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COMPANY UPDATE
Zee Entertainment Enterprises (ZEE.BO)
Neutral Equity Research
Reducing TP as profitability deteriorates; stay Neutral on valuations
What's changed
Zee reported Q3FY11 results that were c.20% below our estimate at the net
profit level, after adjusting for the Rs.700 mn one-time fees (premature
termination of sporting event rights). Significantly higher programming
costs (55% of adjusted sales) vs 43% in FY10 and continuing losses in the
sports business were the key reasons for this disappointment – stock being
down 13% vs. Sensex down 1% since announcement.
Implications
1) We expect programming costs to remain high as Zee continues to
face pressure on market share – mainly by spending on improving its
content pipeline and increasing programming hours. Zee TV (flagship
channel) has lost considerable market share in an intensely competitive
Hindi General Entertainment space - from c.21% in June 2010 to c.14%
now. The channel’s position has also declined to number 4 for a brief
period in the last few weeks, from a consistent 3 prior to August 2010.
2) We expect the sports business to continue to incur losses given
Zee’s plans to continue to invest in sports properties. Management’s
expectations of turning around this business as more subscribers move to
digital platforms and subscribe to premium sports packages can be
realized only in the longer term, in our view.
Building in the impact of these factors, we reduce our EBITDA margins by
150-300 bps leading to a 5-21% reduction in our FY11E-13E EPS estimates.
Valuation
Though the stock now trades at a 9% discount to its 3-yr ave12m fwd P/E
(18.7XPE vs 20.6x median), we maintain Neutral and would wait for signs of
improvement in overall profitability and market share. Our 12m TP of Rs129 is
based on 20X FY12E EPS (from Rs150 on 20X average FY11E and FY12E EPS).
Key risks
Stronger advertising revenue-mkt. share; increasing competition.
INVESTMENT LIST MEMBERSHIP
Neutral
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