Zee Entertainment
Secular growth commands premium
Transfer coverage with Outperform rating and Rs350 TP
We transfer coverage of the Indian media sector, including Zee Entertainment, to
Nitin Mohta. We now rate the stock Outperform, with a target price of Rs350,
implying 19% upside. Under previous coverage, Zee was rated Underperform
with a Rs130 TP. We believe that secular growth in advertising and subscription
revenue augurs well for the media broadcasting sector in India. We believe Zee
remains best placed to ride this growth up cycle, given its diverse content
offering, which includes both Hindi and regional general entertainment channels.
Direct play on consumption theme
Our economists expect India’s GDP growth to be 8.3% in FY11 and 8.5% in
FY12. We expect this to have a positive bearing on the top-line growth of Indian
media companies. Zee is the most profitable pan-India media broadcaster and,
as such, is well placed to reap the benefits of faster economic growth. This
investment view is consistent with our India strategist’s view of favouring
consumption plays with strong domestic connection.
Competitive intensity has hit a plateau
Ad revenue share for flagship channel (Zee TV) has stabilised. Lured by the
attractive opportunity in the sector, four new channels entered the Hindi GEC
genre in 2008. Even so, except for Viacom 18’s Colors, others have not made an
impact. Competition in the genre remains intense, but we believe that loss in ad
revenue market share for Zee has played out.
Rural exposure – adding spice to the curry. Zee added six highly profitable
regional channels in its portfolio in January 2010, following a stock swap deal
with promoter group company Zee News (ZEEN IN, Rs15.11, Outperform, TP:
Rs17.00). We believe that regional media is an attractive opportunity that would
add to Zee’s top line and improve its profitability.
Valuation: with stock at 19x FY12E, steam still left
Our TP implies FY12E PER of 23x. Our target price of Rs350 is based on DCF
using 12% WACC and 4% terminal growth. Our multiple implies 15% premium to
the historical average PER, but we expect the stock to re-rate as the company
delivers around 18% earnings growth in the next two years.
Price performance of consumer stocks has positive read-through. Leading
consumer stocks have rallied on the back of investor interest in Indian
consumption. Some of the large-cap stocks are trading at lofty multiples despite
muted earnings growth. We believe that Zee is attractive at 19x.
Key risks: macro slowdown and adverse regulation
GDP growth has direct bearing on top line. Our ad revenue growth estimates
of ~20% in FY11 (adjusted for regional GEC addition) and 15% in FY12 are
based on sustained momentum in the domestic economy. Any weakness in the
growth trajectory would be negative for Zee.
Uncertainty related to TRAI tariff order. Indian broadcasters have disputed
recent the TRAI order mandating lower tariffs from digital platforms. If the order
is implemented in its current form, there would be 7% downside risk to our EPS.
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