Sun TV stock crash: Changing cable policy & 2G charges on Dayanidhi Maran don't bode well for Kalanithi's company

Earlier this week, newly anointed chief minister J Jayalalithaa announced a long-expected move: the nationalisation of the cable distribution business in Tamil Nadu, currently dominated by Sumangali Cable - a sister business of Sun TV. 

Sun Network itself had known all along that it faced a risk owing to the political allegiance of its founder and CMD Kalanithi Maran . Its pre-listing document, filed five years ago with the Securities Exchange Board of India, had elaborated on this. "Although the company is non-partisan," it said right under the heading "Risks", "there is no assurance that it will not be perceived as having a political allegiance, and there is no assurance that such perception will not have adverse effects on our business." 

The Chennai-based media group has often been criticised for its connections with the DMK party, which has ruled Tamil Nadu for 10 of the 18 years Sun TV has been in the existence. The DMK shared power at the Centre for five of the remaining eight years. Kalanithi, the grand-nephew of DMK chief M Karunanidhi, has always maintained that his business has flourished even when DMK was in the Opposition. 

And the group has always managed to wriggle out of uncomfortable political fallouts, including a tussle with Karunanidhi and family in 2007. That pre-listing statement on the political risk, therefore, has just looked a mere technical formality. Until June 2. 

On that day, well over a quarter of Sun's value in the market was eroded, its single-biggest fall, amid news that Kalanithi's brother and former telecom minister Dayanidhi Maran was under the CBI scanner for a deal that involved their family's direct-to-home business. Additionally, there were media reports that Sun had misused hundreds of telephone lines whose tab BSNL had picked up. Sun has hence denied these allegations. 

Just a day after, Jayalalithaa announced the nationalisation of the cable distribution business. This will be the third attempt at nationalising the business. 

Political commentator Gnani Sankaran reckons it is a challenge that Sun has never faced all these years. "They have managed to resist everything till now," he says. "This is the first time the group is being exposed. Evidence is now coming that they grew using DMK's closeness to power." 

In Tamil Nadu, where the penetration of both the TV and cable access is the highest in the country, the link between media and politics has been historically strong. "In Tamil Nadu, there has been an umbilical cord between politics and media, particularly cinema, till 1990. After that, its been the cable TV," says C Lakshmanan, assistant professor at Madras Institute of Development Studies. 

Even now, every party worth its name runs a channel. But where Sun stands apart, something which even its worst critics grudgingly accept, is its commercial success. 

Though, Sun is not known for its novelty in programming, it has built considerable expertise in soaps and movies. It is said to hold rights for about two-thirds of Tamil movies made till date. Gradually, it managed to launch a slew of channels not just in Tamil, but also in other South Indian languages. 

But one controversial part of its success is the support it gets from Sumangali Cable in its bread-and-butter Tamil Nadu market. Sumangali is not part of the listed Sun TV entity, which takes care of the cable distribution business. 

One instance of how Kalanithi values distribution is how Sun TV shelved a plan to launch a channel in Bengali when it failed to win a bid for RPG's distribution business in 2005. Kalanithi has not only managed to grow his television business, but also enhance a significant scale in FM Radio and direct-to-home businesses. 

When Kalaignar TV, formed by the DMK after its fallout with the Maran brothers, started competing for movie rights, Sun started its own movie production division and made a success of it. 

Overall, it managed to fend off competition from Kalaignar TV, which largely mimicked Sun TV's programming formula. Recent TAM data shows Sun TV's viewership share at a whopping 72%. Kalaignar comes a distant second with a less than 10% share. 

All through the growth, Kalanithi was seen as a businessman who played to his strengths, studiously avoiding the media market north of the Vindhyas. He was also seen as someone who walked the thin line between politics and business. Critics wonder if that has changed now. So despite the strength in business, that seems to continue till date, there is a nervousness surrounding the company. 

"When it comes to TN, businesses are most closely linked to politics than in any other state. For a stock like Sun TV, political risk definitely comes into play and they sometime even overwhelm the fundamentals," says Jagannadham Thunuguntla, equity head, SMC Capital. 

Investment adviser SP Tulsian agrees. He says in Sun TV's case, institutions play an important part because public holding is very low. "If one institution is selling, it would be another institution which would be buying. But currently, institutions are not ready to take position in the stock due to the changing political scenario." 

Less than a week before the Sun stock tumbled, analysts were gung-ho about it on account of its robust fourth quarter results and also prospects of greater growth, with the company enjoying highest margin in the industry. Now it is apparent it is not just about business for Sun TV.