Zee Entertainment Enterprises-Disappointing Q2FY11; JPMorgan

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Zee Entertainment Enterprises
Neutral
ZEE.BO, Z IN
Disappointing Q2FY11; downward revisions to
earnings and price target





• Q2FY11 earnings disappoint. ZEEL reported Net sales, EBITDA and adjusted
PAT of Rs7.1bn (+32% y/y), Rs1.9bn (+25% y/y) and Rs1.3bn (+14% y/y)
respectively for Q2FY11. These include the results of Regional General
Entertainment Channel (RGEC) and are hence not comparable strictly on a y/y
basis. While revenues were c3% below our expectations, EBITDA margins and
earnings growth came in 8% lower than our estimates. Higher losses for the
sports business and higher tax rate led to the earnings disappointment.
• Advertising revenues were up 9% q/q benefiting from improved ad rates and
better utilization levels. We expect ad revenue CAGR of 15% over FY11-13E
for ZEEL supported by favorable industry trends, increased programming hours
and higher growth rates for R-GEC’s.
• Digitization to drive subscription growth. Subscription revenues rose 12%
y/y with domestic revenues up 27% y/y, while international revenues
disappointed with 7% y/y decline (-2%q/q). On the domestic front, while cable
revenues were up 7% q/q, DTH revenues were up 53% y/y and 11% q/q. We
estimate 12% CAGR for subscription revenues over FY11-13E, led by strong
23% CAGR for DTH revenues and 3-5% CAGR for domestic cable and
international revenues.
• Higher costs for sports business led to EBITDA margin decline of 140bp y/y
during Q2FY11. Start up costs for two new sports channels - Ten Cricket and
Ten Action+ along with subdued revenue growth of 12% y/y led to losses of
Rs542mn for the sports business during Q2FY11 and Rs896mn for 1HFY11.
• Management call takeaways. 1) LTL ad revenue growth guidance for FY11
maintained at 14-15%, 2) Plans to extend number of original programming
hours by 7-8 hours (from 24) over next 4-5 months, 3) Growing subscriber shift
from cable to DTH should result in subdued single-digit growth for domestic
cable revenues, and 4) Competitive intensity has risen across genres which
should result in higher programming costs for ZEEL, in our view.
• Revising earnings for FY11/12E down by 10-11% on the back of higher
programming and operational cost assumptions (related to sports and more
programming hours). We roll forward our price target by six months and our
revised Sep’11 price target is Rs300. Key downside risks include: 1) significant
losses in viewership on account of intense competition; 2) rising cost pressures;
and 3) any new investments that could be earnings dilutive.