ZEE ENT 2QFY11: Below estimates on higher losses in sports:: Motilal Oswal

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 ZEE ENT 2QFY11: Below estimates on higher losses in sports business; Strong traction in ad revenues and core (ex sports) margins

-          Zee Entertainment (Z IN, Mkt Cap US$3b, CMP Rs278, Buy) 2QFY11 PAT was below estimates due to higher EBITDA losses in sports business. Reported PAT grew 13.9% YoY but declined 15.8% QoQ to Rs1.26b, 18.4% below estimates.

-     Ad revenue increased to Rs4.1b (up 66.5% YoY and 9.4% QoQ), higher than estimate of Rs3.96b. We estimate 2QFY11 ad revenue growth of 23% on a proforma basis (incl regional GEC in 2QFY10).

-          Subscription revenues at Rs2.7b increased 4.7% QoQ driven by higher DTH and domestic revenues while international subscription revenue declined 2% QoQ likely on INR appreciation.

-          EBITDA at Rs1.89b, up 25% YoY and 0.8% QoQ, was 15% below our estimate. While reported EBITDA margin was 26.5%, EBITDA margin ex sports business expanded to 41% (up 350bp QoQ and 520bp YoY).

-          Sports business reported sales of Rs1.19b (up 12% YoY and 43% QoQ) and operating loss of Rs542m (vs loss of Rs48m in 2QFY10 and Rs354m in 1QFY11. Given 1HFY11 EBITDA loss of ~Rs900m in sports business; earlier management guidance of Rs550-600m loss for FY11 appears difficult to be met.

-          Tax rate for the quarter was 39% (estimate of 32%) as loss in the sports business subsidiaries could not be offset against profit in other business.

-          While 2QFY11 earnings were impacted by weak sports business, strong traction in advertising revenues and margins in core business (ex-sports) are positive.

-          In Earnings Concall on Oct 29, we look forward to management commentary on 1) expected financial performance in sports, 2) sustenance of GRP and channel share, 3) growth outlook for ad revenue.

Ad revenue growth (proforma) estimated at 20-25% YoY, 9.4% QoQ

-          Advertising revenue grew 66.5% YoY and 9.4% QoQ on a reported basis. On a proforma basis (including R-GEC financials for 2QFY10), we estimate ad revenue growth of 20-25%.

-          Flagship channel Zee TV has lost GRPs for the second consecutive quarter to an average of 237 (253 in 1QFY11) with a weekly average channel share of ~22%. Its share in the 100 programs stands at 27.

-          Zee Cinema averaged 131 GRPs during the quarter. Zee Café had a channel share of 18%. Zee Marathi continued delivering 229 average weekly GRPs with 45 of the top 50 shows and 77 of the top 100 shows. Zee Bangla averaged 271 weekly GRPs in the quarter with a channel share of 25%. Zee Telugu averaged 314 weekly GRPs with a channel share of 17%. Zee Kannada clocked an average GRP of 158.

-          Key properties for Ten Sports included live coverage of India-New Zealand-Sri Lanka ODI series, India-Sri Lanka test series, US Open tennis etc. In 3QFY11, the sports network would be telecasting India-South Africa test series, Asian Games, and Ryder cup in Golf.

Subscription revenue up 4.7% QoQ driven by domestic business

-          2QFY11 subscription revenue was at Rs2.7b, up 12.4% YoY and 4.7% QoQ.

-          DTH subscription revenue at Rs787m increased 53% YoY and 10.8% QoQ.

-          International subscription revenue declined 6.5% YoY and 2.1% QoQ at Rs989m, likely impacted by INR appreciation.

-          Domestic subscription excluding DTH revenue grew 7.5% QoQ to Rs961m.

Higher operating costs in sports business drag EBITDA margin

-          While reported EBITDA margin was 26.5%, we estimate that EBITDA margin ex sports business expanded to 41% (up 350bp QoQ and 520bp YoY).

-          Sports business reported sales of Rs1.19b (up 12% YoY and 43% QoQ) and operating loss of Rs542m (vs loss of Rs48m in 2QFY10 and Rs354m in 1QFY11).

-     Higher EBITDA loss is attributed to initial launch as well as running expenses for new channels: Ten Cricket and Ten Action+.

-          We highlight that Sports business is highly event specific, thus implying low visibility on quarterly financial performance.

-     ZEEL had reported an operating loss of Rs576m in FY10 for the sports business.

          

-          We would be reviewing our estimates post Earnings Concall. We currently estimate an FY11 EPS of Rs11.9 and FY12 EPS of Rs15.4.

-          The stock currently trades at a FY11 P/E of 22.7x and FY12 P/E of 17.5x. We have a Buy rating on the stock.