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ZEE ENTERTAINMENT ENTERPRISES LTD (ZEEL)
PRICE: RS.114
RECOMMENDATION: REDUCE
TARGET PRICE: RS.117
FY12E P/E: 19.4X
q ZEEL's 3QFY11 profits, excluding one-off revenues, were below our and
consensus expectations. Advertising and subscription revenues were
broadly in line with our expectations. The company's content expenses
have risen sharply (largely on account of sports), without a similar impact on recurring revenues, leading to the negative surprise on recurring
earnings.
q Following the results, we raise our FY11 revenue and EPS estimates
2.4%, and 3.4% respectively (after incorporating one-off revenues in our
top-line estimate). However, given that the rise is on account of one-off
revenues, and fundamentals appear to have worsened, we cut our earnings estimates for FY12 and beyond. We reduce our FY11 margin estimates to 26%, and FY12 margin estimates to 25.4%. Our EPS estimate for
FY12 is reduced by 7.6%. We expect ZEEL to report EPS of Rs 5.9 for FY11
and FY12.
q Incorporating a higher base of expenses going forward, we reduce earnings estimates downward throughout our explicit forecast period. Our
DCF fair value for the stock, at FY12 - end, is reduced to Rs 117 (Rs 126
earlier). Our computed fair value continues to be ~20x NTM EPS for ZEEL,
in line with average valuations enjoyed by the company.
q We believe that industry circumstance is adverse for the moment, and
ZEEL shall have to either play along (higher content/ distribution expenses), and report lower margins, or risk losing competitive position in
the medium-term. Our investment thesis on ZEEL remains same following the result: 1/ ~70% of the distribution revenues are exposed to pies
that are not growing, 2/ advertising revenues shall respond to competitive position of mass channels, as has been the case historically, 3/
Losses in sports shall continue, while sports continue to be an important
part of ZEEL's bouquet. This places ZEEL earnings on a medium-term
stagnation path.
q We maintain a REDUCE stance on ZEEL, with a price target of Rs.117
(FY12-end), implying that even post the recent decline, we expect ZEEL to
underperform risk-free assets in the medium term.
Zee Entertainment's 3QFY11 recurring revenues were broadly in line with our estimates. The company reported Rs 4398mn in advertising revenues and Rs 2818mn in
subscription revenues . Other income in the quarter, which came in at Rs 1032 mn,
contains one-off items amounting to Rs 700 mn, on account of one time fees for
pre-mature termination of sporting event rights.
As expected, domestic cable revenues of the company as well as international revenues have seen soft growth (domestic cable revenues include the revenues of RGECs). DTH revenues of the company have grown at an unimpressive 4% q/q .
Subscription revenues have, as a result been soft, growing 3% q/q.
Y/Y comparisons of the results are not valid, as 3QFY11 results include results of the
regional channels merged into the company.
Expenses for the company have risen than our expectations, with content and programming expenses rising 80% y/y (20% q/q) to Rs 4152mn, largely on account of
sports. With other expenses broadly in line with our estimates, the company has reported EBITDA Rs 2241mn, and PAT Rs 1600mn.
Results of the company are poor, excluding one-offs. The table below shows that
margins on a recurring basis have crashed to 20% - a decline of 610 bps q/q (920
bps y/y). The impact of competition on the company's financials has been severe. As
such, quality of earnings for ZEEL is poor.
We make adjustments to our estimates and price target for ZEEL. We account for
higher (one-off) other income in FY11 and raise revenue estimates. Consequently,
our FY11 EPS estimates see an increase of Re 0.2. We cut FY11 / FY12 estimates to
account for higher content expenses/ other expenses that the company may have to
incur to battle competition.
Rating and Price Target
ZEEL continues to face competitive issues and the industry conditions are poor for
profitability. We believe there is a lack of upside triggers for the stock, and the correction following the results, although strong, does not provide us an opportunity to
buy the stock - given that our current price target implies that ZEEL shall
underperform risk-free securities over the next year. We remain negative on ZEEL
stock, and re-iterate REDUCE.
We REDUCE our price target (FY12 - end) to Rs 117/ share, based on our DCF Valuation for ZEEL.
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