Zee Entertainment: 2Q: Delivering on growth expectations: Macquarie

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Zee Entertainment
2Q: Delivering on growth expectations
Event
 We remain positive on Zee despite 2Q profit miss. Our optimistic investment
view is based on secular growth in advertising and subscription revenues –
the company delivered on both counts in this quarter. Maintain OP with
revised TP of Rs335 (vs. Rs350 earlier). (Detailed results review in Fig 1 and
Zee TV GRP trends in Figs 3-6).
Impact
 No change in ad growth outlook. Management maintained its YoY industry
ad growth target of 14–15%. We are modelling in 21% ad growth for Zee
(adjusted for regional GEC addition) and remain comfortable with our
estimates.
 Digital shift driving double-digit sequential growth. The Indian Cable &
Satellite industry has witnessed very significant growth in the DTH
subscription over the last two years. Zee had seen muted 4% QoQ growth in
DTH revenues last quarter due to fixed-fee contracts with DTH operators. The
11% growth seen in the quarter reinforces our belief that Zee should be able
to benefit from digitisation, albeit in non-linear fashion.
 Profitability concerns around Sports business persist. We accept the
pressure two new Sports channels would pose on margin and have reduced our
margin forecast for FY11 by 50bp to 28.2%. Even so, the company’s past track
record of focussing on profitable growth keeps us constructive on FY12
margins. There is downside risk to our 30% FY12 margin, but at the same time
our current estimates are not factoring in any revenue upside from dedicated
Cricket and Football channels launched during the September quarter.
 Competition remains intense, but loss of revenue share has played out.
Sony has become the No.3 player in the Hindi GEC genre post launch of
Season 4 of internationally successful game show, Who Wants to Be A
Millionaire, on 11 October. We recognise that competition in the genre
remains intense but believe the loss of ad revenue share for flagship
channel Zee TV has played out after it lost its No.2 position to new entrant
Colors in 2008.
Earnings and target price revision
 We are adjusting our FY11E EPS down by 5% and FY12E EPS by 2%. We
revised our target price to Rs335 (vs. Rs350 previously) post slight changes
post 2Q.
Price catalyst
 12-month price target: Rs335.00 based on a DCF methodology.
 Catalyst: Uptick in ad rates, improved profitability of Sports segment.
Action and recommendation
 Retain Outperform. We continue to believe that TV broadcasters would
benefit from the domestic consumption theme. The current stock price at 19x
FY12E PER is not factoring in the 18% earnings growth expected to be
delivered over FY10-12 period.