Zee Entertainment - Sports Plays Spoilsport :Citi

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Zee Entertainment (ZEE.BO)
Sports Plays Spoilsport
 2Q FY11 results disappoint — Recurring PAT of Rs1.26b (+11% yoy) was below
both our/street estimates of Rs1.46/1.43bn respectively. EBITDA margin
contraction of 140bps yoy to 26.5% disappointed. Key variance was the increase
in sports business losses to Rs542m in 2QFY11 (Rs354m in 1QFY11 & Rs49m in
2QFY10) – partly due to the investment in the launch of the new channels. Exsports,
EBITDA margins would have expanded 510bps yoy to ~41%.
 Advertising lower than forecast; domestic subscription – the silver lining —Based
on our assumptions, if R-GEC growth was ~25/30% yoy, like to like ad growth
would be ~15/12% yoy – weak on last year’s low base. While international subs
continued to disappoint (-7% yoy) - impacted by both FX & volume decline (-5%/-
2%); domestic sub revenues picked up 11% yoy (mgmt guidance: flat yoy).DTH
revenues increased 53% yoy and 11% QoQ - in- line with earlier trends. Overall,
revenues at Rs7.1bn (expectations Rs7.4bn) would have been ~Rs220m higher
had it not been for adjustment post education business demerger.
 Sustaining market shares key to ad growth — Ad market outlook does seem strong,
however, we think ZEEL would benefit only if it sustains its viewership ratings,
given the high competitive intensity & fragmentation. Zee TV’s slippage in
viewership shares is a concern – only 10-11 shows in top 50 now (~21 in Jan 10).
While ZEEL’s dependence on flagship GEC has reduced post R-GEC acquisition,
lower ratings could impact both ad growth trajectory and also costs going forward.
 Conf Call Takeaways — a) Effective tax rate for FY11E would normalize at ~32%
(2QFY11 tax rate was ~39%).; b) Mgmt is planning on increasing the number of
hours of original programming content by ~7-8hrs over the next 3-4months.
 Reducing estimates, target — We pare our FY11-12E estimates by 6-12% as we
tweak ad growth and cost assumptions. Our TP of Rs305 (was Rs330) is based on
22x Mar12E (23x Dec11E earlier). Slight cut in multiple follows weak viewership
ratings in recent past, which may prevent the stock from a meaningful re-rating.