I-Sec picks two long term bets from media space

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Vikash Mantri, Media Analyst at I-Sec in an interview to CNBC-TV18 said that the revised guidelines for owning news and non news channel are still not very clear so it would be difficult to quantify its impact on media stocks.

From the media pack, Mantri is positive on Sun TV and Dish TV .

"We are looking for a significant upside in Sun TV from current levels. The stock has corrected significantly in the last few months because the risks are more political in nature and is not directly linked to the company per se. But I would still buy this stock for the assets it owns in Karnataka and Andhra Pradesh," he said.

I-Sec has target price of around Rs 85 for Dish TV. "We continue to be structurally positive but are not as positive on the earnings upgrades which have been build in the recent past," he added.

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Below is the edited transcript of Mantri's interview with CNBC-TV18. Also watch the accompanying video.

Q: Can you give us assessment of these revised guidelines that came in? How material is this at this point in time and what stocks would be affected?

A: The detail are not yet very clear and it will affect this space. Starting news channel was relatively very easy with very low capital, this will now ensure that only serious players with long-term operate in the news space. It is very difficult to comment who will be impacted. But in a way it is good thing because we have slew of news channels in our country and relatively very small entities per se.

Q: Any impact on existing players though in terms of how they will have to shore up their net worth whether they will have to take on more leverage in order to increase their equity base? How will it work?

A: It will be difficult to ask the current players who relatively do not have very high net worth to match up their net worth as a directive. It is very difficult to ensure that this will happen. It would be true for new channels rather than existing set of channels.

Q: One of your top picks is Sun TV what makes you positive on that stock and what kind of price target do you have on it?

A: We are looking for a significant upside from current levels. The stock has corrected significantly in the last few months because the risks are more political in nature and is not directly linked to the company per se. We believe Sun TV sits on very good assets in the southern market.

One of the markets might be at risk due to the uncertainty at the ground level in terms of distribution, analysts or investors are not very comfortable with the political risk that they are associated. Other than that the Andhra and Karnataka market is devoid of any such risk.

I would buy this stock at these levels only for presence in these two markets. Forget their strong presence in Tamil Nadu which will continue. However this stock continues to be troubled because of other risks that are associated. Investors are not very comfortable taking in those risks.

A similar situation was seen in 2008 and then things turned positive for Sun TV where the risk did not materialise. We continue to have a very positive outlook on Sun TV. Some risks which are political in nature are not very quantifiable. But I would still buy Sun TV for the assets it owns in Karnataka and Andhra Pradesh.

Q: On the downside what are the issues that's plaguing the Network18 stock? Where do you think its going to stabilise from these levels?

A: It is difficult to quantify a bottom for Network18 because relatively it does not have significant assets which are generating positive cash flows. Many of its businesses are still at very nascent stage to support company's debt. Network18 has a gross debt of 2,100 crore. It is vey difficult to serviceit, given that it has no operating assets directly under it.

Aggressive plans of Network18 group in challenging environment and significantly high leverage on the books make it very difficult to call it a bottom. We are nevertheless very positive about the operating assets in terms of the business news channels and the GEC channels in terms of Colors. However high debt continues to be concern in this environment. It is relatively difficult to service that debt at current profitability levels.

Q: What do you do with some of the print names? Over there are you seeing any buying opportunities because when we spoke to them through the course of the last quarter they actually had much better ad revenue trends to show up than many of the television channels did?

A: I would agree with that but the print space continues to reel under high competitive pressure. While in terms on ad environment the outlook is significantly better but the models of the print companies are significantly shifting from a good mix of advertising circulation to an advertising model itself. There is an aggressive cover pricing war continuing in many of the markets. We believe this is not a very sustainable model.

We have seen the state of some print companies in US and how those which were relying on advertising could not sustain themselves. In India we continue to focus on an advertising model and forget pricing for the content, the model will continue to worsen going forward and we have seen that in terms of valuations.

While print companies have reported steady earnings in the past one-one and half years the valuations have corrected by more than 40-50% in terms of PE. If they continue to build on advertising driven model then PE multiple will shrink going forward.

We are not very optimistic about how things are developing now but the price correction does suggest an appreciation of this fact. Going forward, if we have healthy competition which focuses on advertising rather than dropping cover prices to gain circulation or entry into new markets we will be a worried lot for print media else we are positive from current levels.

Q: The other stock that you are positive on is Dish TV. How are you approaching that one and what target price would you have?

A: We have a target price of around Rs 85 for Dish TV. Dish TV has gone through a significant rally in the past one and half year. This rally was driven by analysts' overaggressive expectations on average revenue per unit (ARPU) which were not subsequently delivered in Q4 of FY11. ARPUs will continue to be low but we cannot believe in Dish TV for an ARPU story in the short-term. ARPUs in the near-term will be subdued.

However growth in the segment will be significantly high and we are significant believer in the digitalisation story. While near-term outlook in terms of ARPUs remains subdued that's not the best matrix to look at current levels of high growth of subscriber addition.

We continue to be structurally positive but are not as positive on the earnings upgrades which have been build in the recent past. We continue to have estimates which are on the lower side of the street but yet positive on the stock. I would wait for some of the earnings downgrades to come in on Dish TV before going on significantly long on Dish TV.

(Note: Web18, which owns Moneycontrol.com and Indiaearnings.com, belongs to the Network 18 Group).