Zee Entertainment 3Q: Spoil "sport" quarter:: Macquarie Research,

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Zee Entertainment
3Q: Spoil "sport" quarter
Event
 We are reducing our target price and cutting our earnings estimates following
disappointing 3Q results from Zee. The stock has corrected 15% since results
announcement and a further downside from these levels is limited, in our
view. Maintain OP with revised TP of Rs128.

Impact
 Sports segment: losses continue to mount. 3Q operating loss of Rs1bn in
the Sports segment surprised us negatively. Zee’s total operating loss for this
segment for the 9 months stands at Rs1.9bn (vs. FY10 loss of Rs576m).
Though Zee management had indicated last quarter that sports losses in
FY11 would be difficult to cap at FY10 levels – the step down in profitability
seen this quarter has negative implications for consolidated margins of the
company.
 GEC performance on track. Excluding the sports segment Zee delivered
EBITDA margins of 39% in 3Q (vs. 41% in 2Q, details in Figure 3). Investors
have been worried about the fallout of intense competition in the Hindi GEC
genre between Zee TV and Sony for the No.3 slot. Even so, we do no think
the competition would have negative effects on ad outlook of Zee since family
soaps on Sony are yet to garner viewership share.
 Reducing estimates to factor in the pressure from sports segment. We
have reduced our consolidated margins to 25% from 30% previously as we
build in increased programming costs for investments in the sports business.
 3Q details: Zee reported 3Q revenues of Rs7.5bn, EBITDA margin of 20.4%
(vs. 26.5% in 2Q) and EPS of Rs1.64. Reported financials included one-time
flow-through revenues of Rs700m.
Earnings and target price revision
 Post 3Q we have sharply revised our margin assumption for 4Q and FY12
and FY13. We have cut our earnings by ~18% for each of the forecast years
and our new EPS is Rs5 for FY11, Rs6 for FY12 and Rs7 for FY13. Our
revised TP is Rs128 (vs. Rs168 previously). See Fig 12 for summary of
changes.
Price catalyst
 12-month price target: Rs128.00 based on a DCF methodology.
 Catalyst: Lower loss in the sports segment and uptick in advertising rates
Action and recommendation
 Maintain OP. We acknowledge that 3Q operating loss in the sports segment
surprised the street negatively but steep 15% fall in the stock price reflects rebasing
of investor expectations. We believe secular growth in advertising and
subscription revenues augur well for Zee and retain our positive bias on the
stock. Even so, from a near term perspective the stock could remain under
pressure as investors wait on sidelines before seeing the 4Q performance.