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Price correction provides entry opportunity
Upgrade to BUY, roll-forward to Sept’12 with TP of `324: Post lower than
expected 2QFY11 EBITDA margin (due to high sports losses), but stronger ad
revenue growth, we marginally reduce our FY11/12E EPS forecast for Zee
Entertainment (ZEEL) by 1%/3% to `11.8/`14.8 (Exhibit 4). We roll-forward to
Sept’11 and increase our TP to `324 (Mar’11 `300) and upgrade the stock to
BUY. We continue to peg our target multiple at 20x (based on FY10-12E PEG
of c.1.0) on Sept’12 consolidated EPS of `16.2 to arrive at our Sept’11 TP of
`324. Our target P/E multiple of 20x implies c.8% discount to the 3-yr average
of its 1-yr fwd P/E (Exhibit 12). Our revised EPS estimates for ZEEL are lower
than consensus by 1% to 2%. (Exhibit 3).
Stock underperformance, recent price correction offer entry opportunity:
The stock corrected by more than 10% starting Oct’2010, following Mr Nitin
Vaidya’s (COO) exit from the company and competition led viewership rating
pressure on ZEEL’s flagship channel ‘Zee TV’. We expect ZEEL to come back
strongly with improved ratings from Zee TV as the channel banks upon the
forthcoming festive season with new and innovative content and increases
fresh weekly programming by c.7hrs (24hrs in 2QFY10) over the next 4-5
months. The fourth season of popular dance show ‘Dance India dance’ will hit
the screens shortly and is likely to increase the much required GRP ratings for
Zee TV. ZEEL’s diversified channel mix across genres, including high growth
potential ‘Regional GECs’, will also support the overall ad/subscription
revenue growth going forward. Moreover, ZEEL has underperformed
Sensex/Sun TV by 15%/27% over last 3/6 months (Exhibit 13).
2QFY11 revenues above JMFe, sports losses put pressure on EBITDA
margin: 2QFY11 revenues/EBITDA/net profit came in at `7.12bn, `1.89bn
and `1.26bn vs JMFe of `6.9bn, `1.88bn and `1.32bn respectively. Company
reported EBITDA margin at 26.5% vs JMFe of 27.2% due to `542mn sports
losses (including Ten Cricket, Ten Action launch expenses). Other business,
excluding sports, registered strong 2QFY11 EBITDA margin at 41% vs 37.5%
in 1QFY11 and 35.8% in 2QFY10. Fully diluted 2QFY11 EPS stood at `2.6 vs
JMFe of `2.7. The YoY growth is not comparable as 2QFY10 did not have RGEC
financials and 9x business.
Strong growth in ad revenues, introduce FY13E: ZEEL reported QoQ ad
revenue growth of `4.12bn vs JMFe of `3.83bn, partly contributed by sports
ad revenues due to India centric cricket during 2QFY11 (including India-SL
test series and India-SL-New Zealand Tri-series). Better than expected ad
revenue growth in 2QFY11, coupled with festive season spends in 3QFY11,
prompts us to raise our ad revenue forecast by c.3%/7% for FY11/12 to
`16.5bn/`19.0bn respectively. We introduce FY13E financials with
revenues/EBITDA/EPS at `38.2bn/`11.4bn/18.0 with YoY growth of
15%/18%/21% respectively (Exhibit 4).
Subscription revenue grew c.5% QoQ led by DTH revenue: At `2.7bn,
subscription revenues came in line with JMFe and witnessed a sequential
growth of c.5%, led by strong DTH revenue growth of 11% QoQ at `787mn.
Non-DTH subscription revenues also grew a healthy c.8% QoQ to `961mn, but
international subscription revenue was under pressure due to subscriber
disconnections and rupee appreciation during 2QFY11 at `989mn (down 6%
YoY, 2% QoQ). Paid DTH subs stood at 13mn with yield of c.`20. We expect
c.4.5mn addition each in paid DTH subs for FY12/13E to c.20mn/24.5mn
respectively.
Key takeaways from 2QFY11 earnings call: As per the management 1)
expects 15% YoY ad revenue growth in FY11, 2) the inventory is running full
for 3QFY11 due to pre-booking of ad deals, 3) plans to increase fresh weekly
programming to around 32hrs from 25hrs presently over the next 4-5 month
for Zee TV, 4) plans to launch niche genres like Golf/Food channels in the
next 2-3 quarters, 5) higher standalone profits resulted in 38% tax rate
(consolidated) during 2QFY11, management expects to end FY11 with 32%
tax rate.
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