Sun TV Network Ltd’s financial results for the last quarter disappointed mainly on account of two reasons. First, advertising revenue growth was lacklustre. Second, operating profit margin declined by 428 basis points in the December quarter, compared with the same period last year. Margins declined due to higher costs—primarily, content costs. One basis point is one-hundredth of a percentage point.

Sure, advertising revenue has improved by as much as 17% when compared with the September quarter. However, on a year-on-year basis, advertising revenue has declined by 7.2% on account of lower advertising inventory.

“In the last quarter, Sun TV had taken a significant price hike to counter the reduced inventory, which took a toll on its volumes," pointed out a note from ICICI Securities Ltd.

The saving grace was the subscription revenue performance in the December quarter. Sun TV’s subscription revenue increased by 27%, helped to an extent by strong cable revenue growth; thanks to digitization.

As a result, the company’s total revenue for the December quarter increased by 4.6% over the same period last year to 508 crore. Revenue growth in the last quarter was lower than the 7.6% revenue growth in the September quarter, which was anyway far from impressive. Further, weak operating performance led to a 2% decline in Sun TV’s net profit in the last quarter to 186 crore. The company’s net profit performance looks discouraging, compared with the 11.5% annual net profit growth in the September quarter. Currently, the Sun TV stock trades at around 15.6 times its estimated earnings for the next fiscal. In comparison, rival Zee Entertainment Enterprises Ltd stock trades at about 25 times its expected earnings for the next year; so there is room for Sun TV’s valuations to improve. But then, poor advertising revenue performance is likely to make shareholders cautious.

“Although we like Sun TV’s strong market share in key markets, near-term ad growth will be a challenge. Also, due to increase in content costs and other operating expenses, our earnings per share estimates for FY14E and FY15E are revised downwards by 11.2% and 8.8%, respectively," wrote analysts from Edelweiss Securities Ltd in their post results report.

So far, since the beginning of 2014, the stock has declined 5%, nearly in line with the performance of the BSE 200 index.

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