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Sports drags down robust top-line
Zee Entertainment’s 2QFY11 PAT at Rs1.26bn (up 1.1% QoQ and 13.8% YoY) came in much lower
than our estimates, mainly due to higher-than-expected losses from the sports business. The top-line
held steady, with 5% QoQ growth in what is seasonally the weakest quarter for advertisements.
Management commented that the launch of two new sports channels during the quarter added to the
losses in the segment. Going forward, 2H will be a key indicator of profitability of this segment. We
had been factoring in elevated programming costs for 2H in expectations of new programme launches.
This along with a drop in selling expenses limits our earnings downgrades for FY11 to ~5%%.
Top-line steady; sports, a drag: Revenues were a marginally positive surprise, with sequential growth in
all revenue lines, most notably a 9% QoQ growth in ad-revenues in what is the slowest quarter. Sports
business’ operating losses widened to Rs542m from Rs354m in 1QFY11, belying our expectations and also
management guidance of sports losses being limited to cRs500m for the full year. Management commented
that the launch of two new channels in the sports segment compounded the losses.
Look towards 2H to judge profitability of sports segment In 2H, two contrasting quarters, 3Q with
several premier cricketing properties and 4Q with hardly any cricket properties for Zee, we believe would
allow investors to arrive at some understanding of the sustainable profitability of the sports segment. We
expect a moderation of losses in this segment in 2H.
Tweak earnings; positives remain even with increased earnings volatility: The robust top-line and
the sharp fall in selling expenses cushions the cut to our FY11 earnings to c5%. We believe that in spite of
this quarter’s negative surprise; a robust ad and DTH revenue environment for a diversified bouquet of
channels and moderate valuations (19.4x FY12ii PER) makes Zee an attractive proposition. We retain BUY.
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