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Zee Entertainment Enterprises (Z)
Media
Value-ADD Part 1: Entertained by core business. We upgrade Zee to ADD with revised
TP of Rs130 on the strength of its core entertainment business (Hindi + regional) and post
25% underperformance in the past 6 months. (1) Stable ratings supporting advertising
revenues, (2) continued strong DTH growth and potential higher contribution from Dish TV
and (3) value-accretion from regional channels provide support. Key risks include (1) Zee’s
sports franchise losses, (2) competing sports properties and (3) competitive dynamics (also
media inflation). Valuations are fair at 19X consolidated FY2012E EPS but attractive on 16X
and 10X core (ex. sports) FY2012E EPS and EBITDA
Robust advertising revenue growth: Ratings uptick, competition across industry segments
Our modest 15% CAGR advertising revenue growth expectations for the period FY2011E-13E for
Zee are based on (1) moderate ratings performance across the network (~225 GRPs for flagship
Zee TV channel) and (2) continued robust advertising environment. We highlight the upswing in
ratings of Hindi channels (see Exhibits 2-3) post renewed content slate and investments. We expect
robust TV advertising growth despite threat of reduced spends from FMCG segment (~40% share
of TV) on account of strong competition across upstream industry segments (FMCG, Telecom and
Automobiles; see Exhibits 4-6). This would be supported by contribution of BFSI and mid-size
advertisers, returning after a long hiatus lasting through 2HFY09-1HFY11.
Potential pick-up in subscription revenues: Rapid DTH spread and Dish TV contribution
We highlight the rapid growth of DTH in India, with net paying subscriber base rising to ~28 mn
subscribers by-end CY2010 from ~18 mn at end-CY2009; DTH penetration is still only ~20% of
the Indian TV households (~140 mn) with considerable growth potential (see Exhibits 7-8). Large
broadcasters such as Zee are well-placed to capitalize on the DTH subscription revenue opportunity.
Additionally, a significant chunk of DTH subscribers are incremental additions without fragmenting
Zee’s cable subscription revenues; even so, the value of a DTH subscriber is 3X cable subscribers.
Zee has signed an annual semi-fixed-fee contract with Dish TV, which precludes meaningful
contribution (see Exhibit 9) but with scope for renegotiation.
Regional channels: Worth a lot more today on rising EPS-accretion, reducing Zee’s risk profile
Zee’s R-GECs acquisitions from its sister company Zee News have added incremental value to the
company with (1) stronger-than-industry advertising growth supported by (2) robust ratings
performance (see Exhibit 10-13) and (3) potential for domestic (entry in new regional markets,
niche channels in existing markets) and international expansion (improved subscription revenues).
Zee TV’s (volatile ratings given competitive intensity) contribution to Zee’s advertising revenues has
declined to ~35% from >50% previously, further reducing Zee’s risk profile; R-GECs accretion to
Zee’s EPS has increased to 13-15% from 8-10% previously.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Zee Entertainment Enterprises (Z)
Media
Value-ADD Part 1: Entertained by core business. We upgrade Zee to ADD with revised
TP of Rs130 on the strength of its core entertainment business (Hindi + regional) and post
25% underperformance in the past 6 months. (1) Stable ratings supporting advertising
revenues, (2) continued strong DTH growth and potential higher contribution from Dish TV
and (3) value-accretion from regional channels provide support. Key risks include (1) Zee’s
sports franchise losses, (2) competing sports properties and (3) competitive dynamics (also
media inflation). Valuations are fair at 19X consolidated FY2012E EPS but attractive on 16X
and 10X core (ex. sports) FY2012E EPS and EBITDA
Robust advertising revenue growth: Ratings uptick, competition across industry segments
Our modest 15% CAGR advertising revenue growth expectations for the period FY2011E-13E for
Zee are based on (1) moderate ratings performance across the network (~225 GRPs for flagship
Zee TV channel) and (2) continued robust advertising environment. We highlight the upswing in
ratings of Hindi channels (see Exhibits 2-3) post renewed content slate and investments. We expect
robust TV advertising growth despite threat of reduced spends from FMCG segment (~40% share
of TV) on account of strong competition across upstream industry segments (FMCG, Telecom and
Automobiles; see Exhibits 4-6). This would be supported by contribution of BFSI and mid-size
advertisers, returning after a long hiatus lasting through 2HFY09-1HFY11.
Potential pick-up in subscription revenues: Rapid DTH spread and Dish TV contribution
We highlight the rapid growth of DTH in India, with net paying subscriber base rising to ~28 mn
subscribers by-end CY2010 from ~18 mn at end-CY2009; DTH penetration is still only ~20% of
the Indian TV households (~140 mn) with considerable growth potential (see Exhibits 7-8). Large
broadcasters such as Zee are well-placed to capitalize on the DTH subscription revenue opportunity.
Additionally, a significant chunk of DTH subscribers are incremental additions without fragmenting
Zee’s cable subscription revenues; even so, the value of a DTH subscriber is 3X cable subscribers.
Zee has signed an annual semi-fixed-fee contract with Dish TV, which precludes meaningful
contribution (see Exhibit 9) but with scope for renegotiation.
Regional channels: Worth a lot more today on rising EPS-accretion, reducing Zee’s risk profile
Zee’s R-GECs acquisitions from its sister company Zee News have added incremental value to the
company with (1) stronger-than-industry advertising growth supported by (2) robust ratings
performance (see Exhibit 10-13) and (3) potential for domestic (entry in new regional markets,
niche channels in existing markets) and international expansion (improved subscription revenues).
Zee TV’s (volatile ratings given competitive intensity) contribution to Zee’s advertising revenues has
declined to ~35% from >50% previously, further reducing Zee’s risk profile; R-GECs accretion to
Zee’s EPS has increased to 13-15% from 8-10% previously.
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