Sun's ability to cut operating revenue costs to the bone while generating revenues is in large part the secret of its success
An aptly named company
What marks Sun TV Network apart from that of several other leading listed entertainment media brands is the state of its balance sheet. The financials of this aptly named company radiates with the same glow as the sun, to use a metaphor-and to think that a grand nephew of the 'Kalaignar' has made such a thumping success out of a commercial venture. It should also serve as a beacon to the other listed media heavy weights - some of whom are making heavy weather in their battle to stay on course. The latest iniquitous trend among some of the better entrenched media channels is in seeking financial and equity tie ups with corporate heavyweights - TV 18 and NDTV are the veritable examples of this emerging equation - in order to get more breathing space for their financially faltering operations. For the matter of record Sun TV has a paid up equity capital base of Rs 1.97 bn and reserves & surplus of Rs 24.5 bn. Bonus shares constitute 50% of its middling paid up equity.
The success of this company is due to the favourable fallout of a number of factors - the quick mover advantage in the Tamil TV space, sticking to the regional knittings, the spread of ownership in the South based regional channels, superb audience centric production planning, the rapid growth in TV viewership brought about by increasing economic prosperity, a little help from granduncle (free TVs in Tamil Nadu as a part of the DMK election manifesto) and above all the farsighted decision of the proprietors to run the company in a truly professional manner. The results of this effort are showing up in the top- line and the bottom-line. The total income (comprising of revenues from operations and other income) grew magnificently over four years from Rs 9.3 bn in 2007-08 to Rs 19.7 bn in 2010-11 before recording a blip to Rs 18.3 bn in the latest financial year. The profit before tax likewise grew from Rs 5.6 bn to Rs 11.5 bn before dipping to Rs 10.2 bn in the latest year. And, by all accounts, this company also appears to a one man show from the ownership viewpoint - the Kalanithi Maran show to be precise, given the shareholding pattern in this company. The promoters hold 77% of the equity and this entire promoter holding is held by Kalanithi. It is not immediately known whether other family members are also stakeholders in their own right.
Coming into its own in quick time
Incorporated as a corporate entity in the fag end of the calendar year 1985, it currently operates television channels in Tamil (Sun TV), Telugu (Gemini TV), Kannada (Udaya TV) and Malayalam (Surya TV) with its channel space being beamed to audiences in South Asia, East Asia, The Far East, Middle East, The UK and Europe (the latter through a separate subsidiary called Sun TV Network Europe Ltd), North America, and South Africa. (For those readers not quite in the loop, private TV channels came into their own post 1991, after the Hongkong based Star TV suddenly burst into the Indian cable TV broadcasting space). Extending its reach the company branched out into FM Radio through its two subsidiaries Kal Radio with a 97.8% stake holding and South Asia FM Ltd in which it has a 59.15% stake (who holds the balance stake please?) which are engaged in producing and broadcasting radio software programming in Indian regional languages and also broadcast in Chennai, Coimbatore and Tiruneveli. Kal Radio operates 18 FM stations in South India, and South Asia FM operates another 22 FM stations. As a matter of fact the situation is a little more complex. South Asia FM has a strategic tie up with Red FM Group to further its footprint in the North, West and East Indian markets. Towards this end it has acquired various minority stakes in 10 Red FM companies ranging from a high of 48.8% to a low of 17.1%. It would appear from these stake acquisitions that Sun TV has acquired a base in the Hyderabad market too which is south based. Its film production and distribution division, Sun Pictures undertakes the production and distribution of movies in the Tamil language.
The revenues generated from operations are a fairly complex exercise it appears, and the receipts are grouped under seven heads of account. However, the principal sources of income are Advertising receipts, Subscription income and Broadcast fees. Between them they accounted for over 91% of gross receipts in 2011-12 against a lower 84.5% previously. For the matter of record, the revenues from operations fell marginally during the year to Rs 17.5 bn from Rs 19.2 bn previously, or a fall of 8.6%. The fall in revenues was largely due to a substantial drop in the pickings from movie distribution. Revenues on this count fell to Rs 597 m from Rs 2.2 bn previously or a fall of 73%. This income stream represents the slippery part of the revenue accretals.
How the revenues add up
Income wise it is the pickings from advertising inflows which is the life sustainer of all media ventures, and it is no less so for Sun TV. The point is also that the only direct revenue expenditure that it has to incur to earn advertising revenues is the statutory commission paid to the ad agency releasing the advertisement. Inflows from advertising at Rs 9.4 bn accounted for close to 54% of all revenues from operations against Rs 9.7 bn or 50.4% previously. The second biggest revenue stream amounting to Rs 5 bn - same as previously - is the 'Subscription income' paid by cable TV providers of channel broadcasting. This again is from my understanding of how the company groups its receipts. The interesting feature here is that the subscription income includes fees received from two group companies amounting to Rs 3.5 bn or 70% of all subscription income. In the preceding year such percentage contribution from three group companies was higher at 74%. So it has set in motion a back to back affair. One group company, Kal Comm Pvt. Ltd, however stopped feeding channels to Sun TV in the latest accounting year for whatever reason. Another point of interest is that there used to be considerable leakage hitherto in the reporting format by channel providers, but Sun TV has largely overcome this problem by setting up its own multi system operator (MSO) channel providers. The additional issue here is that independent channel providers can be very choosy about which channels to air and it depends on the subscriber demand on the one hand and the net revenues that they in turn get to make on the other. Sun TV has therefore largely overcome this niggling problem too. It is however a tricky business - the media and entertainment (M&E) business.
The third big income earner is Broadcast fees - which I understand is subscription fees received from DTH (direct to home) providers. Such fees at Rs 1.6 bn against Rs 1.5 bn previously accounted for 9.3% of all such receipts against 8% previously. As stated earlier the income from movie distribution took a direct hit and fell sharply. No reasons have been adduced in the directors' report on this steep fall and what the company intends to do about it in the current year. The only other significant receipt is from Programme licensing fees. Receipts on this count amounted to Rs 843 m against Rs 690 m previously. This head of account apparently refers to fees charged on sitcoms aired on Sun TV and produced by third parties or some such. Bringing up the rear is 'Income from content sharing' and 'Aircraft charter services' (more on this aspect later in the copy). As one can see all the big ticket income streams are dependent on a variety of inscrutable factors.
The main body of revenue receipts is followed up by other income of Rs 742 m against Rs 468 m previously. The biggest revenue contributor by far in this body is 'Interest income on bank deposits etc' at Rs 490 m against Rs 300 m previously, followed by gains on forex at Rs 73 m and dividend incomes on current investments at Rs 63 m. In the preceding year it was on the wrong side of the forex draw recording a loss. (The total forex earnings amounted to Rs 850 m and the forex outgo amounted to Rs 270 m against Rs 690 m and Rs 159 m respectively previously). Export incentives chipped in with Rs 55 m against Rs 67 m previously. Then there is 'Other non-operating income' of Rs 45 m against Rs 26 m previously.
The expenditure side of the equation
The revenue expenses relatively are mere dots on the radar screen so to speak. The second biggest item of expense is 'Cost of revenues'. Under this curiously tiled head of expenditure the total expense amounts to a mere Rs 1 bn. This item of expenditure in the main includes telecast costs, program production costs, cost of programme rights, and pay channel service charges. This item of expenses is the most remarkable aspect of the functioning of this company. It is remarkable enough that it is able to produce and air programmes at such ridiculously low costs. What is the real magic mantra here please?
The highest revenue expense is on salaries of all things - and that is due to a very peculiar quirk. The total expense on this account for starters amounted to Rs 1.6 bn against Rs 1.7 bn previously. This expense is remarkable on two counts - the salary paid to the proprietor and his patni on the one hand, and the fact that the total expense actually declined in a year when the top-line declined too. Kalanithi and Kavery collectively made do with salary and perks of Rs 1.14 bn against Rs 1.29 bn previously. The two it would appear have very thoughtfully accepted a lower handout in line with the fall in the top-line and the bottom-line. How nice! But the fact of the matter is that the two between them still hogged close to 70% of all pagaar paid out against a higher 74% previously. THIS IS SIMPLY PREPOSTEROUS TO SAY THE LEAST. The company also boasted 1,906 other employees at year end. The balance salary etc paid out amounted to Rs 500.4 m. That would mean on a rough basis a per capita salary pay out of Rs 2.62 lakhs per employee per year to the others. This per capita payout on the other hand appears to be pidgin.
Some other similarly distorted payouts that immediately come to mind are the salary packages paid by three other corporates. The remuneration paid to Farouk Irani of First Leasing, the salary package to the chairman of the board of Madras Cements, Mr P R Ramasubrahamaneya Rajah, and the combined emoluments paid to the two Japanese executive directors and the two Indian executive directors of the erstwhile Hero Honda Motors (now Hero Motocorp). Farouk's remuneration package of Rs 17.8 m accounted for 58% of all employee payouts, while the Madras Cements hop honcho's Rs 293 m payment accounted for over 17.1% of all employee payouts. The combined remuneration of the four Hero Honda executive directors at Rs 1.23 bn accounted for some 22% of all employee handouts. Of course Sun TV aces them all - and by a mile at that. The pressing need is for the Company Law Board to clamp an upper limit on such outlandish handouts made to a handful of top dogs who fashion such distorted aggrandisements on their own, simply because they get to control the board of directors by virtue of their shareholding in the enterprise. Such payouts have to be fashioned on the basis of some equity and natural justice, or so one hopes. There has to be some co-relation for example between what the top rung gets and what the bottom of the heap has to contend with. Kalanithi of course gets a lot more moolah. His 77% take of the total dividend for the year of Rs 374 m adds up to another comfortable nest egg.
The other expenses head are basically a masala mix of small expenses which cumulatively add up to Rs 859 m against Rs 800 m previously. But in any event the margin that it generates is something else. The profit before tax as a percentage of gross income amounted to a humungous 56% against an even higher 58.6% previously. The share of other income of Rs 742 m in the gross profit figure is 7%.
Spending on capital assets
With the type of margins that the company generates it has little difficulty in finding the moolah to add to its tangible fixed assets and intangible assets. (For the matter of record it is also debt free - but also pays negligible interest charges on intra year borrowings). It generated net cash of Rs 8.6 bn from operations and plonked down Rs 7.1 bn in income generating assets against a substantially lower Rs 4.8 bn previously. Tangible assets were richer by Rs 3.1 bn and intangible assets by Rs 4 bn. It dabbled in the buying and selling of debt instruments to the tune of Rs 8.3 bn. But if it did make any profit on this exercise it is not showing up separately in the other income schedule. There is however a receipt of dividend income of Rs 63 m from current investments. Significantly, its humungous non-current investments of Rs 4.6 bn did not yield a dime in dividends. But there were other side shows with these investee group companies. It also placed fixed deposits with banks and refunded the deposits, and for some reason also availed of loans of Rs 6.6 bn during the year which was dutifully repaid by year end. Ditto was the situation prevailing at the previous year end on this count. For some morbid reason the directors' see an exaggerated need to show a debt free annual report each year.
Tax provision of Rs 332 m, or 32.3% of pre-tax profit and dividends of Rs 435 m - the latter paid in four instalments-which again is come sort of a unique feature - are the other notable aspects of the company's functioning.
The fixed assets schedule too has some interesting revelations. It consists of a gross block tangible asset base of Rs 12 bn and an intangible gross asset base of Rs 16.1 bn. The biggest individual head of account in the tangible gross block is 'plant and machinery' valued at Rs 7.4 bn. But the biggest item of cost in this classification is the 'aircraft' valued at Rs 2 bn which in all probability is used for commercial purposes - aircraft charter services to be more precise. The inclusion of the aircraft in this classification on the face of it does not appear to make for much sense as it also tends to negatively skew the productive capacity of the plant and machinery. The next biggest item of cost is 'programme production equipment' at Rs 1.5 bn followed by 'reception and distribution facilities' at Rs 1 bn. The depreciable gross block is written off to the extent of 40%.
The intangible assets are larger at Rs 16.1 bn. The largest asset item by far in this classification is 'Film and Program Broadcasting Rights' at Rs 12 bn. This is followed by 'Film Production Costs Distribution and Related Rights' at Rs 3.6 bn. The total asset block has been amortised to the extent of 82%. The company is very prudently amortising this block of assets at an accelerated pace. As a matter of fact the depreciation for the year is almost equal to the asset addition during the year.
Need to fine tune its working capital assets
The working capital management could do with some tweaking in the company's favour. The current assets including cash on hand at year end amounting to Rs 8.8 bn is considerably higher than the current liabilities of Rs 2 bn at year end. Given its heavyweight standing the two should be on keel. And considering that the company operates in an advantageous position it also appears odd that the trade receivables at year end of Rs 4.6 bn is sharply higher than the trade payables of a mere Rs 296 m. There is a reason however as to why it boasts of such large trade receivables. As stated earlier it got subscription receipts of Rs 3.5 bn from group companies. It also received some minor advertising income of Rs 122 m from group companies. The total trade receivables at year end from group companies amounted to Rs 1.3 bn - or 28% of all trade receivables at year end. The receivables at year end of Rs 1 bn from one subsidiary - Sun Direct TV - alone accounted for 55% of all subscription receipts that Sun TV sourced from it. It appears that some of the subsidiaries are entitled to the 'most favoured nation' (MFN) treatment. But, to be fair, such giveaways are a part and parcel of business reality.
There are its humongous investments in group companies in the form of equity and preference shares. The company had in the preceding year end investments in three subsidiaries - Kal Radio Ltd, South Asia FM Ltd, and Sun TV Network Europe Ltd. But the investment in the last mentioned has been exd out this year as this investment is being rejigged. The 'other liabilities' schedule says that it has received a sum of Rs 36 m being advance received for sale of subsidiary. This advance may well pertain to this subsidiary. The entire investment in the balance two companies is deadwood from the dividend income point of view.
From the looks of it FM radio channels do not appear to be 'in the money' so to speak. Both KAL Radio and South Asia FM have very large capital bases relative to their revenues. Sun TV Network Europe has a piddling capital base, and piddling venues to boot. Kal Radio has a capital base of Rs 1.7 bn while South Asia FM has a capital base of Rs 4.8 bn - including share application money. According to the investment schedule of Sun TV its total capital outlay at par in South Asia FM is Rs 2.9 bn - which works out to roughly a 60% holding - and as stated in the annual report. Its holding in Kal Radio is 97.8%. Kal Radio generated revenues of Rs 461 m but could only squeak through with a pre-tax profit of Rs 14 m. It also has accumulated losses of Rs 603 m. The other subsidiary South Asia FM is on much weaker ground. On revenues of Rs 438 m it logged in a pre-tax loss of Rs 134 m. It has accumulated losses of Rs 2 bn. This company is haemorrhaging badly - very badly. The directors' report does not offer any clues to the tepid working of these companies, or what the future augurs for them. Is broadcasting music such a mug's game or what?
The last of the subsidiaries, Sun TV Network Europe, is in equally deep waters. To start with how a capital base of Rs 60 m will help has not been explained given the task on hand. And it is showing. On revenues of Rs 90 m it posted a loss of Rs 3 m.
The outcome of its investment in the 10 other FM radio companies is not immediately known - barring some scraps of information provided in the consolidated balance sheet. They are termed as associate companies and the briefest possible details have been appended on six of the ten investments. It does not help increase one's understanding of the performance parameters of these companies one penny bit. Whether that is the intention of the management is not known.
The Sun TV group is also a lot larger than it would appear at first sight. There are 15 limited liability companies in which key management personnel have significant influence and another three non limited liability companies. Spicejet is among its later acquisitions.
Disclosure: I do not hold any shares in this company, either directly, or under any non discretionary portfolio management scheme
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.