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Zee Entertainment Enterprise Limited
Close to Trough on Earnings and Sentiment: Remain OW
What's Changed
Price Target Rs171.62 to Rs141.00
EPS: F11, F12, F13 Down 30%, 23% and 27%
We find ZEEL stock attractive at current levels: The
two main reasons for a dip in earnings forecasts and
sentiment seem to be bottoming (cricket-related losses
and impact of increased competition). We acknowledge
that the stock may remain range-bound in the next 2-3
months – but with the approaching heavy cricket season,
we highlight that during IPL 2010 ZEEL’s TV ratings
improved 11%.
We reduce our estimates for F11–F13 by 23% to 30%
and price target by 18% to Rs141: We factor in higher
losses in the sports business, increased spending by
ZEEL to fight off competition, and our expectation of a
lower growth trajectory for subscription revenues till F13.
Look for a strong rebound in PAT after a poor F11 –
we project F11-F13 CAGR of 26.5%: Our F12 and F13
EBITDA growth forecasts of 30% and 13% are to some
extent driven by swings of Rs1.1b and Rs200m in the
sports business. There we expect losses to fall from
Rs2.3b in F11E to Rs1.2b in F12 (vs. Rs613m in F10)
which in turn is predicated on lack of Indian cricket
properties (which are quite expensive) after F11. We
highlight that after engaging in a pitched battle for TV
ratings in 2HCY10, ZEEL has regained its third slot and
is now making advances from there as big-ticket
programmes from competition come to an end.
Accordingly, we project the non-cricket EBITDA to grow
at 10.5% in F12 and 9.6% in F13.
The stock trades at P/Es of 18x and 16x, based on
our revised F12 and F13 estimates: On this basis,
relative to our growth outlook, we see good upside.
Investment Thesis
• ZEEL, with its ongoing rebound in TV
rating points, is a direct play on the
growing advertising market and
transforming TV subscription
business. We expect CAGR of 12%
and 15% for ad and subs revenues for
ZEEL in F11-F13.
• We believe ZEEL can overcome the
earnings and sentimental irritants in
next 2-3 quarters…
• …as it shrinks its Indian cricket
properties…
• …as competitors’ spending on GECs
subsides…
• …and as ZEEL increases its original
programming hours.
• P/E of 17x our F12E EPS provides
room for upside, given our projected
EPS CAGR of f 26.5% for F11-F13.
• Strong balance sheet keeps the
option of returning cash to
shareholders open.
Key Value Drivers
• Better ad rates and utilization levels
driving ad revenue growth.
• Rising number of paying subscribers,
rising ARPU driving subscription
revenue growth and margins.
• Competition in GECs, ZEEL’s costs
Potential Catalysts
• Fall in cricket losses in 1QF12
• Sustained improvement in TV rating
trends in next 2-3 quarters
• Conclusion of heavy cricket season in
India by 1QF12
Risks
• Competition sustains its high
spending pattern on programming.
• DTH revenue growth takes longer
than we anticipate due to consistently
high subscriber price sensitivity
• Sports business losses widen beyond
3QF11 levels.
We Remain Overweight, but Reduce PT to Rs141
We Cut Earnings Estimates for F11-13…
1) We push up revenues and costs for the sports business,
incorporating our assessment following the announcement
of 3QF11 results.
2) We prune our subscription revenue numbers to factor in the
lower contribution per subscriber on the DTH platform and
lower than expected revenues on the analog platform in
F11-F13.
3) We increase our advertising revenue forecasts. YoY growth
now increases from 14%-15% for F11 to F13 to 11%-23%,
factoring in the strong 3QF11 performance and advertising
industry trends that are healthier than earlier anticipated.
…but Raise F14e and F15e Earnings by 9%-13%
We project a steepening trajectory in subscription revenues in
that period, given India’s fast pace of digitalization.
Advertising Remains Buoyant
Over the last three months, ZEE TV has fluctuated between the
third and fourth positions. With its DID Doubles, ZEE TV
withstood the high budget programming like Colors’s Big Boss 4
and Sony’s KBC4. Although it scaled down to fourth position for
a period of a month, ZEE TV managed to regain its third position.
However, the impact of the loss of market share was not too high
– as was evident in 3QF11 performance. We believe that ZEEL
will manage to be remain amongst the top three GECs with its
intensity of programming, and it should gain from strong growth
in the overall market.
Notably ZEEL is taking concrete steps to improve its ratings – by
increasing its fresh program content to about 28 hours/week at
3QF11-end vs. about 23 hours in early F11 and about 35 hours
from many competitors. In the next 1-2 quarters, ZEEL plans to
increase this further to about 35 hours, which can help it to
improve its ratings further.
Sports Business Losses Should Fall in F12
ZEEL posted an operating loss of Rs1.03 b in its sports business,
leading to a total operating profit of only Rs1.54 b in 3QF11.
Understandably, the stock has underperformed the Sensex by
12% YTD. It would be naïve to see a dramatic reduction in
4QF11 sports losses, since the India-South Africa cricket series
continued till January 2011 – but we think it would be unduly
harsh to expect the same level of losses in F12 too, which many
people now expect.
Cricket season may be a near term sentimental barrier – but
ratings impact in the past has been limited.
We believe that absolute margin should trend upwards from the
lows of 3QF11 as ZEEL monetizes its sports rights through the
one-dayers in 4QF11 (as they fetch better revenues than the
test matches which happened in 3QF11)
Valuation and Price Target
To calculate our price target, we use a DCF model with an
explicit phase of seven years and a terminal growth rate of 4%.
These assumptions are unchanged. We push up our WACC
from 11.8% to 12.45% as we increase our risk-free rate from
7.5% to 7.86% and risk premium from 6% to 6.5%.
The key changes behind the decrease to our DCF valuation
are: increase in programming costs, as explained in the
earnings section, which implies an EBITDA margin reduction
from 30%-33% to 24-27% for F11-F13. This is mitigated by the
increase in our F14 and F15 estimates.
Exhibit 9
ZEE: DCF Calculation: Price Target: Rs141
(A) Present value of the explicit phase 27,510
Terminal value 101,626
Terminal growth rate (%) 4
(B) Present value of the terminal value 98,690
(A+B) Total present value 126,201
Net present value ( One year from now) 127,618
Net debt (10,632)
Equity Value Rs mn 138,250
Shares (m) 982
Implied DCF value per share (Rs) 141
Source: Morgan Stanley Research estimates
Exhibit 10
ZEEL: WACC Calculation
Risk Free Return (Rf) (%) 7.9
Market Premium (Rm-Rf) () 6.5
Assumed Beta 0.93
Cost of Equity (Re) () 13.9
Equity () 80
Cost of Debt (Rd) () 10.0
Tax rate () 33.0
After-tax cost of debt (Rd [1-t]) () 6.7
Debt () 20
WACC () 12.4
Source: Morgan Stanley Research estimates
ZEE TV’s channels Ten Sports, Ten Action and Ten Cricket
along with ZEE sports have a prime market share of the sports
genre. However, revenues for the properties have not been as
anticipated by the management. Management continues to
believe that sports genre has a long term potential though we
assume that in next two years it will continue to make losses,
albeit substantially lower than in F11 ( and substantially higher
than in F10).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Zee Entertainment Enterprise Limited
Close to Trough on Earnings and Sentiment: Remain OW
What's Changed
Price Target Rs171.62 to Rs141.00
EPS: F11, F12, F13 Down 30%, 23% and 27%
We find ZEEL stock attractive at current levels: The
two main reasons for a dip in earnings forecasts and
sentiment seem to be bottoming (cricket-related losses
and impact of increased competition). We acknowledge
that the stock may remain range-bound in the next 2-3
months – but with the approaching heavy cricket season,
we highlight that during IPL 2010 ZEEL’s TV ratings
improved 11%.
We reduce our estimates for F11–F13 by 23% to 30%
and price target by 18% to Rs141: We factor in higher
losses in the sports business, increased spending by
ZEEL to fight off competition, and our expectation of a
lower growth trajectory for subscription revenues till F13.
Look for a strong rebound in PAT after a poor F11 –
we project F11-F13 CAGR of 26.5%: Our F12 and F13
EBITDA growth forecasts of 30% and 13% are to some
extent driven by swings of Rs1.1b and Rs200m in the
sports business. There we expect losses to fall from
Rs2.3b in F11E to Rs1.2b in F12 (vs. Rs613m in F10)
which in turn is predicated on lack of Indian cricket
properties (which are quite expensive) after F11. We
highlight that after engaging in a pitched battle for TV
ratings in 2HCY10, ZEEL has regained its third slot and
is now making advances from there as big-ticket
programmes from competition come to an end.
Accordingly, we project the non-cricket EBITDA to grow
at 10.5% in F12 and 9.6% in F13.
The stock trades at P/Es of 18x and 16x, based on
our revised F12 and F13 estimates: On this basis,
relative to our growth outlook, we see good upside.
Investment Thesis
• ZEEL, with its ongoing rebound in TV
rating points, is a direct play on the
growing advertising market and
transforming TV subscription
business. We expect CAGR of 12%
and 15% for ad and subs revenues for
ZEEL in F11-F13.
• We believe ZEEL can overcome the
earnings and sentimental irritants in
next 2-3 quarters…
• …as it shrinks its Indian cricket
properties…
• …as competitors’ spending on GECs
subsides…
• …and as ZEEL increases its original
programming hours.
• P/E of 17x our F12E EPS provides
room for upside, given our projected
EPS CAGR of f 26.5% for F11-F13.
• Strong balance sheet keeps the
option of returning cash to
shareholders open.
Key Value Drivers
• Better ad rates and utilization levels
driving ad revenue growth.
• Rising number of paying subscribers,
rising ARPU driving subscription
revenue growth and margins.
• Competition in GECs, ZEEL’s costs
Potential Catalysts
• Fall in cricket losses in 1QF12
• Sustained improvement in TV rating
trends in next 2-3 quarters
• Conclusion of heavy cricket season in
India by 1QF12
Risks
• Competition sustains its high
spending pattern on programming.
• DTH revenue growth takes longer
than we anticipate due to consistently
high subscriber price sensitivity
• Sports business losses widen beyond
3QF11 levels.
We Remain Overweight, but Reduce PT to Rs141
We Cut Earnings Estimates for F11-13…
1) We push up revenues and costs for the sports business,
incorporating our assessment following the announcement
of 3QF11 results.
2) We prune our subscription revenue numbers to factor in the
lower contribution per subscriber on the DTH platform and
lower than expected revenues on the analog platform in
F11-F13.
3) We increase our advertising revenue forecasts. YoY growth
now increases from 14%-15% for F11 to F13 to 11%-23%,
factoring in the strong 3QF11 performance and advertising
industry trends that are healthier than earlier anticipated.
…but Raise F14e and F15e Earnings by 9%-13%
We project a steepening trajectory in subscription revenues in
that period, given India’s fast pace of digitalization.
Advertising Remains Buoyant
Over the last three months, ZEE TV has fluctuated between the
third and fourth positions. With its DID Doubles, ZEE TV
withstood the high budget programming like Colors’s Big Boss 4
and Sony’s KBC4. Although it scaled down to fourth position for
a period of a month, ZEE TV managed to regain its third position.
However, the impact of the loss of market share was not too high
– as was evident in 3QF11 performance. We believe that ZEEL
will manage to be remain amongst the top three GECs with its
intensity of programming, and it should gain from strong growth
in the overall market.
Notably ZEEL is taking concrete steps to improve its ratings – by
increasing its fresh program content to about 28 hours/week at
3QF11-end vs. about 23 hours in early F11 and about 35 hours
from many competitors. In the next 1-2 quarters, ZEEL plans to
increase this further to about 35 hours, which can help it to
improve its ratings further.
Sports Business Losses Should Fall in F12
ZEEL posted an operating loss of Rs1.03 b in its sports business,
leading to a total operating profit of only Rs1.54 b in 3QF11.
Understandably, the stock has underperformed the Sensex by
12% YTD. It would be naïve to see a dramatic reduction in
4QF11 sports losses, since the India-South Africa cricket series
continued till January 2011 – but we think it would be unduly
harsh to expect the same level of losses in F12 too, which many
people now expect.
Cricket season may be a near term sentimental barrier – but
ratings impact in the past has been limited.
We believe that absolute margin should trend upwards from the
lows of 3QF11 as ZEEL monetizes its sports rights through the
one-dayers in 4QF11 (as they fetch better revenues than the
test matches which happened in 3QF11)
Valuation and Price Target
To calculate our price target, we use a DCF model with an
explicit phase of seven years and a terminal growth rate of 4%.
These assumptions are unchanged. We push up our WACC
from 11.8% to 12.45% as we increase our risk-free rate from
7.5% to 7.86% and risk premium from 6% to 6.5%.
The key changes behind the decrease to our DCF valuation
are: increase in programming costs, as explained in the
earnings section, which implies an EBITDA margin reduction
from 30%-33% to 24-27% for F11-F13. This is mitigated by the
increase in our F14 and F15 estimates.
Exhibit 9
ZEE: DCF Calculation: Price Target: Rs141
(A) Present value of the explicit phase 27,510
Terminal value 101,626
Terminal growth rate (%) 4
(B) Present value of the terminal value 98,690
(A+B) Total present value 126,201
Net present value ( One year from now) 127,618
Net debt (10,632)
Equity Value Rs mn 138,250
Shares (m) 982
Implied DCF value per share (Rs) 141
Source: Morgan Stanley Research estimates
Exhibit 10
ZEEL: WACC Calculation
Risk Free Return (Rf) (%) 7.9
Market Premium (Rm-Rf) () 6.5
Assumed Beta 0.93
Cost of Equity (Re) () 13.9
Equity () 80
Cost of Debt (Rd) () 10.0
Tax rate () 33.0
After-tax cost of debt (Rd [1-t]) () 6.7
Debt () 20
WACC () 12.4
Source: Morgan Stanley Research estimates
ZEE TV’s channels Ten Sports, Ten Action and Ten Cricket
along with ZEE sports have a prime market share of the sports
genre. However, revenues for the properties have not been as
anticipated by the management. Management continues to
believe that sports genre has a long term potential though we
assume that in next two years it will continue to make losses,
albeit substantially lower than in F11 ( and substantially higher
than in F10).
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