Sun TV: In search of the next big idea?

BY The Hoot’s ANALYST*| IN Media Business | 28/11/2017

When the Sun TV Board announced the company’s financial results for the September 2017 quarter earlier this month, the numbers didn’t really set the Adyar river in Chennai, on whose banks the company’s corporate office is situated, on fire. The turnover had gone up by eight per cent over the corresponding period of the previous year. The profit after tax grew by an even more modest 5% over the same time last year.

The mainstream media, including even those devoted to business and financial news, largely ignored it. But then, that had nothing to do with its lacklustre performance in the latest quarter. It is not the most actively tracked company by the investment community.

Indeed, the only time Sun TV made it to the news this year was when legal correspondence and business transactions of Appleby, an international legal firm specialising in putting through financial transactions involving tax havens, were leaked (Paradise Papers). There was confirmation in these documents that the Malaysian media baron Ananda Krishnan controlled Astro Overseas Holdings had sought legal opinion on the processes it had followed that culminated in the company eventually picking up a stake in Sun Direct Private Limited, a DTH service provider controlled by the Sun TV promoter, Kalanithi Maran.

As a listed public company, Sun TV has largely flown under the media radar.  It makes more news periodically for its troubles with the government at state and centre, than for its performance.

But the striking thing about it, when you analyse their operations over an extended period of time, is this: The company seems to defy conventional wisdom about why corporates reach out to the general public to raise money for their businesses.

The IPO it did not need

The text book notion is that in the run up to an Initial Public Offer (IPO) of shares, the business would have grown as much as the initial investment by the promoter would allow. Its business model has already proven itself to be a viable one, and is  capable of generating substantially larger profits in the future. This requires scaling up operations from its existing level. But to do so would require infusion of substantial additional capital- something that the original promoter is unable to do- and is therefore in need of funds from the investing public.

Or at least, that is the theory. One needs to look no  further than Infosys to illustrate this point. Could Infosys have become the company that it is today but for the Initial Public Offer (IPO) of shares that it did in 1993? Perhaps, not. The investors’ cash certainly helped it to scale up operations to a level that founding members could not have mustered up on their own, having exhausted their meagre initial resources. That it has since become the darling of the stock market is too well known to bear any repetition.

For the vast majority of companies raising money from the public, it is an epochal event, marking the coming together of a promoter and the investing public in a common journey of shared prosperity in the future.

Read the annual reports in the initial years of any company that has successfully concluded an IPO, it is hard to miss the tone of public affirmation of such a shared destiny being painted in the most glowing terms possible. The Board of Directors would report that the IPO had been a resounding success and how it has been a humbling experience for the management that investors had chosen to repose so much faith in their ability to steer the affairs of the company to greater heights of prosperity.

Which is why the Sun TV’s annual report for fiscal 2006-07, the year after it had successfully concluded its IPO is something of a surprise. There was none of the syrupy sentimentality that one associates with the Directors’ Report on such an occasion. The company, report of that year just blandly spoke of the net outcome of operations. There was also a matter of fact reference to the issue of ‘bonus shares’ to the public. But as to the fact of an IPO having been concluded that year or the fact that it received an overwhelming response from the investing public, there was not a mention.

What’s more, it can be said about the Sun TV IPO with certainty that the company could have easily done without the IPO cash.

A brief look at the company’s financials in the run up to the public issue of shares in 2006-07 and in the years immediately following it amply bear this out. The company mobilised a little over Rs 600 crore through its IPO. After accounting for expenses related to issue of capital, the company was left with Rs 580 crore, roughly. If there was to be no IPO, where else could they have sourced the money from? Could it have raised money from financial institutions by way of debt? Or quite simply, staggered the capital expenditure?

It didn’t have to do any of that. Just how profitable that the company’s operations were can be guaged from the fact that in just two years 2006-07 (the year the company went public with an IPO) and 2007-08, the year following,  the company had earned close to Rs 635 crore in aggregate net profits- a sum that comfortably exceeded the net proceeds from the IPO.

This is not all. A good chunk of the IPO money was to be utilised towards capitalising the two subsidiary companies (Kal Radio and South Asia FM Radio) operating a number of FM radio channels across the country. The company had claimed in the IPO document that this was to cost it roughly Rs 300 crore. But against this must be set against the fact when it merged two other subsidiary companies operating television broadcast channels in Telugu and Kannada (Gemini TV and Udaya TV) in 2006-07, it acquired access to the surplus of cash of these companies amounting to roughly Rs 140 crore.

Just the merger alone did away with roughly half the need for funds towards pumping in cash into the FM radio business.

Then there was also a reference to purchase of new equipments for its broadcast operations and for setting up a centralised corporate office cum broadcast centre. It did invest in purchase of fixed assets and production equipments besides commissioning television programmes to the tune of Rs 114 crore. Likewise the corporate office cum central up linking centre costing a little over Rs 60 crore did indeed come up in time.

So flush was the company with internally generated funds that it would not be really until the financial year 2013-14, a full seven years later, that the company would claim to have fully utilised the proceeds of the IPO for the purposes for which it had raised the money in the first place. But by then the company had also generated in excess of Rs 4000 crore in net profits putting in perspective, how marginal the IPO funding was to its over all scheme of things.

In all these years that has seen the company grow from a single Tamil channel with four hours programming to a multi channel and round the clock broadcasting, the company has not had to go back even once to the shareholders for additional funds. It has practically zero debt and the consolidated investment of over Rs 4,300 crore in the company and its subsidiaries is almost entirely funded by shareholders, 75% of which is owned by Kalanithi Maran, the promoter.

The move from broadcast fees to ad revenues

If the IPO cash was not actually required to finance business expansion did it then serve some strategic purpose? There is evidence to suggest that, that might well have been the case. After all there is nothing quite like having an extra Rs 600 crore by way of war chest to experiment with new strategic options for the business.

For instance, in the broadcast industry, businesses are faced with a hard choice. They could expend money on creating their own content and hope that advertisers would find it worthwhile to advertise their merchandise in such programmes. Alternatively the broadcaster can sell specific time slots for a fixed fee and leave it to the concessionaires to sell advertising time on their programmes.

The broadcaster is trading off between the certainty of some income (‘broadcast fees’) albeit, a modest one at that, to the uncertainty of higher advertising incomes that direct negotiations with potential advertisers can accrue to the broadcasters. Also, when the broadcaster is engaged in creating his own-content there is a better control over quality which helps it to not only secure but also enhance its brand image in the future. But the capacity to take risk is a function of the quantum of ‘risk capital’ available to a broadcaster.

In Sun TV’s case the proceeds of its IPO provided such a financial wherewithal that enabled it to consciously shift from selling fixed time slots of programmes to creating its own content. This is evident from the data on income earned by way of ‘broadcast fees’ (selling time slots) and advertising revenues. In 2005-06, the financial year immediately before the public issue, broadcast fees at Rs 56.96 crore constituted 28% of advertising revenues. In other words, for every rupee earned by selling advertising time on programmes created by it, Sun TV earned Rs 0.28 rupee by selling fixed time slots of programming. By 2010-11 this ratio had fallen to 16% or 16 paise to every rupee of advertising revenue earned on self-generated programme content. As a matter of fact, the number had fallen to 10% by 2014-15.

The conscious shift away from selling time slots for a fixed fee helps a broadcaster to negotiate and secure higher revenues per unit of advertising time available on unsold time slots. This should translate into higher advertising revenues per rupee expended towards creating own-content or acquisition of content from third parties (production expenses).

An analysis of production expenses as a ratio of advertising income over the years showed that the company had been able to consistently improve its performance on this count. As against Rs 4.87 of advertising income generated on every rupee of money spent by way of programme expenses in 2006-07, the company was able to generate Rs 11.39 in 2014-15 the latest year for which such data is available. Of course the ability to generate higher advertising revenue per unit of time is also a function of higher visibility that a channel has in the market place.

Here again, an IPO and consequent listing of a company’s shares in the stock exchange would have done nothing to hurt its case among advertisers. It is no surprise that the company never looked back on its record of growth in turnover and profits post its listing as a publicly traded company. The reluctant groom has thus found marital bliss in the capital market.

Declining net profits

However, the abundance of profits masks an important characteristic of the company’s profit performance over the years. In a four-year period between 2005-06, the last year as a closely held company (pre-IPO) and 2010-11, the company’s profits grew at an exceptionally healthy rate. Net profits grew year-on-year from over 100% (2006-07) to 19% (2008-09) with the average around 43%. But in comparison, the record of performance in later years must be reckoned as somewhat disappointing.

Thus for instance, in the year 2011-12, the company’s television broadcast business earned a net profit of Rs 694.65 crore. This was no doubt quite creditable as it represented a 28% return on shareholder funds (net worth). But this was however lower by roughly 10% of the net profits of Rs 772.22 crore earned in the previous year (2010-11). This was not an aberration. The following year too (2012-13), saw a further decline in net profits at Rs 683.34 crore (a two percentage point decline). It had recovered in the subsequent years (2014-15 onwards) with positive growth rates in net profits with the year 2016-17 registering a net profit of Rs 979.41 crore, a rise of 13%.

While there had been growth, the glory days of profit performance of the initial years which saw profits growing at a compounded annual rate of 43% has certainly become a thing of the past. Indeed, so stark is the contrast that between the years 2011-12 and 2016-17 net profits grew at a more modest rate of 4% per annum. The performance in the first half of 2017-18 for which information is now available does not suggest that a turnaround is just round the corner. If we take a rolling four quarter period October 2016 to September 2017 we find that the company has earned a net profit of Rs 1012.31 crore during this period. The performance during the relevant previous four quarters (October 2015 to September 2016) was Rs 955.40 crore. Thus, in the last 12 months ending September 2017, the company could register only a 6% growth over the corresponding period in the previous year.  

Decline of the movie distribution business

If the era of heady growth in profits witnessed in the period up to 2010-11 has become a thing of the past, what has caused it? The root cause has to be seen the somewhat sluggish growth in operating revenues.

Between 2010-11 and 2016-17 this could grow only at a modest rate of five per cent per annum, on a compounded basis. A visible and proximate cause of the sluggishness in the top line must be attributed to the declining fortunes of the movie distribution business which gave it such a strong boost in the earlier period. The company began to register cash flows in the movie distribution business from 2008-09. The year saw the company register modest revenues of Rs 28.2 crore from that line of business. This went up in the following year when the company ramped it up to clock a gross revenue of Rs 67.5 crore in revenues before reaching a peak of Rs 221.32 crore in 2011-12. As dramatic as the growth in revenues, the subsequent decline has been just as rapid with the business virtually disappearing off the company’s financials by 2014-15.

Incidentally, the company’s foray into the movie distribution business was not without an element of controversy at least in the Tamil Nadu market. There were allegations that the company could drive lucrative bargains with producers of movies by leveraging the promoter’s proximity to the ruling dispensation in Tamil Nadu in the years between 2006 and 2011. While this may or may not be true what is undeniable is that the business fundamentals did change for the worse in a remarkable fashion, post March 2011 (the last year before a change in the ruling dispensation at the State level happened) with successive years of decline that saw the financial year 2014-15, ending with a measly gross income of Rs 10 lakh from movie distribution.

It staged a recovery of sorts in the next two years with the company posting revenues of Rs 7 and Rs 5 crores in 2015-16 and 2016-17. But it is fair to say that its best years in this line of business are definitely behind it at least, as things stand now.

Keeping costs down

It is also unrealistic to expect that to  launch so many other channels such as an exclusive channel for entertainment  or news or humour or a channel targeted at kids and so on would generate as much revenue as the flagship brand that is a combination of entertainment and news. For that matter, the manner in which it has been able to leverage its leadership position in Tamil to generate revenues could not be expected to be mirrored in other geographies. As diminishing returns set in on its Tamil operations it was only a matter of time before that got reflected in the overall revenues of the company.

Mind you, at Rs 285 crore profits in the September quarter which translates into an annualised figure of Rs 1,140 crore, Sun TV’s operations are still  extremely profitable. Even in relative terms, generating a surplus of 26% on shareholders’ funds (2016-17) which the company has done, is no mean achievement. It owes its success to an extremely tight rein on costs on manpower, content creation etc. The lid on manpower costs is particularly remarkable. In 2016-17 such costs accounted for no more than four per cent of gross operating revenue. In 2006-07 manpower costs represented a mere three per cent of operating revenues. This, in an industry that is supposed to be human resource intensive. In fact, so modest is the expenditure on manpower costs that the sum incurred on this count in 2016-17 was Rs 99.24 crore. In contrast, the three whole time directors between them collected Rs 157 crore in salary and commission on profits. (Kalanithi Maran and Kavery Kalanithi took Rs 156 crore out of that, the non–family director got Rs 1 crore.)

A similar discipline has been observed to be maintained on such costs as ‘programme expenses’, ‘purchase of programme rights’, ‘amortisation of costs’ on own production where there has been only marginal increases in costs as a percentage of operating revenue.   

Radio investments begin to pay dividends   

Besides expansion in its core business of television broadcast the company had made two other significant forays as part of its growth strategy. One such foray is the entry into FM radio broadcast business soon after the sector was opened up for private sector operations. It had incorporated two subsidiary companies namely Kal Radio Limited and South Asia FM Limited. Kal Radio Limited had bid for FM radio licenses under the Phase II Policy of the Government for cities in southern India to operate FM Radio stations in key metros and towns in the South.  

South Asia FM Private Limited, the  other subsidiary in the group operates FM radio stations in the North, East and West of India numbering over 20. As can be expected, the initial years were not profitable with huge investments going towards payment of Licence fees to the Central Government. But the fortunes of radio business are definitely looking up. Kal Radio turned in a net profit of Rs 22.96 crore on a turnover of Rs 89.47 crore in 2016-17. Similarly, South Asia FM registered a net profit of Rs 49.16 crore on a turnover of Rs 141.54 crore. While Kal Radio is nearly 100% owned by Sun TV, its ownership interest is close to 60% in South Asia FM. But the company has also invested in convertible preference shares of South Asia FM which upon conversion could take the interest beyond that.

The radio segment is growing faster than other mediums such as television and print. The FM radio business, being a city centric local medium, is ideally poised to offer the vast hoard of local advertisers a platform for reaching their customers at an affordable cost that print or television medium cannot match. As rural penetration improves the opportunities for further revenue growth and profits in the FM radio business look very attractive.

IPL—set to deliver greater dividends

The company’s foray into Indian Premier League T20 (IPL) cricket happened in 2014. Ironically, its entry was facilitated by another media company DC Holdings (publishers of Deccan Chronicle and Financial Chronicle) which defaulted on its franchise payment commitments for ownership of the cricket team, Deccan Chargers Hyderabad in the IPL league, to the Board of Control for Cricket in India (BCCI) and therefore was terminated. According to the terms of the franchise agreement entered into by the Company with the BCCI, the Company has a commitment to pay BCCI, a fixed franchise of Rs. 85 crore per annum for the IPL cricket season 2014 season to 2017 season.

These were reflected in the accounts for the financial years 2013-14 to 2016-17. As against that the company earned as its share of telecast and other revenues from the IPL cricket, sums of around Rs 106 crore, Rs 100 crore, Rs 96 crore and Rs 151 crore during the years 2013-14, 14-15, 15-16 and 16-17 respectively. The sharp rise in 2016-17 was due to the fact that the team had got past the initial league phase to eventually win the tournament and was thus eligible to receive a larger share of telecast revenue.

The net surplus available in each year after meeting the franchise fees is on the face of it insufficient to pay for players’ fees and other expenses of managing a cricket team. Certainly not in the first three years of the company’s participation in the tournament. For instance, in 2016-17 alone the top four players in the team cost upwards of Rs 25 crore. The total fees payable to contracted players for the IPL 2017 came to Rs 53.75. In other words even in the best year (2017) when they actually won the championship and thus became eligible to receive a larger share of telecast revenues there wasn’t much of a surplus available to shareholders after meeting all costs.

But things could change from the financial year 2018-19 (IPL 2018 edition) when the franchise fee payable to BCCI is a percentage of the revenue (20%) as opposed to a fixed fee (Rs 85 crore) as is the norm at present. Moreover, BCCI has been able to secure substantially higher revenues for telecast and other rights relating to IPL 2018 season and onwards. The latest contract is estimated to be about twice that of the existing contract.

This means that franchisees could reasonably expect to get around twice the amount as their share compared to the recent past. This coupled with the fact that franchise fees are going to be a percentage of the BCCI revenues means that even teams that fail to qualify for the knockout phase of the tournament wouldn’t suffer a financial penalty as was the case under fixed fee regime that is currently in vogue. In sum, the IPL business has the potential to generate reasonable surplus for the company going forward. It is however hard to put a number on it, at this stage.

Likely to remain a leader

It is fair to say that its forays into businesses beyond television broadcast are at an inflexion point. Both FM radio and IPL cricket could be a source of decent cash flows in the years ahead given the business fundamentals in these two businesses. On the other hand, their core business of television broadcast is facing some headwinds in the shape of sluggish growth in turnover and profits in recent years.

That said, it is worth keeping in mind the fact that Sun TV even today, enjoys a dominant position in the general entertainment category of television channels in the South. Its channels, Sun TV (Tamil) and Gemini TV (Telugu) figure consistently among the top 10 in the BARC ratings for viewership. Indeed so overwhelming is the popularity of Sun TV among the Tamil audience that it is able to occupy the No 1 slot in national viewership unlike its counterparts in Hindi where competition is a lot more intense.

Throw in the fact that Tamil Nadu and Andhra Pradesh/Telengana while not as populous as Uttar Pradesh or Bihar still account for a big chunk of the national population. They are more prosperous too. Thus, when adjusted for differences in per capita incomes Southern States comprising TN, AP, Telengana, Kerala and Karnataka where Sun TV has a strong presence would rank on par with the Hindi speaking states as far as aggregate disposable incomes are concerned. This translates into a significant chunk of advertising spends by marketers that should continue to flow into the Southern markets.

Also, Sun TV with close to Rs 1,000 crore in net profits (2016-17) from its television business is the most profitable among media companies and its record of profitability compares favourably with the best of blue chip companies listed on the country’s stock exchanges. A position of dominance in the South that Sun TV enjoys at the moment is therefore not a bad situation to be in.

However competition from players with a national footprint is intensifying. They are willing to throw more money at creating innovative programmes to increase their audience base.  Star TV's Tamil Channel, Star Vijay recently concluded the local version of its popular reality show, 'Big Boss' with Kamal Hasan as its host. Not to be outdone, Zee Tamil acquired the television rights for Rajnikanth's soon to be released science fiction film, 2.0 reportedly for Rs 100 crore. The Viacom-TV 18 joint venture will be launching its general entertainment channel in Tamil under the brand name, 'Colors Tamil' some time in the first quarter of 2018.

How does Sun TV respond to this emerging threat? Do they strike out into newer territories in other parts of the country or remain content with their local strengths? The company isn’t revealing its cards as yet. 

The author is former editor of the Hindu Business Line.