Sun TV: Perception Clouds Linger On
I chanced upon the earnings release of the annual results of Sun TV over the weekend and, though I do not own shares or follow its progress regularly, I have admired the company for its consistent performance over the years. And unlike many other promoter driven companies the quality of its balance sheet which complements a great P/L is truly commendable.
It is mysterious though that despite this it has failed to create sustainable value over the last many years and has had subdued stock performance with a CAGR of 5% excluding dividends over a 15 year period. The answer perhaps lies in its fair share of political controversies, perceived lack of management dynamism with respect to expansion into new territories and newer technology platforms, and governance perception related matters over the last decade.
Whilst the first set of issues have been decided in a court of law and the second set is a matter of opinion whose impact will be known only in hindsight, it is the third set of governance perception issues which cause the most damage to the stock’s perceived value. The latest example is of the current earnings release containing the year end results for FY 21 being completely silent on the issue of a final dividend for the year. The massive cut in dividend from INR 985 cr to INR 197 cr in the current year has been completely glossed over in the release. Couple of analysts who attended the conference call also confirmed to me that the only reason the management diffidently gave was that the Board decision was predicated due to the uncertainties of the pandemic !
This is a facile argument at best. Sun TV is a virtual cash generating machine which simply spews up cash year after year. And whilst one can argue on its intent and ability to expand beyond its current avatar, the quality of its niche offerings, focused customer segmentation and innate strength of the business model suggest a virtual recession proof ability to generate cash. As of date it has enormous financial assets, excluding non current assets and trade receivables, of INR 3750 cr. This includes cash, bank and treasury investments. Its gross expenditure nett of depreciation and amortization is approximately INR 1150 cr. In other words, the company can survive for 3 years plus with no revenue whatsoever ! Surely the management does not believe the pandemic’s impact will be so grave on a company with such a robust business model !
Sun TV’s massive cash balances and consistent dividend record is priced into the stock. Over the last few years it has paid out Rs. 10, Rs 12.5 and Rs 25 as dividend vs Rs 5 this year. Even as late as last quarter the management affirmed a bullish outlook to the business. Arguably the second wave which hit us recently caught them unawares but which by itself reflects on its risk management framework and judgment. Similarly, in an environment where the entire organized corporate sector is cautiously optimistic at worst, is it not surprising that Sun TV - with its recession proof business model - should attempt to casually explain away it dividend cut of Rs. 800 cr due to this ? It opens itself us to its worst detractors ( and I am not one of them ) who will point out that the promoters massive compensations have remain intact whilst investors have been short changed.
For the record it generated a nett effective cash flow, less investments and dividend paid, of INR 1412 cr vs INR 1418 cr last year. A recession proof model if any proof was indeed required.
Having said this, I wish the management had thought through its earnings release and the responses to avoidable obvious attack on its stance on a matter as serious as a dividend cut. A more credible response would have been to point out that its RoCE of 40%+ and RoE range of 22% -25% is far higher than the risk free returns which individual investors can hope to earn, and hence investors actually gain whilst the company mulls its options for a couple of quarters.
Dividend decisions affect capital structure but more importantly sentiment. Though it does not affect valuation directly, it does impact it to a degree through sentiment and dividend yield considerations. The key issue is consistency and signaling. It also raises issues of hoarding cash with no apparent need for capital outlays. In such cases it is best to return cash to shareholders to provide them the choice of alternate investments. In the case of Sun TV, where promoters and friends and family control almost 80% of the stock, it raises subtle issues of governance as the promoters aim to reduce the cost impact of declaring dividends with no apparent benefit whereas minority shareholders are differently placed at the other end of the spectrum. This fine balance needs careful handling and credible communication.
It is here that the company errs in my view. It has failed to sense the rising aggression or expectations of minority shareholders especially in well run companies which attract high quality institutional investors. Demanding accountability of managements will be a recurring theme in Indian markets as we mature. As will be the significantly increased focus on balance sheet and utlilisation of cash flows with lesser obsession with only EPS as a parameter. Consistency of policy, financial strategy, board governance and effective investor communication which connects the dots, both past and present, will be integral parts of a thoughtfully articulated investment thesis going forward as markets and investors mature. It is ultimately the credibility of managements which investors actually pay for in the hope of long term sustainable value creation.
Listed promoter driven companies must scale up in this regard where, despite their unique corporate positioning, a more liberal interpretation of value is not being accorded to it by financial investors.
A Sloan Fellow of the London Business School, the author is a non executive director, and an Advisor to Chairmen, of corporate boards.
