India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Zee Entertainment Enterprises (Z)
Media
Sports business plays spoilsport: Part II. Zee reported weak 3QFY11 EBITDA at
Rs1.54 bn (-2% yoy, -18% qoq), versus our expectation of Rs2.1 bn, continuing the
trend of worsening sports business losses from 2QFY11. Sports business losses
increased to Rs1.03 bn (excluding Rs700 mn one-time income) from Rs542 mn in
2QFY11. However, core business was on track with EBITDA of Rs2.57 bn from Rs2.43
bn in 2QFY11, with EBITDA margin of 39%. We expect core business margins to drop
further to ~35% levels given (1) rollover impact of lower Zee TV ratings (200-230 versus
250-270) as well as (2) rising media cost inflation (film investments in particular). We
retain our rating and target price awaiting management commentary on 3QFY11.
Weak 3QFY11 results on account of rising operating losses in sports business
` We highlight that yoy comparison of 3QFY11 financials is not possible due to (1) merger of RGECs channels effective 4QFY10, (2) complete acquisition of Ten Sports business effective
4QFY10-1QFY11 (thus, even EPS is not comparable on a yoy basis) and (3) other small mergers
and acquisitions (9X, ETC Networks).
` ZEEL 3QFY11 EBITDA of Rs1.54 bn (+25% yoy, +1% qoq) was below our Rs2.1 bn expectation.
The variance primarily resulted from sports business operating losses increasing to Rs1.03 bn
from Rs542 mn in 2QFY11, much ahead of our and street expectations. Though we await
management commentary on 3QFY11, we highlight Ten Sports’ bid for South Africa cricket
rights in October 2007 was at peak of competitive intensity in the last cycle.
` However, core business was on track with EBITDA margin of 39% with (1) weakness in flagship
Zee TV ratings (they have since recovered somewhat) negated by sharp improvement in Zee
Bangla ratings (key regional channel) and (2) complete festival season in 3QFY11 (strong
advertising performance). However, (1) rollover of Zee TV ratings decline and (2) renewed
content investments may normalize core EBITDA margins to ~35%.
` ZEEL 3QFY11 advertising revenues of Rs4.4 bn (+7% qoq) were marginally below our
expectation of Rs4.5 bn. However, the variance was largely on account of sports since sports
revenues declined 19% qoq to Rs965 mn from Rs1.2 bn in 2QFY11.
` ZEEL 3QFY11 domestic subscription revenues of Rs1.82 bn were in line with our expectation.
ZEEL reported 4% yoy growth in DTH subscription, 3% qoq growth in cable subscription (on
account of launch of Ten Cricket channel) and even etched out a 2% qoq growth in
international subscription revenue (after a long time). Zee strengthened its presence in Australia
and other geographies in 3QFY11.
` ZEEL 3QFY11 direct costs increased 20% qoq to Rs4.15 bn (our expectation of Rs3.6 bn)
on account of (1) higher sports expenses (sports operating expenses increased to Rs2.0 bn
from Rs1.73 bn in 2QFY11 due to high cost of South Africa rights) and (2) higher content
investments (including Zee Rishtey Awards) in the core business (operating expenses
increased to Rs4 bn from Rs3.5 bn in 2QFY11). The increase in employee and SG&A
expenses was broadly in line with our expectations.
` ZEEL noted Rs700 mn of one-time income from pre-mature termination of sporting event
rights; the sporting event rights pertain to all commercial rights of football tournaments
organized by the All India Football Federation (AIFF).
Core business remains robust
Exhibit 3 presents the core business (excl. sports) financials of ZEEL over time; ZEEL reported
3QFY11 revenues of Rs6.6 bn (elevated on account of contribution from festival season
advertising as well as events such as Zee Rishtey Awards) and EBITDA margins of 39%.
EBITDA margins declined qoq despite robust 11% qoq growth in revenues on account of
faster 15% qoq growth in operating expenses. We expect core business financials to remain
robust but with sustainable EBITDA margins at ~35% levels. One of the key pressure points
on margins would be rising investment in content (original programming, events and movie
telecast rights); we highlight (1) introduction of new 6-7 PM programming slot on Zee TV
and (2) Rs640 mn 3-movie (new films; associated old film library also) deal with Eros during
3QFY11; competition will also impact Zee’s cost of doing business
Exhibit 4 presents the weakness in ZEEL’s flagship channel Zee TV’s ratings in 3QFY11; the
ratings have since recovered in 4QFY11E. ZEEL is not as dependent on Zee TV channel
(advertising contribution down to ~35% post the merger of R-GECs versus >50%
previously). Exhibit 5 presents the strong ratings recovery in Zee Bangla, which may have
helped negate (though only partially) the negative impact of Zee TV’s falling ratings.
However, we expect the pressure on Zee’s market share to increase going forward, initially
(and temporarily) on account of intra-segment competition from sports broadcasting (ODI
World Cup in 4QFY11E followed by expanded Season 4 of IPL), but later on account of
rising competitive intensity in the market post-IPL (more permanent impact). The
competition is just waiting for the closure of two high profile cricket properties to launch
new channels in Hindi cinema (see Exhibit 6) and regional segments.
Sports business turnaround to take time
Exhibit 7 presents the analysis of 3QFY11 sports business operating losses versus 2QFY11;
South Africa cricket rights were the flagship property (besides Pakistan cricket rights, which
could not be exploited on account of political tensions between India and Pakistan) for Ten
Sports and the timing of the rights bid (late-2007), which was the peak of competitive
intensity in the market, resulted in potential overbidding by Ten Sports. However, lack of
value-accretion from non-India cricket may also have played a part. We have discussed the
dynamics of the sports business in general and Ten Sports in greater detail in our note “Ten
Cricket—smart move but business turnaround could take a while” dated August 19, 2010
but a few points are worth revisiting.
The long-term profitability of any sports franchise is contingent upon (1) well-developed
(read addressable) C&S distribution system and (2) availability of sports properties at
‘reasonable’ prices. (1) The Indian C&S distribution is unquestionably getting organized given
the rapid spread of DTH in India (digital cable presents plenty of potential but has been
beset by legacy issues including execution). However, irrational competition for sports rights
(commensurate with launch of new sports channels) poses risk (3QFY11 is ample evidence).
We expect reduced competition in the sports segment since (1) Sony’s plans to launch its
sports channel on the back IPL cricket rights going slow and (2) Neo Sports’ lack of interest
given access to India cricket rights. This leaves only ESPN-Star Sports and Ten Sports with
hope for more rational bidding in future.
No comments:
Post a Comment