Cloud over the Sun

Sun TV Network, controlled by media baron Kalanithi Maran, is the latest entrant into the Indian Premier League (IPL) after it picked up the Hyderabad franchise with its bid of `425 crore for five years. The franchise was up for grabs after the IPL governing council terminated the previous owner Deccan Chargers’ contract for breach of contract terms.

The IPL foray fits well into sun TV’s broad strategy of focusing on media and entertainment, said Chief Financial Officer S.L. Narayanan soon after winning the bid. Sun TV plans to leverage its strong presence in the entertainment industry to ensure the new venture breaks even in the first year and makes a profit from the second. The company has 32 television channels and 45 FM radio stations, mostly in South India.

The stock markets, though, are not sharing Sun TV’s optimism. Its scrip lost 12.5 per cent from a one-week high of `358.25 on October 25, the day the company was awarded the IPL franchise, to close at `318.55 on October 30 on the Bombay Stock Exchange. Analysts are worried that the IPL investment will eat into Sun TV’s enviable profit margins, at least in the short term. The company’s operating profit margin for 2011/12 was nearly 84 per cent and net profit margin a shade below 40 per cent.“While the deal will be EPS (earnings per share) dilutive in the near term, we expect Sun TV to benefit in the medium term from synergies with its television and radio businesses,” says Enam Securities in a report.

But many feel even this is an optimistic view, and that it may be tough for Sun TV to make a profit from the cricketing venture. It has agreed to pay the Board of Control for Cricket in India (BCCI) `85.05 crore annually for five years. There are two other major expenditure heads – player fee, which typically works out to about `50 crore a year, and operational costs, which add up to another `10 crore. Thus, the total cost works out to be `145 crore a year. Against this, there are three revenue streams. A share of TV rights that BCCI distributes to franchises– about `30 crore – team sponsorship and gate revenue. The last two will decide the fate of Sun TV’s investment.

The company’s management is confident of bagging sponsorship deals given its clout with advertisers. But this may not be enough, say analysts. Even successful teams such as Chennai Super Kings or Kolkata Knight Riders, which have a lot of sponsors, are barely making profits, though they paid less than half of what Sun TV has agreed to. Gate revenue is a worry too. The Telangana turmoil prevented Deccan Chargers from hosting its home matches in Hyderabad in the last two tournaments. Footfalls will be low if matches are not held on home ground.

For the moment, the Sun TV management is busy finalising a name for the team and short-listing likely team members. They can only hope that Maran’s magic touch, clearly seen in his earlier business forays such as satellite TV, works once again.