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Sun TV shares under pressure after winning IPL bid

The stock market is clearly not as optimistic as the Sun TV Network management on the company's decision to venture into the Indian Premier League (IPL).

N. Madhavan        Last Updated: October 26, 2012  | 18:17 IST

{mosimage}The stock market is clearly not as optimistic as the Sun TV Network management on the company's decision to venture into the Indian Premier League (IPL). The company's stock took a beating on the bourses on Friday.

The scrip ended the day at Rs 318.75 on the Bombay Stock Exchange (BSE), having lost Rs 24.90, or 7.25 per cent of its value, during the day.

The shares opened at Rs 343.65, touched a high of Rs 344.20 and fell to a low of Rs 317.10 before closing the day at Rs 318.75.

On October 25, the company acquired the Hyderabad franchise of the IPL, after emerging as the highest bidder. It offered to pay the Board of Control for Cricket in India (BCCI) Rs 85.05 crore every year for the next five years.

Sun TV Network's total outgo over this period works out to Rs 425 crore.

Addressing the media, Sun TV CFO VC Unnikrishnan defended the investment, saying the company would leverage its expertise in the entertainment sector to make the franchise a successful one.

He also declared that the team would start making profits from the first year itself.

That appears more than a bit optimistic considering the performance of existing teams, particularly those that acquired other franchises at less than half the price Sun TV Network paid. The team will take time to become profitable, considering the expenses and revenues involved.

The market's concern is understandable as the IPL investment is unlikely to generate the sort of returns Sun TV currently enjoys. In financial year 2011/12, the company posted a revenue of Rs 1,757.37 crore and a net profit of Rs 694.65 crore.

What is significant is its margins.

Sun TV Network's operating profit margin was 83.92 per cent and net profit margin was 39.53 per cent. No other company in the industry enjoys such margins, a reflection of the media network's total dominance in the markets it operates in.

In Tamil Nadu, for instance, Sun TV's market share is well over 60 per cent in terms of viewership.

Analysts are worried that the IPL investment would hurt these margins. Hence the poor performance of the scrip on October 26.

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