 due to issues with Arasu cable. The promoters’ involvement in the 2G case led to fall of Mar ‘12 Mar ‘13 Oct ‘13 16% in the stock price on 13 Jun ‘13. This continues to be a risk going forward as well. Although the fundamentals of the business are very strong, risk averse inves- Promoters 77% 77% 75% tors may not want to hold this stock. FII 14.21% 14% 16% DII 2.82% 1.87% 2.28% Key Financials Others 5.97% 7.07% 6.72% FY 12A FY 13A FY 14E FY 15E FY 16E FY 17E Source: Bloomberg Net Sales (INR mn) 18,472 19,230 22,254 26,098 30,141 34,444 EBITDA (INR mn) 14,144 14,091 16,673 19,554 22,583 25,806 Valuation Summary PAT (INR mn) 6,807 7,066 8,189 9,660 11,166 12,758 Method Price (INR) Networth (INR mn) 26,139 28,854 33,858 39,406 45,513 52,210 DCF 511 Total Assets (INR mn) 29,045 32,396 37,387 42,936 49,043 55,739 DDM 474 ROE (%) 26.04 24.49 24.19 24.51 24.53 24.44 Residual Income 496 EPS (INR) 17.27 17.93 20.78 24.51 28.33 32.37 Comparables 524 DPS (INR) 9.44 9.50 11.18 13.19 15.25 17.42 Source: Team Estimates Source: Company Filings, Team Estimates 1

Business Description

Established in 1993, SUN TV Network Limited has become one of the largest TV and Radio broadcasting companies in India, operating 33 television channels in Tamil, Malayalam, Telugu and Kannada and 46 radio stations throughout the country. The Group is also into movie production and distribution and owns the Hyderabad IPL team ‘SunRisers Hydera- bad’, bought recently in October 2012. Figure on the left gives the structure of the company. The Company has two subsidiaries, Kal Radio Ltd. (59.15% stake) and South Asia FM 59.15% 97.78% Ltd. (97.78% stake), through which it operates its radio channels. South Asia FM Ltd. further has a 48.9% beneficial interest in Red FM Radio Companies. The movie distribution and production is handled by the SUN Pictures division.

48.90% Undisputed Leader in South With SUN TV’s channels leading the Tamil, Telugu and Malayalam markets and marginally behind the leader in Kannada, it leads in the industry in South India. SUN TV is the largest regional TV network in the country. Its channels are spread across the genres GEC, news, music, action, life, movies, kids and comedy and are available in more than 27 countries FM Radio Network worldwide. In radio broadcasting, South Asia FM Ltd. has 23 FM Radio licenses, mainly in Tamil Nadu and Andhra Pradesh 13 the North, East and West, whereas the Southern region is covered by Kal Radio’s 18 licenses. The stake in Red FM has also given the company, access to their very popular radio Karnataka and Kerala 9 stations in Delhi, Mumbai and Kolkata. 50% of the total Radio revenues come from the West 8 Metro stations.

North and East 16 Ownership Structure Total 46 The company is held by the influential Maran family of Tamil Nadu with the promoters hav- ing trimmed their stake to 75% in May 2013 to comply with the SEBI guidelines. With the large promoter stake, political factors play a major role in the environment affecting the company. Institutional investors hold another 18.28% with 16% being with the foreign inves- 3) tors and 2.28% with the domestic. Other investors, which include the retail investors, hold a -FY1 Y10 6.72% stake. R (F CAG .8% 9 Financial Snapshot The total revenues of the company were INR 19,230 million in FY13 up from INR 18,472 million in FY12. Revenues from both, TV broadcasting and distribution segment which comprises around 93% of the total and Radio broadcasting, contributing around 6%, went up whereas Movie production/distribution segment’s share fell from around 3.2% in 2012 to 0.01% in 2013. But the company expects movie distribution business to pick up again 2014 onwards. Company’s major source of revenues is the sale of advertising. In FY 2013, advertising revenues contributed 60% to the total revenues. They have increased at a CAGR of 11% during FY 2010-13 as against the total revenue that grew at a CAGR of 9.8% during the same period. Approximately, 50% of the advertising income comes from the national FMCG sector and another major portion from the local brands. SUN TV Network has recently more than doubled its ad rates. Although ad revenues grew 15% YoY in 1Q FY14, the growth might be affected with the implementation of TRAI’s 10+2 minutes/hour ad cap regulation.

Related Parties, Subsidiaries and Other Businesses Key management personnel of SUN TV have a significant influence on a number of companies in the field of DTH services, textile and media services. The most important of these from SUN TV’s perspective is Sun Direct TV Private Limited, the DTH arm of the group. It contributes nearly 50% of SUN TV’s DTH revenue. The company has the following subsidiaries - South Asia FM Limited and Kal Radio Limited. The radio subsidiaries achieved breakeven in FY13 after registering a loss of ~INR 65 million in FY12. The radio business is expected to remain strong, although it still forms a very small portion of the company’s total business. The company bought the IPL franchise ‘SunRisers Hyderabad’ from BCCI in October 2012 for a consideration of INR 4250 million payable in five years at INR 850 million per year. It registered a loss of INR 300 million on this business in FY13. The management expects it to break even by FY15.

Data Sources: Company Filings, Team Estimates 2

Industry Overview & Competitive Positioning

Industry segments (in INR billion) The media and entertainment industry comprises of primarily television, print, films, radio, 370.1 digital marketing and music, with television being the main segment of this INR 821 billion 847.6 industry. SUN TV is a major player in the television segment with a strong presence in radio. 224.1 The company also operated in the films segment earlier, which the company has put on hold 340.2 currently but expects to restart soon. 112.4 The Indian television broadcasting industry was estimated to stand at INR 370 billion in 193.3 2012, with a CAGR of 18% between 2012 and 2017. It earns its revenue mainly from two 35.3 sources, subscription and advertisement. Subscription revenues are currently estimated to 73.4 contribute around 66% to total television revenues, which is expected to increase to 72% on 21.7 account of digitization and increased penetration. 87.2 Growth in Subscription Volumes Expected 18.2 27.3 Substantial growth in subscription revenues is expected, on account of increase in television households as well as increase in Cable and Satellite (C&S) household penetration. Televi- 0 500 1000 sion households are expected to increase from 146 million in 2011 to 191 in 2017, with the 2012 2017 paid C&S penetration increasing from 76% to 91% of TV households. This will be driven further by digitization. Increase in income, change in lifestyle and an increase in working population are set to fur- Ad Revenues (in INR billion) ther increase demand in the media & entertainment industry, and particularly the television 600 industry. Increasing urbanization and expansion of the middle class will also drive the industry’s growth. An increase in demand for televisions, and consequently the increase in sub- 400 scriber base will drive growth in subscription revenues for broadcasters. Falling prices and increasing penetration will further propel demand.

200 Ad Revenues Set to Rise Ad spends, primarily dominated by the FMCG sector, is expected to grow at a CAGR of 0 14% over 2012-2017. While the ratio of ad spends in radio, internet and mobile media are expected to increase, the same is expected to remain largely constant in television, with 2012 2013 2014 2015 2016 2017 the percentage of ad spend on print media set to decline. The television industry accounted for 38% of India’s advertisement revenues. Specifically, television advertising spends are TV Print Radio expected to grow at a CAGR of 14% over 2012-2017. Recent trends such as focus on OOH Digital Ads regional channels and genre-based advertising are expected to drive this growth. Local and regional advertising is expected to grow at a much higher rate than the overall growth in advertisement. Digital Penetration of Pay-TV Subscribers in Key Asian Digitization to Have a Positive Impact Countries (%) The TRAI regulations for digitization and the increase in FDI limit from 49% to 74% for cable and DTH platforms are expected to drive digitization of paid television in India. This 100 100 100 99 90 will lead to an increase in genre-based channels as well as target-based advertising. Also, 77 smaller channels which depended on local cable operators (LCOs) for broadcasts, will benefit substantially and will be able to offer services to a niche subscriber base as well as 57 earn revenues from targeted ad spends. Digitization will thus lead to an increase in both 28 subscription and advertising revenues for broadcasters. Digitization will result in a more transparent subscriber base for broadcasters, with subscriber declaration expected to increase from 15%-20% to 100%, thus significantly en- hancing subscription revenues.

Ad Minute Cap to Impact Short-Term Advertising Revenues In March 2013, TRAI issued a mandate which inter alia, required broadcasters to limit ad- Post Digitization ARPU per vertisement time on channels to a maximum of 12 minutes per hour, effective October 2013. Ad volumes will significantly decline if this mandate is strictly implemented, however since month 260 this is an industry-wide phenomenon impacting all players, it is expected that there will be 240 a hike in ad rates and the long-term outlook for advertising revenues remains positive. Some broadcasters have already executed an increase in their ad rates. Also, this regula- 220 tion may lead to closure of smaller channels which depend primarily on ad revenues and 200 may cause the smaller advertisers to shift to other media. However, despite this development, ad revenues are expected to increase significantly over time. 180 160 ARPU Expected to Increase Transparency in subscriber base due to digitization, availability of premium channels such 140 as HD, introduction of customized channel packages for customers are all expected to drive 2011 2012 2013F2014F2015F2016F ARPU upwards over the medium term. However, this increase in ARPU will be diluted by the Analog Digital rise in content costs being faced by broadcasters.

Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013 3

Industry Overview & Competitive Positioning (Contd.)

200 Subscriber Base Restricted Pricing Power Consolidation between media planning agencies, and a limited number of distributers 150 (MSOs and DTH players) will put pressure on broadcasters from both ends of the industry chain. This will limit the pricing power of broadcasters. Also, competition is expected to in- 100 tensify due to the clearance of 75 new channels by the government, which will put further pressure on tariffs.

50 Reduction in Carriage Fee will Lead to Increased Subscriber Base The limited bandwidth of analog operators forces broadcasters to pay carriage fee to 0 cable operators (estimated at INR 16 billion in FY12). Digitization will eliminate the capac- 2011 2013F 2015F ity constraint problem faced by analog distributors. Channels in mediocre bands cost an estimated INR 250 million p.a. with prime bands being charged at an even higher rate. This Analog Digital DTH DD Direct is in contrast with the INR 15-25 million charged by DTH operators, although with a smaller viewership. Carriage fees are consequently expected to fall to the extent of 20%-50% in Radio Revenues (in INR billion) 27.4 some markets, with a slightly moderate fall in other markets.

22.7 Radio Landscape Undergoing Change The growth in the radio industry segment has not been as good as other media segments in 18.7 the last few years. This is primarily due to saturation in utilization levels. However, given 15.4 that the utilization level in non-metro cities are much lower than those in metro cities, the 14 12.7 change in focus of radio players towards non-metro cites is a positive development. The outlook for the segment is expected to improve in the coming years with radio revenues set to increase at a CAGR of 14% over 2012-2017.

Unique Business Model SUN TV has a unique business model wherein it sources most of its content in-house. For ex- ternal content producers, instead of buying the content SUN TV sells ad slot to the producers. This not only minimizes the cost but also transfers risk to the producers, thus incentivizing 2012 2013 2014 2015 2016 2017 them to produce better content. Content producers also have to sign a non compete agree- ment with SUN TV where they cannot produce content for a competitor. Viewership Share (Regional Channels) Large Movie Library Oriya, Movie and movie related content generates high viewer ship in South India. SUN TV has Gujarati 1% Malayal acquired around 80% of the movies which are released in southern India. It has a library of , 1% am, 6% 8,000 movie titles and holds perpetual rights for close to 95% of its movies. SUN TV follows a conservative accounting system of writing of the cost of movie at the time of first telecast Bengali, itself and thereby revenue from subsequent screenings directly adds to the bottom-line . Tamil, 12% 27% Digitization Potential Maximum in Southern States The ratio of digital to analog subscribers is much lower in the states of Tamil Nadu, Andhra Pradesh, Karnataka and Kerala compared to other states in the north. These being the main states in which SUN TV subscribers are present, the digitization implementation will benefit Telugu, Marathi Kannad SUN TV more than its competitors. In addition, implementation of digitization norms in Chen- 23% nai, a city with a huge SUN TV audience, is pending a court stay order which is expected to , 17% a, 12% be lifted soon.

Genre 2012 (% share) Reduced Carriage Charges SUN TV should gain from the reduction in carriage charges as it is expected to benefit the Eng Entertainment 0.14 regional players more than the national players. Earlier, it was uneconomical for SUN TV to Eng News 0.23 operate nationally in areas where the audience concentration was low. This meant that the Eng Movies 0.88 carriage charges were very high for its channels in states other than the four major states of Hindi Entertainment 30.01 South India. Now, with the reduction in these charges it can target these specific audience Hindi News 3.18 segments in other states as well. Hindi Movies 11.93 Regional GEC 20.18 High Share in Regional Markets Regional News 2.78 Regional markets have outpaced the national market in terms of revenue growth in the ad- Regional Movies 3.65 vertising segment and this trend is expected to continue in the near future. The four regional Kids 6.47 languages - Tamil, Telugu, Kannada and Malayalam - in which SUN TV is the dominant Music 3.09 player comprise an astounding 68% of the total regional language television market. Infotainment 1.08 Hence, it is expected to benefit significantly from this trend. Adding to this, the average Others 16.38 expected growth forecast of GDP in the four southern states is higher than the national GDP growth forecast.

Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013 4

Investment Summary

Highly Popular Broadcasting Network with Strong Growth Opportunities SUN TV network is the strongest TV broadcasting network in South India with offerings in all House- Television C&S four major languages – Tamil, Telugu, Kannada and Malayalam – to cater to all audiences in the region. The company has seen strong growth on the back of healthy growth in the TV Language holds households households viewership in the states fuelled by strong economic growth of the region. Going forward, the stock is sitting on a gold mine as the digitization of the TV content distribution goes Tamil 17.7 16.4 15.9 through. The stock has a very high intrinsic value given the growth prospects making the current valuation very attractive. A relatively safe stock of beta very close to 1 in an emerging market makes it a great investment choice. In the medium term, the stock is poised Telugu 20.9 15.1 14.8 to give high returns.

Kannada 13.5 10 9.9 Strong Fundamentals and Growth Drivers SUN TV has a strong foothold in all the South Indian markets with market share as high as 65% in Tamil Nadu. We believe that the current valuation does not fully reflect the growth Malayalam 8.1 7.6 7.1 prospects that the company enjoys not only because of its market leadership but also due to changes in the environment due to regulatory policies. And, to the great benefit of SUN TV, Total 60.2 49.1 47.7 this growth will come without any extra capital expenditure. The two biggest growth drivers for the stock are as follows. Digitization through Conditional Access System (CAS) – TV signals are being fully digitized All figures in millions in a phased manner throughout the country. In the pre-digitization era, households received TV signals through networks owned and operated by local cable providers who paid a subscription fee to channels on a per-subscriber basis. But, this arrangement was fraught with under-reporting and most of the revenues were pocketed by the network owners. The mandatory migration to digital signals accessible only through a Conditional Access System (CAS), the last phase of which is expected to be completed by March 2015, will purge this 67,000- inefficiency and allow SUN TV to recover rightful revenues. In addition, through CAS, SUN 82,000 TV will be able to provide high margin value added services to their subscribers. Paid Advertising – Earlier this year, the Telecom Regulatory Authority of India (TRAI) released fresh regulation notification restricting the advertising time on channels to no more than 12 minutes per hour. Currently, most channels are in contravention to the proposal. Due to its dominant market share, this change affects SUN TV much less than the competitors who will find it harder to raise prices in response to the decrease in their advertising inventory.

Downside Risks to the Valuation 32,000- The key downside risks to SUN TV’s target price are (i) CBI investigation against Mr 36,000 Kalanithi Maran, Executive Chairman of SUN TV, for the alleged illegal transactions by SUN Direct in 2006 can put pressure on the stock, (ii) increase in advertising rates because of regulatory limits can make other sources of advertising more attractive causing a shift in advertising patterns, (iii) different phases in the digitization of TV signals have been marred 25 45 65 85 Range Range of rates ad per 10-second Old rates Revised rates by several delays and deadline extensions, (iv) the global economic outlook has been bleak primetimeslot (in Throusand Rupees) impacting the Indian economy too and hence potentially impacting the advertising revenue of SUN TV, (v) competition may intensify in markets where the company has a stronghold and dominant market share. Any decrease in growth of the stock is likely only if one or more of the above factors materialize and remain sustained in the medium to long term.

Q3 profit improves Posts strong annual Despite IPL losses, Final dividend of profit Q1 profit improves 40% declared

DMK pulls out of UPA govern-

CBI gets new information in Replaced company’s Ad rates raised Aircel-Maxis deal from Malaysia private aircraft

Data Sources: Yahoo Finance, Company Presentation, Economic Times (Aug 3, 2013 retrieved on October 31, 2013) 5

Valuation

We have considered the following methods for the valuation of SUN TV Network – Dis- 400 ARPU Growth counted Cash Flow (DCF), Dividend Discount Model (DDM), Residual Income Valuation (RI) and Comparable Company Analysis. 300 DCF Valuation We consider this as the most important of the valuation methodologies that we have used 200 because the company’s revenues and thus cash flows will witness an above average growth (compared to historical growth rates) because of digitization norms coming into effect. 100 Hence, a proper forecast of cash flow is needed for the time until the growth rate stabilizes. The stock price according to the DCF valuation is INR 506 (excluding IPL). The details of the valuation model can be found in Appendix 9. The main factors that have gone into this fore- 0 cast are mentioned below. 2012 2013 2014 2015 2016 2017 Revenue Forecast Cable DTH The forecast of revenue has been divided into the following – Advertising Revenue, Sub- scription Revenue and Other Revenues. Within advertising revenue, the growth from FMCG and other discretionary has been considered separately as this constitutes more than half of SUN TV’s advertising revenue. Subscription Revenue has been divided into DTH, Analog Cable and Digital Cable revenues and the effect of change in subscriber base and Aver- 8 FCFF age Revenue per User (ARPU) due to the implementation of digitization norms has been considered in the model. Other Revenues include Broadcast Fee, Program Licensing, Movie Distribution, Content Trading, Aircraft Charter Services and revenues from the IPL franchise. 6 The details of the revenue forecast can be found in Appendices 1 and 2.

Radio and Film Distribution Business 4 The radio business has not been valued separately as it comprises a small portion of the company’s top-line and there isn’t any major change expected in this business which merits a 2 detailed valuation. The revenue from the film distribution business has slumped from over INR 2.2 billion in FY 2011 to INR 3 million in FY 2013. While the management has stated that it plans to revitalize this part of the business, we would look for actual realization of 0 revenue in this business in FY14. As of now we have assumed it to remain stagnant at the '12A '13A '14E '15E '16E '17E current revenue figure. FCFF (in INR billion) WACC Calculation The cost of equity for the company has been calculated using the CAPM model. For the risk free rate, we have taken the yield of the current on-the-run 10 year GOI bond (8.60%). WACC Calculation For calculating the market rate of return we have considered the average 10-year returns Beta 0.96 of the stock market (Nifty Index) for the last 10 years which comes out to be 12.43%. For Adjusted Beta 0.97 calculating β, the weekly returns of the stock were regressed against the returns of the Risk Free Rate 8.60% index (Nifty). The adjusted β for the company is 0.97. The company does not have any debt on its books and does not plan to change its capital structure in the foreseeable future. Equity Risk Premium 3.83% Hence the weighted average cost of capital is same as the cost of equity. Details of the Cost of Equity 12.33% WACC calculation can be found in Appendix 7. WACC 12.33% Residual Growth Rate Forecast This is another critical input to the model. The residual growth rate has been estimated tak- ing into consideration the following factors – expected long term real GDP growth rate of the Indian economy, long term inflation expectation. Based on the above we estimate the terminal growth rate to be 9%.

Dividend Discount Model 80% Dividend Payout We have used the multistage dividend discount model. This is appropriate as the growth 60% rate of income, and thus dividends, is expected to be high in the near future because of implementation of digitization. We expect this growth to slow down and settle at the termi- 40% nal growth rate once the implementation of digitization norms is complete. The company hasn’t declared a dividend policy, however the dividend payout has been pretty consistent 20% in the last few years and we expect this trend to continue as the company does not have any debt repayments or major capital expenditure plans. The stock price according to the 0% dividend discount model comes out to be INR 469 (excluding IPL). The details of the divi- 2007 2009 2011 2013 dend discount model can be found in Appendix 10.

Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013, Company Filings, Team Estimates 6

Valuation (Contd.)

60 Comparable Company Analysis P/E Ratios We have used Zee Entertainment Enterprises Limited (ZEEL) as the comparable peer for this analysis. P/E ratio of SUN has traded at a discount to ZEEL for the past couple of years. 40 However, the gap has widened significantly in recent months. We have taken the historical average discount for the last two years and used that to compute the fair P/E ratio for SUN. Multiplying that by the average EPS estimate for FY14 and FY15, we arrive at the 20 share price of INR 519 (excluding IPL) . For details please see Appendix 12.

Residual Income Valuation 0 We have considered this method as this puts less weight on the terminal value in comparison Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 to other methods. The Clean-Surplus relationship holds true for our forecasts and hence this ZEEL SUN TV method is applicable. For cost of equity and terminal growth rates, we have used the same numbers as those arrived in the DCF valuation. The stock price according to the Residual Income Valuation is INR 491 (excluding IPL) . The details of this model can be found in Ap- pendix 11.

Risk Inherent in Above Models We conducted a sensitivity analysis to find out the factors that contribute the most to the model risk. The most sensitive factor was the terminal growth rate, followed by the WACC. While our assumptions for the terminal growth rate are conservative macroeconomic risks that impact the nominal GDP growth rate might adversely affect the valuation. We conducted a Monte Carlo simulation to determine the price ranges we get for the stock. The mean value obtained from the simulation (for DCF analysis) was INR 514 , which is pretty close to our target price of INR 506 (excluding IPL). Details of the sensitivity analysis and Monte Carlo simulation can be found in Appendices 18 - 20.

IPL Valuation The IPL business has been valued separately and SOTP method is used to add this value to Inputs Ranked By Effect on the rest of the business. According to the management, while the IPL franchise of Sunrisers Output Mean (DCF) Hyderabad is currently making losses to the tune of INR 300 million per annum, it is expected to become profitable starting FY14-15, adding INR 650 million to the bottom-line 1 447.66 591.82 every year. With all the IPL franchises privately owned, there is little data in the public 2 453.13 585.44 domain and their financial estimates vary considerably. No traditional valuation method could be applied because of difficulty in determining reliable estimates of cash flows and 3 499.34 528.16 the appropriate market risk that is applicable to this stream of income. Therefore, we de- cided to value the real option with the IPL franchise’s cash flow as the underlying. This 4 498.99 527.79 model valued Sunrisers Hyderabad at INR 1,800 million (equivalent to INR 5 per share), Baseline 507.70 519.73 the details of which can be found in Appendix 22. 5 = 513.95 Final Price The DCF valuation price has been considered as the target price for the share. The DDM, RI 440 460 480 500 520 540 560 580 600 and Comparable Company Analysis have been used to validate the DCF price. Thus, the 1 – WACC 2 – Terminal Growth final price for SUN TV Network common stock is INR 511 (INR 506 for core business and 3 – Other Ad Rev Growth 4 – FMCG Ad Rev Growth INR 5 for IPL). 5 – Market Share Erosion/year Financial Analysis

Major Revenue Streams Strong Revenue Stream 20 SUN TV has witnessed tremendous revenue growth since its IPO in 2006. Its top-line has increased from INR 3 billion in 2006 to INR 19 billion in 2013, registering a CAGR of more 15 than 25%. This has been driven by healthy growth in its advertising and subscription revenues. The future revenue stream looks equally bright as well. We have estimated the reve- 10 nue from advertisements to increase at a CAGR of 13% for FMCG and other consumer discretionary and at 12% for others. The subscription revenue will be boosted significantly 5 because of the digitization norm implementation. It would lead to higher subscription in digi- in INR INR in billion tal segment as well as increase in ARPU from both DTH and cable segments. We forecast 0 the subscriber base in DTH to increase from ~9 million presently to ~14 million by 2017 and the ARPU to increase by over 60% in the same period. We expect SUN TV’s top-line to grow to INR 34 billion by 2017 before stabilizing as the digitization implementation is com- Advertisement Subscription pleted.

Data Sources: Bloomberg, Company Filings, Team Estimates 7

Financial Analysis (Contd.)

14 38% Decline in Movie Distribution Segment Movie distribution revenue for the company has collapsed from nearly 11% of the top-line 12 in FY2011 to about 0.01% in FY2013. While this has been more than offset by robust growth in other segments, the company is trying to regain its market share. However, it re- 10 mains to be seen how successful it is in achieving this. 8 37% Stable Profit Margins 6 SUN TV’s profit margins have been equally impressive and have been well maintained with 4 NetMargin the growth in revenues. It has remained close to 35% over the years and we expect this to improve marginally as under declaration of subscriber information from LCOs comes down. PAT PAT INR (in billions) 2 However, a key risk to profit margins in the short run will be the IPL business which registered a loss of INR 300 million in FY13. We expect the bottom-line of the company to grow 0 36% to INR 13 billion by 2017. '12A '13A '14E '15E '16E '17E With stable profit margins, surplus cash cushion and no major investment plans for the near PAT Net Margin future, we expect SUN TV to have high dividend payout ratios, in line with the average payout of ~53% it has had for the preceding four financial years.

Du Pont Analysis ROE The company had a very high return on equity of 36.9% in FY11 which has come down to 36.9|25.6|26.6 Legend 25.6% in FY13. Comparing these two years, this decrease is mainly due to the decrease in ‘11|’13|’17E return on assets although the assets to equity ratio has also come down. Going forward, we predict both, the net profit margin and the assets turnover in 2017, to be higher than the 2013 figures. This would lead to a higher return on assets which, combined with a lower ROA (Asset/ Total Asset/Equity assets to equity ratio, would give a proportionately less increase in return on equity (26.6% Equity) 1.27|1.12|1.06 in FY17). In SUN TV’s case, the net profit margin and the asset turnover ratio are the major 28.5|22.9|24.8 drivers of return on equity.

Strong Cash Flows The projections show a strong cash flow to the firm on the back of expected robust revenue Sales/Total Assets Net Income/Sales and earnings growth over the forecast horizon. The subscription revenues alone are ex- 0.75|0.63|0.66 38|36.6|37.7 pected to grow at a CAGR of 24% in addition to strong advertising revenue growth of 13%. All investment in capex will be achieved through reinvestment of the profits along with a substantial part being paid out as dividends. The free cash flow is expected to grow from INR 4,961million in FY13 to 8,736 million in FY17. SUN TV’s current ratio dipped slightly in FY13 to 5.50 from 6.28 the previous year. But, it is expected to remain strong and continue to grow from 6.79 in FY14 to 12.51 in FY17. The growth can be attributed to the strong cash position that the company enjoys. SUN TV’s investments are expected to grow at a modest pace funded fully from the operating cash 20 0.95 flow. In addition, all requirements for working capital will also be funded from the cash flow. 0.9 The Earnings Quality Indicator [EQI = Cash Flow from Operations/(Net income + Deprecia- 10 tion + Change in net working capital)] is expected to continuously increase over the fore- EQI 0.85 casted period. The indicator stood at 0.85 in FY12 and 0.94 in FY13 and is expected to remain stable in the coming years. A higher value indicates better cash realization from

CFO (INR CFO(INR billion) operations and that the net income closely represents the actual realizations instead of ac- 0 0.8 cruals. '12A '13A '14E '15E '16E '17E CFO EQI Capital Structure The company is financed entirely through equity and has no short term or long term interest paying debt on its books. The company doesn’t plan any change in its capital structure in the near future and thus this will help it further to strengthen its cash flow, which would imply a stable and high dividend payout for the shareholders.

Total Assets (in INR billion) Contingent Liabilities and Cash Outgo on Airline Replacement 60 The company has a contingent liability related to Disputed Income Tax amounting to over INR 2,000 million as of 31st March 2013. Most of it is related to company’s accounting 40 policies involving expensing of film distribution rights on first telecast. While interaction with management suggests that they have won some of those cases, this is something which needs to be monitored going forward. 20 The company sold its existing aircraft and purchased a new one leading to a cash outgo of over INR 1,000 million. While the company has enough cash on its books, such unrelated 0 transactions in the future might not go down well with the investors. '12A '13A '14E '15E '16E '17E

Data Sources: Company Filings, Team Estimates 8

Investment Risks

Weak Macroeconomic Environment Macro economic environment continues to remain challenging, as overall economic growth has been impacted due to policy paralysis and a lack of reforms. Advertising income contin- GDP Growth Rate ues to be the major source of SUN TV’s revenues. It contributes more than 50% of the reve- 10 nues and has seen ~15% growth YoY after bottoming out in the second half of FY13. FMCG and regional consumer goods companies account for approximately 90% of the 8 advertisement income and spends from these industries has remained steady thus far. Key risk to this growth is any sharp slowdown in ad spending by the FMCG sector. This could be 6 because of general economic conditions or a downturn in particular consumer industries 4 leading them to decrease their advertising budgets.

2 TRAI’s Ad Cap 0 The capping of advertisement duration to 12 min/hour by Telecom Regulatory Authority of India (TRAI) would have a substantive impact on SUN TV (flagship channel). Management '07 '08 '09 '10 '11 '12 '13 plans to take adequate hike in ad rates across channels to broadly nullify any adverse Trendline impact from the expected implementation. However, SUN TV has already taken a rate hike (~119%) in July in select slots for the flagship channel. If the regulation is implemented and SUN TV is unable to pass on the ad rate hike, its financials would be impacted substantially. However, the implementation has been delayed for now.

Phase Phase comple- Delays in Digitization City/Region (planned date) tion date The I&B Ministry had issued an order mandating the complete switch-off of analogue TV transmission signals by December 2014. There have been considerable delays in migration 31 October to digital access system (DAS) and it is unlikely that it will happen by the sunset date. Digiti- Delhi 2012 zation process has been delayed in both Phase-I and Phase-II because of: • execution delays by LCOs 15 January Phase I Kolkata • intervention of a few state governments (31 October 2013 • stay orders issued by High Courts 2012) 31 October Mumbai There have been delays in key markets of Tamil Nadu and Andhra Pradesh. Chennai is still 2012 not digitized due to a pending case filed by state-run Arasu Cable for DAS license. Execu- Chennai Not Completed tion delays could limit upside for the stock in the near term.

Phase II 38 cities in 15 Intensification of Competition (31 March Not Completed states 2013) SUN TV faces an uphill task in retaining its unusually large market share in Tamil language category as competition intensifies. Established players like Zee and Star network are look- Phase III Remaining ur- ing to refocus on this market. There has been an increase in competition, especially in mar- (30 September ban areas kets like AP and Karnataka where Suvarna TV has gained market share. ETV has been a 2014) constant threat with regional language news and entertainment channels. SUN TV could lose Phase IV market share with increasing competitive intensity in various states as a result of channel (31 December Rest of India fragmentation. This could also increase the cost of content/movies acquisition and may im- 2014) pact operating margins. Market share erosion could also lower ad rates for SUN TV, impacting revenue growth.

Promoter's Legal Risk The Central Bureau of Investigation (CBI) is poised to file a charge sheet against Mr 500 Volumes 100 spike & Kalanithi Maran and former Telecom Minister, Mr Dayanidhi Maran in alleged irregularities 480 price 90 in the Aircel-Maxis deal. As part of the probe, CBI has accused Dayanidhi Maran of plunges on ‘forcing’ Chennai based telecom promoter Mr C Sivasankaran to sell the stake in Aircel to 460 information 80 in Aircel- Maxis Group, a Malaysian firm, in 2006. The CBI is also investigating if the investment by 70 440 Maxis deal l Astro All Asia Networks in SUN Direct TV was linked to Maxis’ buyout of Aircel. News flow 60 on the case could create volatility in the stock price. Also, if the verdict goes against Mr. 420 Maran, it would have significant impact on the stock price. 50 400 SUN Direct contributes a major share of SUN TV’s reported DTH revenue of INR 3.7 billion 40 in FY13. An adverse legal verdict may not halt operations of SUN Direct, but potential pen- 380 30 alties may impact growth prospects. It would also provide competitors a chance to grab an 360 incremental subscriber share. 20 340 10 Radio Licenses - Phase III Ownership and operation of FM radio stations is governed by licenses granted by the Cen- 320 0 tral Government. These licenses are for limited terms with no guarantee of renewal. SUN TV Jan-13 Apr-13 Jul-13 Oct-13 operates FM radio stations across India through its two subsidiaries, South Asia FM Limited Volume Price and Kal Radio Limited. The company has 46 radio stations across India under the brand Suryan FM (Tamil Nadu) and Red FM (rest of India).

Data Sources: Database on Indian Economy - RBI, Bloomberg, TRAI 9

Investment Risks (Contd.)

Phase III of the radio licenses auction has been cleared by the government for 839 channels. This auction has been delayed several times and the number of licenses that Red FM gets remains a risk for the radio business. Phase III will facilitate penetration into tier II & tier III cities leading to increased national reach. 3 Contingent Liabilities (INR billion) Possible Decline in SUN TV’s Popularity 2.5 Possible decline in the popularity of channels of SUN Network would also adversely impact its revenue, both from advertisement as well as subscription. SUN’s competitive advantage is a result of its high popularity, exclusive access to high quality content and a large movie 2 library.

1.5 Competition from Substitutes Internet Protocol Television (IPTV) has grown significantly worldwide but is still at a nascent 1 stage in India. However, looking at the impact in other countries, were this to gain popularity in India, the television industry would be impacted by the resulting competition. 0.5 Contingent Liabilities SUN TV has contingent liabilities of INR 2.6 billion as of FY13. The company has demands 0 of income tax of INR 2 billion in relation to the company’s policy of claiming deduction of '09 '10 '11 '12 '13 certain expenses. It has also received demands for customs duty aggregating to INR 615 million on account of certain asset imports. The company has appealed against the demands and management believes that their claim is likely to be accepted by the authorities. How- ever, if the contingent liability were to materialize, it would impact the income substantially.

Industry Consolidation Some broadcasters are consolidating to increase their bargaining power with distributors with regard to the push for digitization. Consolidation is also likely to be favoured due to Peak Power Demand Deficit large investments required in content and distribution. In 2010, SUN Network and Net- work18 entered into a strategic alliance to form “SUN18 Media Services”. In 2011, Star 20% Den Media Services Private Limited and Zee Turner Limited formed a 50:50 joint venture called “Pro Media Enterprise” to jointly aggregate and distribute television content. The broadcasting industry may also witness consolidation, as channels enter more regional mar- 15% kets and make significant investments in content and distribution to attract viewers who would have a larger number of offerings to choose from. These are initial steps towards consolidation with NDTV Imagine being acquired by Turner Asia Pacific Ventures in 2009 10% and 9X by Zee Entertainment Enterprises Limited in 2010.

Regulatory Risk 5% The media industry in India has to continuously deal with regulatory issues including those of license, investment caps and ownership limits. There are regulations such as FDI cap of 26% in broadcasting, no dubbing of content (Kannada) which are negatives for the industry. SUN 0% TV has performed well in the past in the face of regulations. However, further adverse FY08 FY09 FY10 FY11 FY12 regulatory changes remain a concern.

Operational Risk AP TN Power situation in some of the southern states has worsened over the last few decades. The peak power deficit in Tamil Nadu, its biggest market, has been at its highest level in the last five years. In addition, SUN TV is also at risk from natural disasters given its major operations are located in very few locations across South India. A major disaster like the tsunami of 2004 can severely impact the company. The company uses sophisticated technology and tools in its business. Any failure of these tools can cause delays and possible disruptions. Service disruptions can also be caused in case of failure of satellites used by the company.

Team Disclosure We assign a BUY rating when a security is expected to deliver returns of 15% or greater over the next twelve months. A SELL rating is given when the security is expected to deliver returns of -5% or lower over the next twelve months, while a HOLD rating implies returns in the range of -5% to 15% over the next twelve months.

Data Sources: Company Filings, GreenCleanGuide.com 10 Appendix 1: Ad and Subscription Revenue Forecast Advertising and Subscription Revenue Forecasts DTH 2013A 2014E 2015E 2016E 2017E Subscriber Base 8,900,000 10,294,820 12,153,607 13,297,475 14,155,377 ARPU 34.93 38.94 45.56 52.19 58.01 Revenue (in INR millions) 3,730 4,810 6,645 8,327 9,853 Cable Subscriber Base 35,000,000 34,300,000 33,013,750 33,871,250 36,015,000 ARPU 3.31 3.84 4.34 4.89 5.39 Revenue (in INR millions) 1,390 1,582 1,719 1,988 2,328 Total Subscription Revenue (in INR millions) 5,120 6,392 8,364 10,315 12,182 FMCG Advertising Revenue (in INR millions) 5,777 6,528 7,377 8,336 9,419 Other Advertising Revenue (in INR millions) 5,777 6,470 7,247 8,116 9,090 Total Advertising Revenue (in INR millions) 11,554 12,998 14,623 16,452 18,509 Total Ad & Subscription Revenue (in INR millions) 16,674 19,390 22,987 26,767 30,691 Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013, Company Filings, Team Estimates Appendix 2: Total Revenue Forecast Total Revenue Forecasts (in INR millions) 2013A 2014E 2015E 2016E 2017E Advertisement 11,554 12,998 14,623 16,452 18,509 Subscription 5,120 6,392 8,364 10,315 12,182 Broadcast Fee 1,436 1,538 1,538 1,504 1,526 Program Licensing 1,031 1,237 1,485 1,782 2,138 Movie Dist 3 3 3 3 3 Content Trading 62 62 62 62 62 Aircraft Charter Services 23 23 23 23 23 Total Revenue 19,229 22,254 26,098 30,141 34,444 Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013, Company Filings, Team Estimates

Appendix 3: Income Statement Income Statement Y/E Mar (INR millions) FY 12A FY 13A FY 14E FY 15E FY 16E FY 17E Net Sales 18472.00 19230.00 22253.62 26098.17 30140.94 34443.80 Growth 4.10% 15.72% 17.28% 15.49% 14.28% Expenditure 4328.00 5139.00 5580.53 6544.63 7558.43 8637.46 Raw Materials 0.00 0.00 0.00 0.00 0.00 0.00 Employee Cost 1859.00 1994.00 2273.55 2666.33 3079.36 3518.97 Other Exp 2469.00 3145.00 3306.98 3878.30 4479.07 5118.49 EBITDA 14144.00 14091.00 16673.08 19553.54 22582.51 25806.34 Growth 0% 18% 17% 15% 14% EBITDA Margin 76.57% 73.28% 74.92% 74.92% 74.92% 74.92% Depreciation 4736.00 4417.00 5204.46 6055.42 6969.89 7973.26 EBIT 9408.00 9674.00 11468.63 13498.12 15612.62 17833.08 EBIT Margin 50.93% 50.31% 51.54% 51.72% 51.80% 51.77% Other Income 796.00 722.00 897.24 1052.25 1215.25 1388.74 Interest Expenses 58.00 49.00 49.00 49.00 49.00 49.00 PBT 10146.00 10347.00 12316.87 14501.37 16778.87 19172.81 Tax 3317.00 3306.00 3981.06 4687.13 5423.26 6197.03 Effective Tax Rate 32.69% 31.95% 32.32% 32.32% 32.32% 32.32% PAT 6829.00 7041.00 8335.81 9814.24 11355.61 12975.78 Growth 3.10% 18.39% 17.74% 15.71% 14.27% Net Margin 0.37 0.37 0.37 0.38 0.38 0.38 (Profit) Loss from Minority Interest 22.00 (25.00) (1.50) (13.25) (7.38) (10.31) CSR Charge (2% of Avg L3Y PAT) 148.04 167.94 196.70 227.64 Adjusted PAT 6807.00 7066.00 8189.27 9659.55 11166.28 12758.45 Growth 3.80% 15.90% 17.95% 15.60% 14.26% Data Sources: Company Filings, Team Estimates

Appendix 4: Balance Sheet Balance Sheet Y/E Mar (INR millions) FY 12A FY 13A FY 14E FY 15E FY 16E FY 17E Equity Share Capital 1970.00 1970.00 1970.00 1970.00 1970.00 1970.00 Reserves & Surplus 24169.00 26884.00 31887.86 37436.41 43543.15 50239.75 Net worth 26139.00 28854.00 33857.86 39406.41 45513.15 52209.75 Minority Interest 293.00 318.00 305.50 305.50 305.50 305.50 Secured Loans 0.00 0.00 0.00 0.00 0.00 0.00 Unsecured Loans 0.00 0.00 0.00 0.00 0.00 0.00 Net Deferred Tax Liability 338.00 285.00 285.00 285.00 285.00 285.00 Current Liabilities & Provisions 2275.00 2939.00 2939.00 2939.00 2939.00 2939.00 Current Liabilities 2275.00 2939.00 2939.00 2939.00 2939.00 2939.00 Provisions 0.00 0.00 0.00 0.00 0.00 0.00 Total Liabilities 29045.00 32396.00 37387.36 42935.91 49042.65 55739.25 Gross Block 31597.00 34777.00 40977.00 47677.00 54877.00 62777.00 Less: Depreciation 19121.00 21008.00 26212.46 32267.88 39237.76 47211.02 Net Block 12476.00 13769.00 14764.54 15409.12 15639.24 15565.98 Capital WIP 35.00 28.00 28.00 28.00 28.00 28.00 Investment 2244.00 2437.00 2646.60 2874.23 3121.43 3389.89 Current Assets 14290.00 16162.00 19948.22 24624.56 30253.99 36755.37 Inventories 5.00 5.00 5.00 5.00 5.00 5.00 Sundry Debtors 5090.00 5835.00 6807.78 8019.18 9104.57 10463.73 Cash & Bank Balance 3075.00 4162.00 6235.43 9045.23 12984.41 17008.94 Loans & Advances 5759.00 5587.00 6200.00 6700.00 7200.00 8200.00 Other Current Assets 361.00 573.00 700.00 855.15 960.00 1077.71 Total Assets 29045.00 32396.00 37387.36 42935.91 49042.65 55739.25 Data Sources: Company Filings, Team Estimates

Appendix 5: Free Cash Flow Calculations Free Cash Flow Calculations Y/E Mar (INR millions) FY 12A FY 13A FY 14E FY 15E FY 16E FY 17E PBT 9,350.00 9,625.00 11,419.63 13,449.12 15,563.62 17,784.08 Depreciation 4,736.00 4,417.00 5,204.46 6,055.42 6,969.89 7,973.26 Interest Provided 58.00 49.00 49.00 49.00 49.00 49.00 Other Non-cash Items 0.00 0.00 0.00 0.00 0.00 0.00 Change in Working (6,539.00) (114.00) (1,922.38) (2,094.17) (1,937.45) (2,745.33) Capital Taxes Paid 3,317.00 3,306.00 3,981.06 4,687.13 5,423.26 6,197.03 Operating Cash Flow 4,288.00 10,671.00 10,769.64 12,772.24 15,221.79 16,863.98 Capital Expenditure (4,175.00) (5,710.00) (6,200.00) (6,700.00) (7,200.00) (7,900.00) CSR Charge 148.04 167.94 196.70 227.64 Free Cash Flow 113.00 4,961.00 4,421.61 5,904.30 7,825.09 8,736.34 Data Sources: Company Filings, Team Estimates Appendix 6: Key Ratios Key Ratios Profitability FY 12A FY 13A FY 14E FY 15E FY 16E FY 17E EBITDA Margin 76.6% 73.3% 74.9% 74.9% 74.9% 74.9% Operating Margin 50.9% 50.3% 51.5% 51.7% 51.8% 51.8% Profit Margin 37.0% 36.6% 37.5% 37.6% 37.7% 37.7% Return on Equity 26.0% 25.7% 26.1% 26.4% 26.3% 26.1% Return on Assets 23.4% 23.0% 23.5% 24.1% 24.3% 24.4% Liquidity Current Ratio 6.28 5.50 6.79 8.38 10.29 12.51 Turnover Asset Turnover 0.64 0.63 0.64 0.65 0.66 0.66 Receivables Turnover 3.63 3.52 3.52 3.52 3.52 3.52 Data Sources: Company Filings, Team Estimates

Appendix 7: Calculation of Weighted Average Cost of Capital (WACC)

WACC Calculation Beta 0.96 Adjusted Beta 0.97 Risk Free Rate 8.60% Equity Risk 3.83% Premium Cost of Equity 12.33% WACC 12.33% Data Sources: Bloomberg, Team Estimates Appendix 8: Calculation of Terminal Growth Rate

Terminal Growth Rate Calculation Long Term Real GDP Growth Rate 4.50% Long Term Inflation Forecast 4.50% Terminal Growth Rate 9.00% Data Sources: Reserve Bank of India (RBI), International Monetary Fund (IMF) Appendix 9: Discounted Cash Flow Valuation

∑

where FCFFi is the Free Cash Flow to the firm in year i WACCi is the weighted average cost of capital for year i FCFFn is the terminal free cash flow and g is the terminal growth rate of free cash flow

Discounted Cash Flow Valuation FY14 FY15 FY16 FY17 Terminal Value Free Cash Flow (INR millions) 4421.61 5904.30 7825.09 8736.34 286147.56 PVIF (@12.33%) 0.89 0.79 0.71 0.63 0.63 PV (INR millions) 3936.26 4679.26 5520.80 5487.14 179724.39 Total Firm Value (INR millions) 199362.49 Number of Shares Outstanding (millions) 394.08 Intrinsic Value per share (INR) 505.89 Data Sources: Team Estimates

Appendix 10: Dividend Discount Model Valuation

∑

where Di is the Dividend paid in year i ki is the cost of equity for year i and g is the terminal growth rate of dividend

Dividend Discount Model Valuation FY14 FY15 FY16 FY17 Terminal Value PAT (INR millions) 8189.27 9659.55 11166.28 12758.45 Dividend Payout (INR 5155.41 6081.00 7029.53 8031.86 millions) Dividend Per Share (INR) 13.08 15.43 17.84 20.38 667.56 PV 0.89 0.79 0.71 0.63 0.63 PVIF (INR) 11.65 12.23 12.58 12.80 419.28 Intrinsic Value per share(INR) 468.54 Data Sources: Team Estimates

Appendix 11: Residual Income Valuation

∑

where

BV0 is the initial book value of shareholder’s equity

ki is the cost of equity for year i and g is the terminal growth rate

Residual Income Valuation FY14 FY15 FY16 FY17 Terminal Value Net Income (INR millions) 8,189.27 9,659.55 11,166.28 12,758.45 Cost of Equity*Book Value (INR millions) 3,557.08 4,173.95 4,857.97 5,610.80 Residual Income (INR millions) 4,632.19 5,485.60 6,308.31 7,147.65 234,112.22 PVIF 0.89 0.79 0.71 0.63 0.63 PV (INR millions) 4,123.81 4,347.59 4,450.92 4,489.66 147,053.05 Total Additions (INR millions) 164,465.04 Initial Book Value (INR millions) 28,854.00 Total Residual Income (INR millions) 193,319.04 Number of Shares Outstanding 394.08 (millions) Intrinsic Value per share (INR) 490.55 Data Sources: Team Estimates Appendix 12: Comparable Company Analysis Comparable Company Analysis Average SUN TV P/E Discount to ZEEL 28.90% Zee TV Current EPS 32.25 Expected SUN TV P/E 22.93 SUN TV Average EPS for FY14E and 22.65 FY15E Intrinsic Value per share (INR) 519.27 Data Sources: Bloomberg, Team Estimates

Appendix 13: Corporate Information Board of Directors Kalanithi Maran Executive Chairman K. Vijaykumar Managing Director and Chief Executive Officer S. Selvam Director Kavery Kalanithi Executive Director J. Ravindran Independent Director M.K. Harinarayan Independent Director Nicholas Martin Paul Independent Director R. Ravivenkatesh Independent Director

Audit Committee J. Ravindran Chairman M.K. Harinarayan Nicholas Martin Paul R. Ravivenkatesh

Remuneration Committee J. Ravindran Chairman M.K. Harinarayan Nicholas Martin Paul R. Ravivenkatesh

Investor/Shareholder’s Grievance Committee M.K. Harinarayan Chairman J. Ravindran Nicholas Martin Paul R. Ravivenkatesh

Share Transfer and Transmission Committee Kalanithi Maran Chairman Kavery Kalanithi Data Sources: Company Filings

Appendix 14: Related Party Disclosures Enterprises in which Key Management personnel or their relatives have significant influence Kal Publications Private Limited Sun Foundation Spicejet Limited Murasoli Maran Family Trust Udaya FM Private Limited S & S Textiles Sun Direct TV Private Limited D.K. Enterprises Private Limited Kungumam Publications Private Limited Kungumam Nithyagam Private Limited Sun Distribution Services Private Limited Kal Comm Private Limited Kal Investments (Madras) Private Limited Kal Media Services Private Limited Kal Airways Private Limited Kal Cables Private Limited Kal Holdings Private Limited Sun Business Solutions Private Limited

Associates AV Digital Networks(Hyderabad)Private Limited Digital Radio (Mumbai) Broadcasting Limited Asia Radio Broadcast Private Limited Deccan Digital Networks (Hyderabad) Private Limited Digital Radio(Kolkata) Broadcasting Limited Pioneer Radio Training Services Private Limited Metro Digital Networks(Hyderabad) Private Digital Radio (Delhi) Broadcasting Limited Limited Optimum Media Services Private Limited South Asia Multimedia Private Limited Data Sources: Company Filings

Appendix 15: Advertising Trends and Projections Advertising Revenue (INR billion) Overall Industry Size 2010 2011 2012 2013p 2014p 2015p 2016p 2017p (calendar year) TV 103.0 116.0 124.8 138.6 156.6 180.1 207.2 240.3 Print 126.0 139.4 150.0 162.0 179.0 200.0 222.0 248.0 Radio 10.0 11.5 12.7 14.0 15.4 18.7 22.7 27.4 OOH 16.5 17.8 18.2 19.3 21.1 23.0 25.0 27.3 Digital Advertising 10.0 15.4 21.7 28.3 37.1 48.9 65.1 87.2 Total 266.0 300.0 327.0 362.0 409.0 471.0 542.0 630.0 Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013 Appendix 16: Breakup of Broadcasting Revenue Broadcasting Industry 2012 2013P 2014P 2015P 2016P 2017P Advertising Revenue (INR billion) 125 139 157 180 207 240 Subscription Revenue (INR billion) 70 87 116 156 191 224 Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013 Appendix 17: Language-wise Size of Market Language TV Households C&S Households Ad market (million) (million) (INR million) Tamil 16.4 15.9 13500 Telugu 15.1 14.8 9000 Bangla 9.5 8.6 7000 Kannada 10 9.9 6200 Malayalam 7.6 7.1 6600 Marathi 16.8 14.9 4100 Bhojpuri 16.6 11.3 1000 Punjabi 4.8 4.3 1500 Oriya 4.2 3.5 800 Gujarati 8.1 7 450 Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013

Appendix 18: Sensitivity Analysis - DCF Valuation

0.007

0.006

0.005

0.004

0.003

0.002

0.001

0 369 407 445 484 522 560 598 636 674 712

Simulation Iterations 100000 Mean INR 514 Median INR 507 25% Percentile INR 466 75% Percentile INR 555

DCF Inputs Ranked By Effect on Output Mean

WACC / 2012 447.66 591.82

Terminal Growth Rate / 2012 453.13 585.44

Other Ad Revenue Growth Rate 499.34 528.16

FMCG Ad Revenue Growth Rate 498.99 527.79

Market Share Erosion/year 507.70 519.73

Baseline = 513.95

440 460 480 500 520 540 560 580 600

DCF Data Sources: Team Estimates

Appendix 19: Sensitivity Analysis - DDM Valuation

Simulation Iterations 100000 Mean INR 476 Median INR 469 25% Percentile INR 431 75% Percentile INR 513

DDM Inputs Ranked By Effect on Output Mean

WACC / 2012 414.85 547.37

Terminal Growth Rate / 2012 419.89 541.52

FMCG Ad Revenue Growth Rate 463.90 486.74

Other Ad Revenue Growth Rate 464.27 487.02

Market Share Erosion/year 472.69 478.91

Baseline = 475.80

400 420 440 460 480 500 520 540 560

DDM Data Sources: Team Estimates

Appendix 20: Sensitivity Analysis: RI Valuation

0.007

0.006

0.005

0.004

0.003

0.002

0.001

0 364 400 436 472 508 544 580 616 652 688

Simulation Iterations 100000 Mean INR 498 Median INR 491 25% Percentile INR 452 75% Percentile INR 536

RI Inputs Ranked By Effect on Output Mean

Cost of Equity / 2012 432.20 574.30

Terminal Growth Rate / 2012 448.64 556.82

FMCG Ad Revenue Growth Rate 480.46 514.72

Other Ad Revenue Growth Rate 481.99 515.06

Market Share Erosion/year 493.06 502.88

Baseline = 497.91

420 440 460 480 500 520 540 560 580

RI Data Sources: Team Estimates

Appendix 21: Real Options The basic idea of a real option is that managers take decisions depending on the information that emerges and do not necessarily stick to a decision that they made in the beginning. As time progresses, the project may do better than predicted or maybe worse. In the latter case, the management can sell off the project even if it was originally planned for several more years. The value of an abandonment decision in such scenarios gets captured in option valuation whereas it is not included in a traditional valuation method such as DCF.

An option can be valued as a probability weighted combination of the outcomes such that the expected return is same as the risk free return. Conversely, we can define Δ (delta) such that a combination of Δ shares bought and one call option sold give the same return irrespective of the resulting stage. Since we know the final value of the portfolio (irrespective of the resulting state) and the value of the underlying shares, we can arrive at the value of the call option.

Δ is determined by equating the two possible future outcomes as follows

The above calculations are for a single stage and have to be repeated for each stage during the life of the option. The generic equations that give the option price on each decision node are given below. Since the values of the last (terminating) stages are known, the calculations proceed backwards towards earlier nodes until the ‘current node’ is reached. The value at the ‘current node’ is the required option value.

Appendix 22: IPL Valuation as Real Option

Variable Value Risk free rate 8.60% Time horizon 10 years Income stream in first year INR 650mn Initial investment INR 4250mn Depreciation 10% per annum Standard Deviation 20% Final Option Value INR 2901.05mn Present Value of IPL (inclusive of losses in FY14 and FY15) INR 1803.42mn Data Sources: Team Estimates

Note: The Binomial model can be found on the next page

4802.89 1481.88 3932.27 5296.80 3219.47 3219.47 7695.42 1481.88 2635.88 2635.88 9064.6 4000.41 2158.08 2158.08 2158.08 9697.66 5572.63 1481.88 1766.88 1766.88 1766.88 9815.41 6457.6 3131.42 1446.60 1446.60 1446.60 1446.60 9582.92 6851.8 4149.68 1481.88 1184.38 1184.38 1184.38 1184.38 9122.4 6902.88 4710.11 2548.91 969.69 969.69 969.69 969.69 969.69 8523.4 6721.42 4944.10 3195.85 1481.88 793.91 793.91 793.91 793.91 793.91 7850.64 6389.19 4950.55 3538.71 2158.45 CASH FLOW 650.00 650.00 650.00 650.00 650.00 650.00 PRESENT VALUE 7,151.045 5966.47 4803.43 3665.36 2556.48 1481.88 532.17 532.17 532.17 532.17 532.17 INVESTMENT 4,250.00 5499.77 4558.75 3642.26 2753.50 1896.71 NPV 2,901.045 435.71 435.71 435.71 435.71 435.71 ABANDONMENT 4266.39 3522.98 2809.46 2127.89 1481.88 OPTION VALUE 651.045 356.73 356.73 356.73 356.73 3373.28 2781.37 2231.27 1721.26 292.06 292.06 292.06 292.06 2788.43 2285.18 1853.88 1481.88 239.12 239.12 239.12 2509.58 2032.76 1646.54 195.78 195.78 195.78 2258.62 1829.49 1481.88 160.29 160.29 2032.76 1646.54 131.23 131.23 1829.49 1481.88 107.44 1646.54 87.97 1481.88

SALVAGE VALUE (years 0-10) 4250.00 3825.00 3442.50 3098.25 2788.43 2509.58 2258.62 2032.76 1829.49 1646.54 1481.88

Appendix 23: Calculation of Market Return The annualized return on CNX Nifty was used to calculate the market premium over the risk free rate. Over a period of 2003 to 2013, the annualized return over the immediately preceding 10 year period was calculated using the closing value on the last day of the financial year. The average of the annualized returns over the time period under consideration, thus calculated, was taken as the market return. The actual figures are as given below.

Date Closing value 10-Year Annualized Return 31-Mar-93 660.51 31-Mar-94 1177.11 31-Mar-95 990.24 29-Mar-96 985.30 31-Mar-97 968.30 31-Mar-98 1116.90 31-Mar-99 1078.05 31-Mar-00 1528.45 30-Mar-01 1148.20 28-Mar-02 1129.55 31-Mar-03 978.20 4.01% 31-Mar-04 1771.90 4.17% 31-Mar-05 2035.65 7.47% 31-Mar-06 3402.55 13.19% 30-Mar-07 3821.55 14.72% 31-Mar-08 4734.50 15.54% 31-Mar-09 3020.95 10.85% 31-Mar-10 5249.10 13.13% 31-Mar-11 5833.75 17.65% 30-Mar-12 5295.55 16.71% 28-Mar-13 5682.55 19.24%

Market Return 12.43% Data Sources: NSE, Team Estimates

Appendix 24: SUN TV - Channel Portfolio

Genre Tamil Telugu Kannada Malayalam National General Entertainment      Movies     News     Music     Kids     Comedy    Life   Action     denotes one regular channel and one HD channel Data Sources: FICCI-KPMG Indian Media and Entertainment Industry Report - 2013

Data Sources: Company Presentation

Appendix 25: Channel Portfolio Compared with Zee Entertainment

5 5 4 4 4 4 4 4 4 3 3 3 3 2 2 2 2

0 0 0 0 0 NA 0 0

Life

Kids

Niche

News

Sports

Music

Action

Movies

Regional

Comedy

Eng. Ent. Eng. Gen. Ent. Gen. Sun TV Zee TV

Data Sources: Company Presentation, www.zeetelevision.com (retrieved on October 31, 2013)

Appendix 26: DTH Penetration in Phase II Cities (Low in South Indian Cities)

Agra

Pune

Surat

Patna

Jaipur

Thane

Rajkot

Indore

Ranchi Nashik

Bhopal

Kanpur

Nagpur

Meerut

Mysore

Howrah

Jodhpur

Srinagar

Jabalpur

Varanasi

Amritsar

Lucknow

Sholapur

Ludhiana

Vadodara

Faridabad Allahabad

Bangalore

Ghaziabad

Hyderabad

Chandigarh

Aurangabad Ahmedabad

Navi Mumbai Navi

Vishakapatnam

Kalyan-Dombivli Pimpri Chinchwad Pimpri

Data Sources: Cable Wars - Outlook Business (June 22, 2013, retrieved on October 31, 2013)

Appendix 27: Risk Matrix

High

Digitization Hike in Ad Rates

Delays

Increased Macroeconomic Level Slowdown of Competition

PROBABILITY Industry Regulatory Possible Decline Promoter's in SUN TV's Legal Risk Consolidation Risks popularity Materializing

Contingent Operational IPTV Low Liabilities Risk

Insignificant IMPACT Severe

Appendix 28: Worldwide Presence of SUN TV

Countries and Regions – India, USA, Canada, Europe, South Africa, UAE, Sri Lanka, Malaysia, Singapore, Australia and New Zealand.

Data Sources: Company Filings

Appendix 29: Porter’s Five Forces Analysis Threat of New Entrants 5

Threat of Substitute 2 Bargaining Power of Products Suppliers 1

Competition in the Bargaining Power of Industry Buyers

Composite Score – 2.2 Threat of New Entrants (2/5)  Medium level Barriers to Entry  Regulatory licenses needed  Capital Expenditure requirement not too high Bargaining Power of Suppliers (2/5)  Medium Bargaining Power of Suppliers  High Bargaining Power of suppliers in the movie rights  Low Bargaining Power for other Television content Bargaining Power of Buyers (1/5)  Low Bargaining Power of Buyers  Large number of Buyers  SUN TV has a dominant presence in its markets Competition in the Industry (4/5)  High level of competition  Quite a few national players as well as regional players present  High Product Differentiation Threat of Substitute Products (2/5)  Medium threat of Substitute Products  IPTV can be a major competitor going forward  No other perfect substitute

Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with Indian Association of Investment Professionals (IAIP), CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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