Sun TV‘s Q2 results were out a couple of days ago and they were really good. The net sales jumped from 320 crores to 424 crores (32% YoY) and net profit jumped from 130 crores to 167 crores (28.5% YoY). A 30% jump in revenues and net profit suggests that the company is doing extremely well. The company has consistently been performing really well and growing each and every quarter by a vast margin.

Why did the stock fell after results?

Sun TV had given a 53% revenue growth and 43% growth in profits last quarter and similar kind of figures in preceding quarters. Infact, there was a 10-20% growth on QoQ basis in the last few quarters. Such kinds of massive growth led people to have huge expectations from the stock. I’m sure the people assumed a 50%+ growth this quarter as well but that didn’t happen. People were not happy with just 30% growth YoY basis. The company posted lower profits since last quarter as well, so the expectations of 10-20% growth on QoQ basis was thrashed. The whole rally of 300 to 500 was based on future earnings growth, stretching the valuations too high.

If you look at Sun TV, it is very high valued stock. Market capital has reached almost 20,000 crores whereas profit of FY10 stands at only 437 crores. P/E as per FY10 earnings has reached 44. And as per current net profit of 337 crores in half FY11, considering the company performs just the same in next two quarters, P/E stands at 29 which is still pretty high. Now let us assume that due to the movie Endhiran, the next half year results grow by 20% than the first half year. Then the P/E ratio stands at 26, again high. The high P/E is only because of assumption of future earnings since the company has been doing really well year after year and people expect the company to continue to perform. As long as the company keeps performing, the P/E ratio will tend to be high, so don’t wait for it to hit a low P/E to enter the stock.

Buy or Sell Sun TV?

If you are looking for some short term gain here, then it is better you sell the stock. I don’t see any trigger in the next 2 months. Q2 results have disappointed the public and they will most probably stay away from the stock for now. However if you are in for a long term investment, then continue to hold the stock.

Fresh Entry into the stock is only recommended after a correction or close to Q3 results dates. The Endhiran movie’s profit that we expected to come along Q2 is actually going to be reflected in Q3. Management has already said that you can expect something big in Q3. If the company posts a huge profit growth on Q3, the expectations of people will come back and the stock might rally new highs. Make sure to book your profits at those new highs as Q4 might not deliver in comparison to Q3 and stock can see profit booking.

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