Zee Entertainment downgraded by ICICI Securities,

We have analysed Zee Entertainment Enterprises’ (ZEEL) performance in the past
three years, highlighting key short-term and long-term risks. We believe the
management has focussed more on short-term EBITDA, due to which investing for
growth has lagged behind – this is despite the fact that ZEEL has one of the
strongest broadcasting networks and a robust balance sheet. Thus, many new
players have repeatedly challenged Zee TV in the critical Hindi general
entertainment channel (GEC) space as entry barriers are low. This strategy is in
contrast to Sun TV’s, which has made rapid strides in launching channels and
producing & acquiring movies (thus creating entry barriers). The recent
intensifying competition with high-ticket programming from peers risks Zee TV’s
market standing further. If ratings dip further, ZEEL’s fair value could get affected
12%. We downgrade ZEEL to HOLD from Buy as risks outweigh reward.
􀁦 ZEEL’s investment intensity low in FY07-11. ZEEL had to abandon some of its
investments in movies, and youth and Tamil GECs due to poor business economics.
Also, operating cashflows during the period were accompanied by increase in loans
and advances to group companies. ZEEL’s recent investments in Ten Sports in the
sports genre also continue to be in losses.
􀁦 Zee TV faces intense competition in Hindi GEC space; can slip from #3 as the
competition is investing aggressively in high-ticket programming and movies, which
are relatively more predictable performance wise. Sony TV (along with SAB TV)
continues to post strong performance. ZEEL’s proposal to invest in increasing weekly
programming hours to 35 from 24 and buy satellite rights of movies may be too late a
step and too little.
􀁦 Downgrade to HOLD due to low investments and rising competition – ZEEL has
had a poor streak in programming performance. We lower our target price to
Rs300/share from Rs336/share after factoring in lower market share in the key Hindi
GEC space and poor sports performance. We also consider in a bear-case scenario
of Rs268/share based on further slippage in ZEEL’s market share.