Sun TV Network Ltd’s market capitalization eroded by Rs.3,052 crore, or 21.7%, on Monday. This was in reaction to news reports stating that the home ministry had denied “security clearance” for the renewal of broadcasting licences of its channels—a move that can lead to a cancellation of Sun TV’s broadcasting licence. If that happens, then it may compel Sun TV to stop broadcasting its 33 channels. That’s the big threat investors face.
This development follows the recent denial of security clearance for its radio stations. The company has managed to get a stay from the Madras high court on this till the matter is disposed of. News reports highlight that the home ministry has denied clearance for renewal of channels citing three pending legal cases against the company and its promoter Kalanithi Maran.
Sun TV clarified it hasn’t received any communication from any ministry and that its channels continue to be on air. “We reckon if the I&B (information and broadcasting) ministry were to go by the MHA (ministry of home affairs) decision and deny security clearance to Sun, it is likely to get a stay on the decision from the courts but should the group get conviction in any of the pending legal cases, Sun could end up losing its licence,” said a report from Credit Suisse on Monday.
Perhaps investors hope that the courts could save the day for Sun TV, possibly a reason why the decline in Sun TV shares was arrested at 22%. The sharp drop in the stock means that Sun TV’s valuations are undemanding at 12 times its estimated earnings for this fiscal year. Before this fall, the stock was trading at 16 times based on Friday’s closing price, far cheaper than the 33 times expected earnings this year that rival Zee Entertainment Enterprises Ltd commands. However, analysts say Zee enjoys a premium thanks to its superior growth profile. Zee’s earnings have grown by 36% in the last two years compared with a much slower 10% growth seen in Sun TV’s consolidated net profit.
Still, Sun TV’s cheaper valuations hardly make a case for bottom fishing. “With risks around business continuation should the group get convicted in any of the pending legal cases, we reckon the valuation discount will increase,” said Credit Suisse. The brokerage has downgraded its rating and target price.