3 Lessons from Sun TV's 22% Fall in A Single Day

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  • Mr Market
  • 9-Jun-2015

SUN TV Shocker - 25% Intra-Day Fall!

As news reports of Ministry of Home Affairs (MHA) denying security clearance for the renewal of broadcasting licenses of 33 channels of Sun TV Network started pouring in, the stock took a massive beating and corrected as much as ~25% as the markets opened. CFO's appearance in media channels brought little comfort to investors as the management was also caught unawares about the MHA's actions. The denial of the clearance was attributed to 3 legal pending cases against Sun TV Network's promoter and his politician brother. The stock closed 22% lower with the uncertainty surrounding the existence of SUN TV Network's business.

Business of Sun TV Network

Sun TV Network is one of India's largest media conglomerate and a strong brand name in South India. It's network broadcasts 33 channels in 4 different languages with a reach in 27 countries across continents.

Promoter of SUN TV - Overhang of Political Connections, Legal Tangles & Regulator

Kalanithi Maran, India's media and entertainment industry's baron and promoter of SUN TV Network, is embroiled in 2 criminal cases which are pending against him - CBI's Aircel Maxis case of the 2G Scam fame and an Enforcement Directorate (ED) case of money laundering. His younger brother Dayanidhi Maran is the grandnephew of DMK leader M. Karunanidhi and has served as a Union Minister twice during UPA's regime - Communications & IT Minister, 2004 and Textiles Minister, 2009 (shortlived due to the 2G scam and had to resign in 2011).

Both the brothers are also facing a criminal case for alleged allotment of 300 high-speed BSNL telephone lines to Dayanidhi Maran's residence (the then Communications & IT Minister) which were extended to his brother, Kalanithi's channels.

Why did the Stock get Hammered So Much?

It's a for Sun TV Network - The group's radio channels were denied a similar clearance by MHA a couple of days ago and now it's the turn of its TV channels. Every 10 years, broadcasting channels need a security clearance to continue operations. These 33 channels which have been denied clearance by MHA contribute to almost all of Sun TV Network's profits. This implies that in case the MHA & I &B Ministry decide to stay put with the decision to deny clearance, then Sun TV Network's operations will come to a standstill and so will its revenues and profitability.

However, the company can seek legal recourse and salvage the damage - For the clearance declined by MHA to Sun Group's radio channels, the company had managed to get a stay from the Madras High Court.

ProsperoTree.com View - 3 Important Lessons from Sun TV's Episode

1. Risk Stems from the Unthinkable

A blanket denial of security clearance for all 33 channels was simply not anticipated and its impact on the stock was unprecedented. We reckon that no management personnel, analyst, investor or any stakeholder could have predicted this event. As it was a complete surprise, the stock got hammered sharply.

2. Premium for Quality

Post 2008, a very high premium is allocated to quality companies - Companies having clean promoter background, good corporate governance are awarded extremely high valuations even for relatively better performance. For instance, FMCG, Consumer companies having powerful brands and aforementioned parameters. The SUN TV episode will further reinforce the quality premium notion. However, the quality bubble may also crack at some point in future. But at this juncture, it has got more momentum.

3. Is there An Opportunity in SUN TV Network Today?

This is not a recommendation but just a thought on what could happen in the future. If SUN TV is somehow able to get this sorted, investors of today will be able to garner very high returns for the future. If they mess up, competitors in this space will try to milk the benefits of the vacuum created by Sun TV Network's absence. Or maybe SUN TV could become an acquisition target as it happened with MCX during NSEL fraud.

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