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EARNINGS REVIEW
Zee Entertainment Enterprises (ZEE.BO)
Neutral
Below expectations: Programming costs trending up; stay Neutral
What surprised us
Zee Entertainment reported 2QFY11 net income of Rs1,263 mn – c.11%
below our and Bloomberg consensus estimates, as programming costs
continued to trend higher, negatively impacting margins. 1HFY11
programming costs were 47% of sales vs. 43% in FY10. As a result, EBITDA
margins for the quarter declined to 26.5% vs. 28% in FY10. The company,
however, continued to deliver strong revenues – with both advertising and
subscription revenues in line with our estimates.
What to do with the stock
We continue to forecast advertising revenue CAGR of 18% over FY11E-13E
for Zee (ex regional GECs), higher than the 12%-13% growth we expect for
the television advertising industry. However, rising programming costs
will likely be a dampener on the company’s operating performance; as
such, we lower our FY11E-FY13E estimates by 7%-9%.
Our new 12m TP is Rs300 (vs. Rs 326 previously), still based on 20X
average FY11E and FY12E EPS. We retain our Neutral rating, as we believe
current valuations balance the benefits of the strong recovery in
advertising revenues with the risks of greater competition and higher
programming costs. Risks: Stronger-than-expected advertising revenue
growth and DTH subscriber additions, further increase in competition in
the Hindi GEC genre, where the flagship channel Zee TV operates.
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