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Higher loss in sports business drags margin: ZEE's 3QFY11 PAT was below estimate due to higher than expected
operating cost and EBITDA loss in the sports business. Adjusted PAT down 9.6% QoQ to Rs1.14b v/s estimate of
Rs1.56b. ZEE recorded adjusted EBITDA loss of Rs1.03b in the sports business in 3QFY11. EBITDA declined 18.2%
QoQ (25.4% below estimate) to Rs1.54b. EBITDA margin was 20.4% (down 607bp QoQ) v/s estimate of 26.9%.
Continued momentum in advertising and domestic subscription: Advertising revenue grew 62.4% YoY and
6.7% QoQ on a reported basis. On a proforma basis (including R-GEC financials for 3QFY10), we estimate ad
revenue growth of 20-25%. Subscription revenue increased 3% QoQ to Rs2.8b (1.8% below estimate), driven by
higher domestic as well as international revenues.
Core (ex-sports) margin at 39%; continued loss in sports business: EBITDA declined 18.2% QoQ (25.4% below
estimate) to Rs1.54b due to higher than expected operating costs. While EBITDA margin was 20.4%, EBITDA
margin ex sports business stood at 39% (v/s 41% in 2QFY11). EBITDA loss in 9MFY11 was Rs1.93b v/s Rs576m in
FY10. Management expects lower loss in the sports business in 4QFY11, led by higher revenue from monetization
of India-SA ODI series, and a sharp reduction in loss in FY12.
Downgrading earnings estimates by 14-16% on sports business losses; Under Review: Given higher loss in the
sports business and potential margin decline in the non-sports business, we are cutting our earnings estimates by
13.6% for FY11, 16.3% for FY12 and 26.9% for FY13. We are revising our rating to Under Review (Buy earlier) given
continued negative surprises, low visibility in the sports business and potential margin headwinds in the non-sports
business. The stock trades at 18.8x FY12E EPS and 17.2x FY13E EPS.
ZEE's 3QFY11 PAT was below our estimate due to higher than expected operating
cost and EBITDA loss in the sports business.
Adjusted PAT was down 9.6% QoQ to Rs1.14b v/s our estimate of Rs1.56b (not
comparable YoY due to R-GEC business merger). Reported PAT was up 26.8%
QoQ to Rs1.6b.
Excluding one-time fees of Rs700m for premature termination of sporting event
rights, revenue was up 6.1% QoQ (1.8% below estimate). We estimate 3QFY11
ad revenue growth at 21% on a proforma basis (including regional GEC in 3QFY10).
Ad revenue increased 6.7% QoQ to Rs4.4b (1.2% below estimate). Management
expects industry ad revenue growth of 14-15% in FY12.
Subscription revenue increased 3% QoQ to Rs2.8b (1.8% below estimate), driven
by higher domestic as well as international revenues.
Operating expenses increased 14.8% QoQ to Rs6b mainly on account of higher
programming and transmission cost (up 20.1% QoQ and 10% above estimate).
EBITDA declined 18.2% QoQ to Rs1.54b (25.4% below estimate). EBITDA margin
was down 607bp QoQ at 20.4% (v/s estimate of 26.9%).
Adjusted sports revenue stood at Rs97m (excluding one-time receipt of Rs700m)
while operating costs in the sports business amounted to Rs1.99b, resulting in adjusted
EBITDA loss of Rs1.03b. Higher sports losses in 3QFY11 are attributed to (1)
higher costs associated with India-South Africa series, and 2) lower than expected
subscription revenue due to delay in launch of new sports channel, Ten Cricket by
4-5 months. EBITDA loss in 9MFY11 was Rs1.93b v/s Rs576m in FY10.
Management expects lower losses in the sports business in 4QFY11, led by higher
revenue from monetization of India-SA ODI series, and a sharp reduction in loss in
FY12. Despite high losses, the management remains committed to the sports genre,
given opportunities in the medium to long term. We reiterate that the sports business
is highly event specific, implying low visibility in quarterly financial performance.
Core margin excluding sports business declined from 41% in 2QFY11 to 39.1% in
3QFY11. Competitive environment in the non-sports business has been intense in
3QFY11. Zee proposes to further increase original programming hours, which could
impact the current EBITDA margin of 39% (ex-sports business) by 200-400bp.
Tax rate of 34.5% was higher than our estimate (30%) likely due to loss in sports
business subsidiaries not being offset against profit in other business.
We are cutting our earnings estimates by 13.6% for FY11, 16.3% for FY12 and
26.9% for FY13.
Our rating is Under Review (Buy earlier) given continued negative surprises, low
visibility in the sports business and potential margin headwinds in the non-sports
business.
Ad revenue growth (proforma) estimated at 20-25% YoY, 6.7% QoQ
Advertising revenue grew 62.4% YoY and 6.7% QoQ on a reported basis. On a
proforma basis (including R-GEC financials for 3QFY10), we estimate ad revenue
growth of 20-25%.
Flagship channel, Zee TV has lost GRP for the third consecutive quarter to an average
of 200 (237 in 2QFY11), with a weekly average channel share of ~19%. Its position in
the top-100 programs stands at 18.
Zee Cinema averaged 126 GRP during the quarter. Zee Marathi continued delivering
209 average weekly GRP, with 33 of the top-50 shows and 68 of the top-100 shows.
Zee Bangla averaged 383 weekly GRP in the quarter, with a channel share of 33%.
Zee Telugu averaged 344 weekly GRP, with a channel share of 18%. Zee Kannada
clocked an average GRP of 178.
Key properties for Ten Sports included Asian Games, Ryder Cup, Shangai Rolex
Masters and TNT NBA Basketball while Ten Action+ included ATP World Rakuten
Open. Ten Cricket properties included South Africa v/s Pakistan series, Sri Lanka
v/s West Indies series and India v/s South Africa test series.
In 4QFY11, the sports network would be telecasting India v/s South Africa series
(Tests, ODI's and T20), WWE Royal Rumble, Aircel Chennai Open, Grand Prix of
Qatar, etc
Subscription revenue up 3% QoQ, driven by domestic and international
business
3QFY11 subscription revenue was at Rs2.8b, up 14.2% YoY and 3% QoQ.
DTH subscription revenue at Rs821m increased 41% YoY and 4.3% QoQ.
International subscription revenue increased 2.2% QoQ but was flat YoY at Rs1.01b.
Domestic subscription excluding DTH revenue grew 2.6% QoQ to Rs986m.
Sports business continues to drag EBITDA margin
EBITDA margin was 20.4% (down 607bp QoQ) v/s our estimate of 26.9%.
Core margins (excluding sports business) declined from 41% in 2QFY11 to 39.1% in
3QFY11.
Sports revenue stood at Rs1.67b (including one-time receipt of Rs700m) while operating
costs in the sports business amounted to Rs1.99b, resulting in adjusted EBITDA loss
of Rs1.03b.
Zee had incurred EBITDA loss of Rs354m in the sports business in 1QFY11 and
Rs542m in 2QFY11; accordingly, adjusted EBITDA loss for the nine months ended
December 2010 stands at Rs1.9b.
Management expects lower loss in the sports business in 4QFY11, led by higher revenue
from monetization of India-SA ODI series, and a sharp reduction in loss in FY12.
Despite high losses, the management remains committed to the sports genre, given
opportunities in the medium to long term.
We reiterate that the sports business is highly event-specific, implying low visibility in
quarterly financial performance
Downgrading earnings estimates by 14-16% on sports business losses;
Under Review
Given higher loss in the sports business and potential margin decline in the non-sports
business, we are cutting our earnings estimates by 13.6% for FY11, 16.3% for FY12 and
26.9% for FY13. We are revising our rating to Under Review (Buy earlier) given continued
negative surprises, low visibility in the sports business and potential margin headwinds in
the non-sports business. We continue to believe that the sports segment remains the single
biggest swing factor for ZEE's earnings. The stock trades at 18.8x FY12E EPS and 17.2x
FY13E EPS.
Recent developments
Zee Sports International Limited, ZEE's subsidiary, has
increased its 82.2% shareholding in its subsidiary Taj
TV Mauritius to 95% by an additional investment of
US$12m.
The Bombay High Court has approved: (a) merger of
ETC Networks Ltd with the company with effect from
31 March 2010, and (b) demerger of education business
into Zee Learn Ltd with effect from 1 April 2010.
The company has recently launched Ten Cricket (cricket
focussed sports channel) and Ten Action+ (soccer
focussed sports channel).
The board has approved amalgamation of two wholly
owned subsidiaries (ZES Holding Ltd, Mauritius and
Zee Multimedia Worldwide, BVI) with the company.
Valuation and view
We are cutting our earnings estimates by 13.6% for
FY11, 16.3% for FY12, 26.9% for FY13 and revising
our rating to Under Review (Buy earlier) given
continued negative surprises, low visibility in the sports
business and potential margin headwinds in the nonsports
business. We continue to believe that the sports
segment remains the single biggest swing factor for
ZEE's earnings. The stock trades at 18.8x FY12E EPS
and 17.2x FY13E EPS.
Company description
ZEE is the leading player in television broadcasting and
syndication of content overseas, with well established
brands such as Zee TV, Zee Cinema, Zee Music, Zee Sports
and Zee Studio. Post the merger with Zee News, the
company has added regional channels like Zee Telugu, Zee
Kannada, Zee Marathi and Zee Bangla in its portfolio.
Key investment arguments
With its offering of 24 channels, ZEE addresses ~64%
of the viewership having pan-India ~12% market share.
ZEE's flagship channel Zee TV is placed strongly
among the top three players in the Hindi GEC segment.
We expect 15% ad revenue CAGR over FY11-13.
We expect the strong traction in DTH revenues to
continue and estimate ~20% CAGR in DTH revenue
over FY11-13. This will enable 10% CAGR in total
subscription revenue in FY11-13.
Key investment risks
Higher than expected losses in the sports business.
Increasing ratings gap v/s the market leader in Hindi
GEC; this could prove to be negative for ad revenue
momentum as well as cost control.
Possibilty of disruption caused by entry of well funded
competition in Hindi GEC (like R-ADAG CBS JV).
Potential negative regulatory developments in the DTH
space.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Higher loss in sports business drags margin: ZEE's 3QFY11 PAT was below estimate due to higher than expected
operating cost and EBITDA loss in the sports business. Adjusted PAT down 9.6% QoQ to Rs1.14b v/s estimate of
Rs1.56b. ZEE recorded adjusted EBITDA loss of Rs1.03b in the sports business in 3QFY11. EBITDA declined 18.2%
QoQ (25.4% below estimate) to Rs1.54b. EBITDA margin was 20.4% (down 607bp QoQ) v/s estimate of 26.9%.
Continued momentum in advertising and domestic subscription: Advertising revenue grew 62.4% YoY and
6.7% QoQ on a reported basis. On a proforma basis (including R-GEC financials for 3QFY10), we estimate ad
revenue growth of 20-25%. Subscription revenue increased 3% QoQ to Rs2.8b (1.8% below estimate), driven by
higher domestic as well as international revenues.
Core (ex-sports) margin at 39%; continued loss in sports business: EBITDA declined 18.2% QoQ (25.4% below
estimate) to Rs1.54b due to higher than expected operating costs. While EBITDA margin was 20.4%, EBITDA
margin ex sports business stood at 39% (v/s 41% in 2QFY11). EBITDA loss in 9MFY11 was Rs1.93b v/s Rs576m in
FY10. Management expects lower loss in the sports business in 4QFY11, led by higher revenue from monetization
of India-SA ODI series, and a sharp reduction in loss in FY12.
Downgrading earnings estimates by 14-16% on sports business losses; Under Review: Given higher loss in the
sports business and potential margin decline in the non-sports business, we are cutting our earnings estimates by
13.6% for FY11, 16.3% for FY12 and 26.9% for FY13. We are revising our rating to Under Review (Buy earlier) given
continued negative surprises, low visibility in the sports business and potential margin headwinds in the non-sports
business. The stock trades at 18.8x FY12E EPS and 17.2x FY13E EPS.
ZEE's 3QFY11 PAT was below our estimate due to higher than expected operating
cost and EBITDA loss in the sports business.
Adjusted PAT was down 9.6% QoQ to Rs1.14b v/s our estimate of Rs1.56b (not
comparable YoY due to R-GEC business merger). Reported PAT was up 26.8%
QoQ to Rs1.6b.
Excluding one-time fees of Rs700m for premature termination of sporting event
rights, revenue was up 6.1% QoQ (1.8% below estimate). We estimate 3QFY11
ad revenue growth at 21% on a proforma basis (including regional GEC in 3QFY10).
Ad revenue increased 6.7% QoQ to Rs4.4b (1.2% below estimate). Management
expects industry ad revenue growth of 14-15% in FY12.
Subscription revenue increased 3% QoQ to Rs2.8b (1.8% below estimate), driven
by higher domestic as well as international revenues.
Operating expenses increased 14.8% QoQ to Rs6b mainly on account of higher
programming and transmission cost (up 20.1% QoQ and 10% above estimate).
EBITDA declined 18.2% QoQ to Rs1.54b (25.4% below estimate). EBITDA margin
was down 607bp QoQ at 20.4% (v/s estimate of 26.9%).
Adjusted sports revenue stood at Rs97m (excluding one-time receipt of Rs700m)
while operating costs in the sports business amounted to Rs1.99b, resulting in adjusted
EBITDA loss of Rs1.03b. Higher sports losses in 3QFY11 are attributed to (1)
higher costs associated with India-South Africa series, and 2) lower than expected
subscription revenue due to delay in launch of new sports channel, Ten Cricket by
4-5 months. EBITDA loss in 9MFY11 was Rs1.93b v/s Rs576m in FY10.
Management expects lower losses in the sports business in 4QFY11, led by higher
revenue from monetization of India-SA ODI series, and a sharp reduction in loss in
FY12. Despite high losses, the management remains committed to the sports genre,
given opportunities in the medium to long term. We reiterate that the sports business
is highly event specific, implying low visibility in quarterly financial performance.
Core margin excluding sports business declined from 41% in 2QFY11 to 39.1% in
3QFY11. Competitive environment in the non-sports business has been intense in
3QFY11. Zee proposes to further increase original programming hours, which could
impact the current EBITDA margin of 39% (ex-sports business) by 200-400bp.
Tax rate of 34.5% was higher than our estimate (30%) likely due to loss in sports
business subsidiaries not being offset against profit in other business.
We are cutting our earnings estimates by 13.6% for FY11, 16.3% for FY12 and
26.9% for FY13.
Our rating is Under Review (Buy earlier) given continued negative surprises, low
visibility in the sports business and potential margin headwinds in the non-sports
business.
Ad revenue growth (proforma) estimated at 20-25% YoY, 6.7% QoQ
Advertising revenue grew 62.4% YoY and 6.7% QoQ on a reported basis. On a
proforma basis (including R-GEC financials for 3QFY10), we estimate ad revenue
growth of 20-25%.
Flagship channel, Zee TV has lost GRP for the third consecutive quarter to an average
of 200 (237 in 2QFY11), with a weekly average channel share of ~19%. Its position in
the top-100 programs stands at 18.
Zee Cinema averaged 126 GRP during the quarter. Zee Marathi continued delivering
209 average weekly GRP, with 33 of the top-50 shows and 68 of the top-100 shows.
Zee Bangla averaged 383 weekly GRP in the quarter, with a channel share of 33%.
Zee Telugu averaged 344 weekly GRP, with a channel share of 18%. Zee Kannada
clocked an average GRP of 178.
Key properties for Ten Sports included Asian Games, Ryder Cup, Shangai Rolex
Masters and TNT NBA Basketball while Ten Action+ included ATP World Rakuten
Open. Ten Cricket properties included South Africa v/s Pakistan series, Sri Lanka
v/s West Indies series and India v/s South Africa test series.
In 4QFY11, the sports network would be telecasting India v/s South Africa series
(Tests, ODI's and T20), WWE Royal Rumble, Aircel Chennai Open, Grand Prix of
Qatar, etc
Subscription revenue up 3% QoQ, driven by domestic and international
business
3QFY11 subscription revenue was at Rs2.8b, up 14.2% YoY and 3% QoQ.
DTH subscription revenue at Rs821m increased 41% YoY and 4.3% QoQ.
International subscription revenue increased 2.2% QoQ but was flat YoY at Rs1.01b.
Domestic subscription excluding DTH revenue grew 2.6% QoQ to Rs986m.
Sports business continues to drag EBITDA margin
EBITDA margin was 20.4% (down 607bp QoQ) v/s our estimate of 26.9%.
Core margins (excluding sports business) declined from 41% in 2QFY11 to 39.1% in
3QFY11.
Sports revenue stood at Rs1.67b (including one-time receipt of Rs700m) while operating
costs in the sports business amounted to Rs1.99b, resulting in adjusted EBITDA loss
of Rs1.03b.
Zee had incurred EBITDA loss of Rs354m in the sports business in 1QFY11 and
Rs542m in 2QFY11; accordingly, adjusted EBITDA loss for the nine months ended
December 2010 stands at Rs1.9b.
Management expects lower loss in the sports business in 4QFY11, led by higher revenue
from monetization of India-SA ODI series, and a sharp reduction in loss in FY12.
Despite high losses, the management remains committed to the sports genre, given
opportunities in the medium to long term.
We reiterate that the sports business is highly event-specific, implying low visibility in
quarterly financial performance
Downgrading earnings estimates by 14-16% on sports business losses;
Under Review
Given higher loss in the sports business and potential margin decline in the non-sports
business, we are cutting our earnings estimates by 13.6% for FY11, 16.3% for FY12 and
26.9% for FY13. We are revising our rating to Under Review (Buy earlier) given continued
negative surprises, low visibility in the sports business and potential margin headwinds in
the non-sports business. We continue to believe that the sports segment remains the single
biggest swing factor for ZEE's earnings. The stock trades at 18.8x FY12E EPS and 17.2x
FY13E EPS.
Recent developments
Zee Sports International Limited, ZEE's subsidiary, has
increased its 82.2% shareholding in its subsidiary Taj
TV Mauritius to 95% by an additional investment of
US$12m.
The Bombay High Court has approved: (a) merger of
ETC Networks Ltd with the company with effect from
31 March 2010, and (b) demerger of education business
into Zee Learn Ltd with effect from 1 April 2010.
The company has recently launched Ten Cricket (cricket
focussed sports channel) and Ten Action+ (soccer
focussed sports channel).
The board has approved amalgamation of two wholly
owned subsidiaries (ZES Holding Ltd, Mauritius and
Zee Multimedia Worldwide, BVI) with the company.
Valuation and view
We are cutting our earnings estimates by 13.6% for
FY11, 16.3% for FY12, 26.9% for FY13 and revising
our rating to Under Review (Buy earlier) given
continued negative surprises, low visibility in the sports
business and potential margin headwinds in the nonsports
business. We continue to believe that the sports
segment remains the single biggest swing factor for
ZEE's earnings. The stock trades at 18.8x FY12E EPS
and 17.2x FY13E EPS.
Company description
ZEE is the leading player in television broadcasting and
syndication of content overseas, with well established
brands such as Zee TV, Zee Cinema, Zee Music, Zee Sports
and Zee Studio. Post the merger with Zee News, the
company has added regional channels like Zee Telugu, Zee
Kannada, Zee Marathi and Zee Bangla in its portfolio.
Key investment arguments
With its offering of 24 channels, ZEE addresses ~64%
of the viewership having pan-India ~12% market share.
ZEE's flagship channel Zee TV is placed strongly
among the top three players in the Hindi GEC segment.
We expect 15% ad revenue CAGR over FY11-13.
We expect the strong traction in DTH revenues to
continue and estimate ~20% CAGR in DTH revenue
over FY11-13. This will enable 10% CAGR in total
subscription revenue in FY11-13.
Key investment risks
Higher than expected losses in the sports business.
Increasing ratings gap v/s the market leader in Hindi
GEC; this could prove to be negative for ad revenue
momentum as well as cost control.
Possibilty of disruption caused by entry of well funded
competition in Hindi GEC (like R-ADAG CBS JV).
Potential negative regulatory developments in the DTH
space.
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