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Zee Entertainment Enterprises
Neutral
ZEE.BO, Z IN
No near-term catalysts in sight
• 3QFY11 earnings disappoint. ZEEL reported net sales, EBITDA and
adjusted PAT of Rs7.5bn (+42% y/y), Rs1.5bn (-2% y/y) and Rs1.1bn (-5%
y/y) respectively for 3QFY11. These include the results of Regional General
Entertainment Channel (RGEC) and are hence not comparable strictly on a
y/y basis. While revenues were c3% below our expectations, earnings came
in 25% lower than our estimates. Higher losses for the sports business
(cRs1bn) led to the huge earnings miss. We are also not enthused by DTH
subscription growth of just 4% q/q.
• Management call takeaways. 1) TV ad revenue growth expectation for
FY11/12 maintained at 14-15%, 2) Visibility on sports division’s
profitability remains low and FY12 is unlikely to witness breakeven,
although losses should moderate in coming quarters, 3) Competitive
intensity has risen across genres and ZEEL has expanded its programming
hours by adding new shows (which could pose downside risk to margins for
non-sports business in coming quarters, in our view), 4) DTH yields have
dropped to Rs18/sub (from Rs20/sub q/q) and are likely to remain subdued
on account of fixed fee contracts signed with DTH players.
• Cut FY11-13E EPS by 12-15%. As we build in poor performance for
sports business and lower profitability for non-sports business (vs earlier
expectations) in view of significant competitive activity, our EPS estimates
for FY11E, FY12E and FY13E are revised downwards by 15%, 14% and
12% respectively. As a result our Sep’11 TP is cut to Rs125 (vs Rs150
earlier). Losses for sports business will remain an overhang on the stock in
near term, in our view.
• What would lead to stock re-rating? We believe investors would look for
1) improving sports business profitability, 2) sustained uptrend in viewership
ratings, and 3) significant uptick in DTH subscription revenues before
assigning a higher earnings multiple to the stock.
Conference Call – Key takeaways
Advertising growth outlook. Management is quite optimistic and maintained its
TV industry’s ad revenue growth guidance for FY11/12 at 14-15% and expects
ZEEL to meet or better this.
Competitive intensity has risen across genres. Management noted that there is lot
of activity in terms of big ticket shows being launched and ZEEL has expanded its
programming hours by adding new shows. We believe stiff competition across
genres could pose downside risk to margins for non-sports business in coming
quarters.
Visibility for sports business is low. Management noted that economics for sports
business are not favorable considering higher costs for acquiring sporting rights and
inadequate monetization of subscription revenues for the same. During 3QFY11,
much of the losses for the sports business were on account of the less-than-expected
generation of revenues for the India-South Africa Test series. Management expects
losses to reduce in coming quarters, while refraining from quantifying the likely
losses. They noted that FY12 is unlikely to achieve breakeven but losses should be
substantially lower.
Over medium to long term, the company expects sports business margins to benefit
from rising digitalization which will help monetize premium subscription for it.
DTH yields to remain subdued in near term. DTH yields have dropped to Rs18/sub
(from Rs20/sub q/q) and are likely to remain subdued on account of fixed fee
contracts signed with some DTH players. This will imply that increase in DTH
revenues for ZEEL will not be commensurate with increase in DTH subscriber base.
ZEEL currently has nearly 15mn of DTH subscriber base for their channels (industry
size is 30mn currently).
Balance Sheet color. Gross debt on ZEEL’s books as of Dec’10 end was Rs911mn
while cash was Rs10.3bn. Debtor days stood at 118 days.
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