INDIA DAILY November 4, 2011 India 3-Nov 1-day1-mo 3-mo Sensex 17,482 0.1 10.2 (1.2) Nifty 5,266 0.1 10.3 (1.2) Contents Global/Regional indices Daily Alerts Dow Jones 12,044 1.8 11.4 5.8 Nasdaq Composite 2,698 2.2 12.2 5.5 Results FTSE 5,546 1.1 12.2 2.8 Sun TV Network: Average quarter in a challenging environment Nikkie 8,752 1.3 2.4 (9.2) Ashok Leyland: Operating leverage benefits lead to expansion in margins Hang Seng 19,789 2.8 21.8 (9.6) KOSPI 1,918 2.6 12.4 (5.0) Jubilant Foodworks: Early warning signals visible Value traded – India Sector Cash (NSE+BSE) 121 124 133 Technology: 2QFY12 earnings review—on balance, positive Derivatives (NSE) 1,039 811 1,040 Telecom: Regulations—a new day, a new document, nothing definitive yet Deri. open interest 1,192 997 1,172 News Round-up Forex/money market Change, basis points ` TRAI rings in telecom M&A game-changer. Operators with 35% combined market or 3-Nov 1-day 1-mo 3-mo revenue share can merge, case-wise approval possible of joint share up to 60%; new Rs/US$ 49.1 0 (26) 460 ground rules on spectrum. Theoretically, it would be possible in the Delhi circle for 10yr govt bond, % 8.9 2 38 49 Airtel to merge with Aircel or Idea Cellular; for an Airtel-Vodafone merger, the ball Net investment (US$mn) would be in the government's court. (BSTD) 2-Nov MTD CYTD FIIs 39 - 359 ` The government is likely to raise the FDI limit in single brand retail to 74% from 51%, MFs (10) - (282) even as it has plans of increasing the limit to 100% in a phased manner. (BSTD) Top movers -3mo basis ` Oil companies have decided to increase petrol prices by INR 1.82 a litre with effect Change, % from Thursday midnight. (BSTD) Best performers 3-Nov 1-day 1-mo 3-mo MM IN Equity 839.7 (0.1) 8.1 23.6 ` The manufacturing PMI numbers out earlier this week may have ignited ACEM IN Equity 157.1 0.4 5.5 23.5 macroeconomic hopes but worrisome services PMI and food inflation data brought ACC IN Equity 1210.3 2.1 10.0 23.2 the gloom back today. Food inflation rose to a near nine-month high of 12.21% for JPA IN Equity 78.3 2.1 14.2 23.1 the week ended October 22. (BSTD) BJAUT IN Equity 1727.9 0.5 15.7 21.7 Worst performers ` Average coal stocks at India's thermal power plants have dipped below "critical" ADE IN Equity 463.0 (0.1) (4.1) (29.6) level, or are enough to last less than a week, against the norm of 22 days, mounting SUEL IN Equity 36.5 (0.4) 2.4 (29.6) pressure on electricity generating cos. as they cannot afford to build stocks with WLCO IN Equity 104.7 1.7 (0.9) (29.2) imports because of low tariffs. (ECNT) RCAPT IN Equity 373.6 2.0 15.6 (27.7) IVRC IN Equity 38.6 (0.1) 10.1 (26.5) ` RBI has notified the lowering of lock-in period for foreign institutional investments in bond & debentures issued by infrastructure non-banking finance cos. The lock-in period has been lowered from three years to one year, while the investment limit continues to be USD 25bn. (ECNT) ` L&T's (LT IN) subsidiary L&T (Oman) has secured orders worth USD 178.57 mn. (THBL) ` Maruti Suzuki (MSIL IN) to step up investment in Haryana, INR 34 bn worth of investment lined up. The third assembly line expected to be up and running by 2013.(FNLE) ` Foreign holdings in listed media cos. such as Reliance Mediaworks (RMW IN) & Den networks (DEN IN) have halved between June & Sept. due to lack of visibility on new releases & business outlook that's been floundering due to series of flops. (ECNT) ` Sesa Goa (SESA IN) will acquire all the stake in Goa Energy from Videocon Industries and other shareholders for USD 11 mn. (BSTD) Source: ECNT= Economic Times, BSTD = Business Standard, FNLE = Financial Express, THBL = Business Line. For Private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES. REFER TO THE END OF THIS MATERIAL. BUY Sun TV Network (SUNTV) Media NOVEMBER 04, 2011 RESULT Coverage view: Neutral Average quarter in a challenging environment. Sun TV reported 2QFY12 EBIT of Price (Rs): 274 Rs2.48 bn (+3% yoy), marginally below expectations, led by multiple pressure points Target price (Rs): 400 notably (1) weak advertising environment, (2) Arasu Cable (cable subscription declined BSE-30: 17,482 qoq) and (3) Supreme Court judgment (DTH subscription declined qoq). The news flow remains adverse given CBI inquiry into (1) 2G scam and (2) BSNL telecom lines issue, reflected in valuation of 11.5X FY2013E EPS (>20% discount to Zee). Retain BUY with FY2013E FV of Rs400 (Rs440 previously); stress case FV of Rs350 (Rs360 previously) is likely a better metric given the uncertainty (rising debtor levels are a red flag in 1HFY12) supported by Rs6.25/share interim dividend (~4.6% 1HFY12 annualized yield). Company data and valuation summary Sun TV Network Stock data Forecasts/Valuations 2011 2012E 2013E 52-week range (Rs) (high,low)557-214 EPS (Rs) 19.5 20.0 23.8 Market Cap. (Rs bn) 107.9 EPS growth (%) 48.1 2.5 18.9 Shareholding pattern (%) P/E (X) 14.0 13.7 11.5 Promoters 77.0 Sales (Rs bn) 20.1 20.6 24.1 FIIs 13.5 Net profits (Rs bn) 7.7 7.9 9.4 MFs 2.0 EBITDA (Rs bn) 12.6 13.1 15.3 Price performance (%) 1M 3M 12M EV/EBITDA (X) 8.1 7.6 6.4 Absolute 21.6 (10.7) (47.5) ROE (%) 36.5 32.1 33.8 Rel. to BSE-30 12.4 (8.3) (38.6) Div. Yield (%) 3.2 3.7 5.1 2QFY12 results analysis: multiple pressure points on the revenue line ` Sun TV reported 2QFY12 EBIT (our preferred earnings metric for Sun TV given majority of content costs are booked in the amortization line) of Rs2.48 bn, marginally below Rs2.55 bn expectation primarily led by weak revenue growth. (1) Weak advertising environment, (2) impact of Arasu Cable on cable subscription revenues and (3) impact of Supreme Court ruling on DTH subscription revenues pressured 2QFY12 revenues. ` 2QFY12 advertising revenues of Rs2.35 bn (+2% yoy) and advertising revenues (including slot sales) of Rs2.74 bn (+1% yoy) were weak notably in light of 5-15% increase in advertising rates across the network at start-FY2012E. Sun TV noted robust flagship GE channel advertising negated by weak niche channel advertising in 1HFY12; we believe weak ratings in non-GE channels (notably movie channels) also pressured advertising revenues. Stress case FV of Rs350 more relevant given potential pressure points Retain BUY with FY2013E fair value of Rs400 (Rs440 previously) adjusted for (1) reduced ad growth in FY2012E to 9% (12% previously), (2) reduced TN cable subscription revenues by 50%, (3) higher debtors days (90 versus 75) in our DCF-model and WACC (14% versus 13.5%). We believe our stress-case valuation methodology (Rs350 versus Rs360 previously) is a more relevant valuation approach since it captures (1) non-Tamil-C&S TV business segments not impacted by political risks and (2) potential adverse impact on Tamil business (a) TRP ratings, (b) Arasu Cable, (c) entertainment tax on DTH as well as (d) competitive cost pressures. The pressure of transition from dominant to oligopoly market/player is clearly visible. However, the recovery in advertising spends is likely around the corner, given the commentary by listed FMCG companies (~40% contribution in C&S TV ad spends); 3QFY12E will likely still suffer on account of high base but competitive and growth pressures will likely result in renewed growth in ad spends by 4QFY11E. Sun TV has managed to maintain market share in flagship channels in competitive non-Tamil markets though fragmentation is inevitable in the long run. The ability of the company to manage the competitive pressures is critical. For private Circulation Only. FOR IMPORTANT INFORMATION ABOUT KOTAK SECURITIES’ RATING SYSTEM AND OTHER DISCLOSURES, REFER TO THE END OF THIS MATERIAL. Sun TV Network Media Interim results of Sun TV Network (SUNTV), March fiscal year-ends (Rs mn) (% chg) 2QFY12 2QFY12E 2QFY11 1QFY12 2QFY12E 2QFY11 1QFY12 FY2011 FY2010 (% chg) Total revenues 4,513 4,650 4,248 4,540 (3) 6 (1) 20,135 14,528 39 Ad revenues (incl. slot sales) 2,740 2,800 2,700 2,700 (2) 1 1 12,148 9,808 24 Subscription revenues 1,440 1,450 1,400 1,600 (1) 3 (10) 5,720 3,960 44 Others (incl. movies) 333 400 148 240 (17) 125 39 2,267 760 198 Total expenditure (2,034) (2,100) (1,833) (1,942) (3) 11 5 (9,137) (6,829) 34 Cost of revenues (225) (275) (250) (242) (18) (10) (7) (1,349) (1,227) 10 Employee costs (414) (450) (407) (440) (8) 2 (6) (1,919) (1,340) 43 SG&A expenses (219) (275) (268) (199) (20) (18) 10 (1,063) (1,053) 1 D&A expenses (1,176) (1,100) (908) (1,061) 7 30 11 (4,805) (3,209) 50 EBIT 2,478 2,550 2,415 2,598 (3) 3 (5) 10,998 7,700 43 OPM (%) 54.9 54.8 56.9 57.2 54.6 53.0 Other income 186 150 93 173 24 101 8 487 350 39 Interest expense (8) - (3) (2) 153 230 (23) (49) (54) PBT 2,657 2,700 2,505 2,769 (2) 6 (4) 11,463 8,000 43 Extraordinaries — — — — — — Tax provision (856) (900) (830) (892) (5) 3 (4) (3,831) (2,991) 28 Minority interest — — — — 90 190 (53) Reported PAT 1,801 1,800 1,674 1,876 0 8 (4) 7,722 5,199 49 Adjusted PAT 1,801 1,800 1,674 1,876 0 8 (4) 7,722 5,199 49 Tax rate (%) 32.2 33.3 33.1 32.2 33.4 37.4 Notes: (a) Sun's quarterly financial data is standalone and yearly financial data is consolidated for FM radio subsidiaries.