Report on Shemaroo

Sun TV to bank on pay revenues and radio biz for growth

Since Kalanithi Maran started his media business 13 years back, he has been fighting against one rival: himself. Now, after years of staying almost unchallenged in the southern region, he is setting himself up for battle in newer markets.

He has an expanded war chest of Rs 6.03 billion which he raised through an initial public offering (IPO) of Sun TV Ltd (STL) to pledge his new bet on private FM broadcasting. Also in the pipeline is a direct-to-home (DTH) service through Sun Direct TV, a privately held company.

Holding 90 per cent stake in STL, Maran is worth Rs 78.28 billion. And the market cap of STL has hit Rs 86.98 billion in a brief span of two weeks, enjoying a 44 per cent premium over its IPO price. In media business, only Subhash Chandra‘s Zee Telefilms has a higher market cap with Rs 110.9 billion. takes a close look at the ambitious plans Maran has to grow his media empire and the challenges that lie ahead of him as he heads a listed company.

Concern for topline growth

At question is Maran‘s ability to counter slow growth from his traditional revenue lines - advertising sales and broadcast fees. To squeeze more out of matured channels who enjoy a very high level of audience share can turn out to be a challenging task.

Ad revenues have stayed flat for two years, sitting at Rs 1.55 billion in FY04 and Rs 1.56 billion in FY05. Broadcast fee (time slots that Sun sells to content producers on its channels) has also seen small change, going up from Rs 458 million to Rs 495 million during this period.

Maran has attacked this somewhat in FY06. Advertising income was up 24.7 per cent to Rs 889 million in the first half of the fiscal, as against Rs 713 million a year ago. This was the period when Sun‘s combined audience share for all its Tamil channels (Sun TV, Sun News, KTV and Sun Music) went up from 60 per cent in FY05 to 70 per cent in the first half of FY06. In Kerala, the company‘s aggregate audience from its Malayalam channels (Surya TV and Kiran TV) rose from 29 per cent to 34 per cent during this period.

The growth could escalate for the year-period (Sun has not yet announced its FY06 results), fuelled by a rate increase for Sun TV channel by seven per cent in September 2005. This is the first rate hike the channel has come up with in the last three years.

Analysts also expect Surya TV to put up a better show in FY06, estimating its revenues to touch Rs 450 million. The Malayalam channel, facing stiff competition from Asianet, was raking in close to Rs 300 million. Other channels like KTV have also the potential to stimulate marginal growth.

But several content producers and marketing agents associated with Sun network feel the potential to exploit more ad revenues from existing channels is limited. "With such a dominating viewership, Sun has been commercially exploiting its slots to the optimum. There is very little scope to raise ad or auction slot rates. This is particularly true of Sun TV, the Tamil flagship channel. And in case of Surya TV, the main Malayalam channel, Maran has to take into consideration the presence of Asianet as a strong competitor," they say on request of anonymity.

For speeding the growth engine, Maran has a multi-pronged strategy. In the short run, he expects pay-TV revenues to climb significantly once he takes flagship channels Sun TV and Surya TV pay. And in the medium-term period, the radio operations should be able to generate substantial cash flows to drive the company‘s topline growth. Also adding to the kitty will be the three yet-to-be launched channels and rise in international revenues with new alliances in overseas markets.

"A master tactician, Maran has protected himself adequately from any slowdown in growth. Topline growth can see faster growth if Sun gets into movie production as well. Pay revenues will also fatten Sun‘s profitability," an analyst in a leading equity firm says.

A drag on the company‘s profitability, Maran has hived off his cable distribution business ahead of the IPO. Kal Cable, which operates under the SCV brand, was separated from 1 April 2005. In FY2005, SCV‘s revenues stood at Rs 156 million while costs were at Rs 301 million. The FY06 results will, thus, exclude the financial performance of Kal Cable.

A result of this: net profit has surged to Rs 614 million in the first half of FY06, up from Rs 322 million a year ago. Rich profits have always been the strength of STL. On a turnover of Rs 2.9 billion for FY05, net profit stood at Rs 778 million. In fact, net profit as a percentage of total income has averaged 27.6 per cent over the past five financial years.

"STL, the dominant broadcaster in the South Indian languages of Tamil and Malayalam, enjoys a phenomenal net profit. With a slot auction model for the main channels, programming expenses are in any case low," says an analyst at a brokering firm.

So how do the revenues pile up? Several estimates by analysts are available, ranging from Rs 7.5 billion to Rs 8.4 billion by FY08. Conservative estimates put it at a little over Rs 6 billion. Net income is also estimated to jump to over Rs three billion in FY08.

A lot of these projections, however, will depend on how much growth takes place from pay-TV revenues and on the success of Maran‘s FM radio expansion.

Sun to ramp up pay revenues

Keeping flagship channels Sun TV and Surya TV free-to-air, STL has clocked pay-TV revenues well below its potential. In FY05, it stood at Rs 398 million, up from Rs 325 million a year ago.

Maran wants to change all this by turning Sun TV and Surya TV into pay channels. Currently, it has three pay channels - KTV, Sun News and Sun Music. But in Chennai which is a conditional access system (CAS) market where consumers can view pay channels through a set-top box (STB), all these pay channels are free-to-air.

Sun is yet to ramp up its pay-TV revenues. Analysts estimate revenues from pay-TV to go up progressively from Rs 500 million in FY06 to Rs 1.1 billion in FY07 and Rs 1.7 billion in FY08. This calculation is based on Sun TV going pay in the middle of this year and Surya TV converting from the free-to-air mode later in the year.

"There is going to be a definite and substantial upside for Sun TV Ltd‘s pay revenues. Sun can scale up its pay-TV revenues by converting flagship and new niche channels to pay mode. The number of cable households, paying subscribers and pay channel rates are also expected to go up," an analyst says.

Sun TV, which is expected to be priced at Rs 15-20, is expected to ramp up STL‘s current 2.8 million paying subscriber base. Taking Surya TV pay, however, will be a difficult task if Asianet decides to stay free-to-air.

STL‘s pay revenues will also come from its content contracts with direct-to-home (DTH) operators. Revenue from DTH consumers is estimated at Rs 260 million, putting the company‘s subscription revenues in the neighbourhood of Rs two billion by FY08 at the optimum level.

Radio to tune in growth

FM radio will be Maran‘s first media vehicle to have a national footprint, taking him outside the southern language market. He will operate 46 stations across the country through Sun TV Ltd‘s two subsidiaries, Kal Radio and South Asia FM.

The investment required: over Rs 3.3 billion. Kal and South Asia FM will, in fact, require an approximate of Rs 1.83 billion towards acquisition of broadcasting equipement (FM transmitters, FM antennas, payment of common infrastructure), setting up of local offices and radio studios.

But Maran realises this is where his big leap in revenues for Sun TV Ltd will come from. Though profitable, the revenues from the four operating stations are small. In Tirunelveli, for instance, Sun earned revenues of Rs 28 million in FY05 and Rs 13 million in the first half of FY06. And in Coimbatore, the income stood at Rs 56 million and Rs 32 million during this period.

Some analysts, however, expect radio operations to contribute to 20 per cent of Sun‘s total revenues by FY08, compared to around five per cent in FY05. Sun‘s radio revenues are expected to leapfrog from Rs 147 million in FY05 to Rs 1.97 billion in FY08. In the southern language markets, Sun has the advantage of dominating ownership of movie rights which it can leverage for its radio business. But it remains to be seen how successful he can be in new markets outside the southern region.

The structure that Maran has outlined for FM radio looks somewhat like this: Kal Radio (where Sun TV owns 89 per cent) will operate in the southern language states, while South Asia FM (Sun has 94.91 per cent equity) will take up stations beyond the Southern markets.

Maran has not bid in Delhi, Mumbai and Kolkata, leading to speculation in the market that he may have some understanding with Astro (Sun has a JV with Astro for launching language channels). These are the cities where Red FM, which was acquired by a consortium of NDTV, Value Labs and Astro from Living Media Group‘s Radio Today, operates. But no official confirmation is available on this and it may be a matter of pure coincidence.

Maran‘s plan is to consolidate the radio assets. The existing licenses of the four operational radio stations are, thus, being transferred to Kal Radio. While Suryan FM has licenses and operates in Chennai, Coimbatore and Tirunelveli. Udaya TV Pvt Ltd. runs Vishaka FM in Visakhapatnam.

Analysts say Sun‘s design to operate the FM radio business through subsidiaries is to separate radio from other segment revenues for licence fee computation (4 per cent of gross revenues). Besides, Sun will have the flexibility to rope in a joint venture partner.

Sun‘s ownership of rights of a vast number of films in various South Indian languages will provide it with a unique advantage to grow its radio revenues and earnings strongly over the next few years.

Flexing muscles for cable distribution in South India

Maran may be the king of content but he realises the importance of having distribution in his winning mix. Which is why he wanted to acquire Indian Cable Net (formerly RPG Netcom), the largest multi-system operator (MSO) in Kolkata, ahead of launching Bengali channel Surjo.

Maran was so confident of the deal sailing through that in an earlier interview with he admitted he was "on the verge of closing it." But, as events rolled out, Subhash Chandra beat him to it and Siticable snapped up Indian Cable Net. Surjo‘s launch was shelved and the media king of the south is yet to gat a foothold into the northern market.

No major investments have been made into the cable business for over a year. Maran did try to expand GCV‘s presence in Hyderabad but without much success. He even explored talks with Siticable to work together in that market but nothing conclusive came up. Sources say Siticable, which doesn‘t have signals from Star and Sony, is finalising plans on how to revive its network independently as it has lost market share in the city to Hathway Cable & Datacom. Maran will, thus, have to come out with a different formula even as he nurses ambitions to spread GCV‘s tentacles across Andhra Pradesh.

In Tamil Nadu, the story is entirely different. SCV dominates cable TV operations, so much so that chief minister Jayalalitha introduced legislation in the state assembly that would allow the state to acquire and take over bigger cable TV networks in Tamil Nadu, including MSOs and optical transport systems. Though controversial, a lot of how things shape up will depend on who wins the assembly elections.

Control of the distribution chain has put Maran in a unique position in Chennai, a conditional access system (CAS) market. The low offtake of set-top boxes (STBs) has meant that CAS has more or less been killed in this market. Sun has indirectly benefited by the virtual blackout of all the English-language channels like Star World, Star Movies and HBO. Hindi channels, in any case, did not have much of viewing in this southern-language market.

"All the other channels have lost their business models here. Sun with its strong language content channels have become more powerful in this market," the head of a large broadcasting company says.

In a corporate restructuring, Sun has terminated its cable TV distribution agreement with Kal Cable from 1 April 2005. The reason: cable was losing money. "Unlike MSOs operating in the Hindi belt, SCV will have very less carriage fee. For digital to get a push, Sun TV has to go pay in the Chennai market," says an analyst.

Gearing up for DTH

It is a slice of the business many players are keen to lay their hands on. In India, it doesn‘t matter if you run cable TV or IPTV operations. DTH promises to bring about addressability and better quality of service in a distribution chain that has been dominated by an unorganised cable TV industry.

Maran hopes to kickstart DTH operations this year even as Insat 4C launches in July. Having booked space on the satellite, he is negotiating with the Indian Space Research Organisation (Isro) for eight Ku-band transponders. Initially, he had asked for five transponders on the satellite which could later be ramped up to nine.

Sun Direct will join the race after Tata Sky launches its service. Already in existence are Dish TV and Doordarshan‘s DD Direct Plus, which offers subscribers free-to-air (FTA) channels. Soon to follow will be Anil Ambani‘s Blue Magic service, which has also booked space for its own DTH plans.

So how will Maran stand out in this crowded market? He may come out with a specific south language package, keeping the pricing low. Along with this basic bundle, he can add sports and the other language channels to consumers who want more. Tata Sky and Dish TV as national players will find it difficult to compete in a target-specific market. Even if they match the pricing, they may not be in a position to offer all the south channels due to lack of transponder space.

For broadening the menu to South Indian audiences, Maran will have to create more niche channels. Also necessary is to have Sun TV and Surya TV as pay channels by then. For those subscribers he fails to tap in DTH, he will try to retain through his cable network. But whatever DTH plans he has, no information is coming out from the company.

Finding favour in the stock market

Some analysts feel STL is an expensive buy with the stock price quoting at around Rs 1260 per share. But there are several indicators one should consider before taking a final view.

a) There is a scarcity premium on the stock. With Maran offloading just 10 per cent stake, there is a chase among buyers.

b) Sun enjoys a clear leadership position and there is no credible competitor emerging to challenge this status. Asianet is a strong contender but only in the Malayalam market. Maran is adequately protected with his breadth of channels. He has also developed extensive programming assets and holds rights for 2,650 movies (60 per cent are Tamils and 40 per cent Malayalam). He is in an ideal position to exploit content across all platforms including DTH.

c) There is a growth trajectory in radio and pay-TV business. The success in these two areas is crucial to STL‘s future earnings and valuations.

d) Profitability is the most attractive element in Maran‘s business and this is likely to continue

e) Launch of kids and documentary channels will further add to STL‘s topline growth. Maran is in talks with Hungama TV for partnership in the kids space. While he will take care of the distribution infrastructure, the programming and other support for the southern version of the channel with initial focus in Tamil language will be handled by Hungama TV.

f) Maran can also create a slew of channels for DTH which will allow him to increase bandwidth.

g) These fresh investments run the risk of facing failure in the marketplace. But investors are currently betting on Sun more for its strategic than growth value.

h) Maran has the flexibility to do a private placement and get in a strategic investor. The Foreign Investment Promotion Board (FIPB), in fact, has formally cleared STL‘s application for issue of preferential allotment of shares to foreign investors. No allotment has been made so far.

i) Sun can also expand internationally through a $25 million joint venture agreement with Malaysia‘s Astro All Asia Network. The JV plans to collaborate in content creation for filmed and other entertainment products in Indian languages including Tamil, Telugu, Kannada, Malayalam, Hindi and Bengali for distribution to international markets.

j) The market expects Maran to merge Gemini and Udaya at some stage with STL. But these are speculations and could prove to be wrong. Incidentally, Maran consolidated his ownership position by buying out entire stakes of Sharad Kumar and Dayalu Ammal (wife of DMK president M Karunanidhi). In Gemini and Udaya, he still has minor partners.

k) When actor-cum-politician Sarath Kumar quit DMK to join AIADMK, speculation was rife that wife Radhika would walk her production house Radaan Mediaworks out of Sun TV. Since Radaan is the leading producer for Sun network with popular shows like Chithi and currently Chelvi, this would have an impact on STL. Nothing has happened so far and Radaan has not started making shows for Jaya TV. If it does, then it can‘t make content for Sun as Maran has a policy that disllows production houses from making shows for rival broadcasters. Will that be a severe blow for Sun? Analysts feel broadcast platforms have far higher long term strengths than production houses, particularly when competing channels are so far behind.

Sun's IPO may set the trend in the South

Sun‘s IPO may have a ripple effect in the southern region, inspiring several broadcasting companies to tap the market.

A strong case in point could be Asianet, though it has not expressed its intent to get listed so far. But Hyderabad-based Maa TV, which has been struggling to raise funds, is considering taking this route. Even Raj TV is closely observing the market trend.

"We realise we have to add up channels so that we grow to some size. For our expansion, we require funds. We have been trying to raise private equity but have failed. We may plan for an IPO," says a senior company executive.

South-based listed companies like Radaan, Telephoto Entertainment and Pentamedia have actually spoilt the market with their poor financial performance after the IPO. A healthy company like Sun can open up the capital market for other players to step in.

The problem is that companies of the size of Maa TV may not attract investor confidence unless they work out better business models. And those like Raj TV may not want to change the way they run their closely held business.

But a transition in culture may well be on the way. Media organisations will have to keep pace with the changing times if they have to grow and flourish.

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