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Zee Entertainment Enterprises (ZEEL)
Media
Surprisingly zesty. Zee reported surprisingly strong 4QFY11 EBIT at Rs2.2 bn, much
ahead of our Rs1.65 bn expectation, led by both (1) lower-than-expected Rs152 mn
losses in sports business as well as (2) higher-than-expected Rs2.35 bn operating profits
from core entertainment business (despite seasonally weak quarter and impact of World
Cup 2011 on advertising revenues). Reiterate ADD with revised TP of Rs145 (Rs130
previously) given supportive 17X FY2012E core earnings; however, quarterly financials
may remain volatile led by (1) likely pressure on core entertainment business margins
and (2) losses in sports business (FY2012E guidance of ~Rs1 bn).
4QFY11 results analysis: Surprisingly zesty but financials likely to be volatile in the near term
Zee reported strong financial performance with 4QFY11 EBIT of Rs2.2 bn turning out to be
much ahead of our Rs1.65 bn estimate. The surprisingly strong performance was led by both
the two key Zee TV verticals: (1) Lower-than-expected losses from sports business and (2)
higher-than-expected operating profits from core entertainment business (see Exhibit 1).
Zee reported sharp decline in operating losses from the sports business at Rs152 mn versus
Rs1.03 bn (excluding extraordinary gains of Rs700 mn) in 3QFY11 and our Rs300 mn
expectation. The company noted sharp revenue gains on the advertising (changed mix of sports
content – more ODI than test matches) and subscription (revenue traction in new channel Ten
Cricket) as the key drivers behind the sharp turnaround.
However, the robust sports business performance in 4QFY11 was also due to accounting
mismatch between revenues and costs, in our view. Zee books costs based on number of
days of cricket while revenues are booked on actual realizations. Thus, revenues derived
from test matches would be lower versus cost expensed and vice-versa for ODI/T20 matches,
resulting in significant volatility in reported financials.
The revenue-cost mismatch is further accentuated by the observation that the company did
not book any syndication revenues in 4QFY11 (other income declined 77% qoq to Rs76 mn);
sports business revenues increased a sharp 48% qoq nonetheless.
The company has guided for sports business losses of Rs0.8-1.0 bn for FY2012E. However,
we continue to expect volatility in sports business performance given sports business revenue
profile remain erratic even if cost structure is manageable. The India-West Indies cricket
series in 1Q-2QFY12E follows ICC CWC 2011 and an expanded IPL Season 4; viewer as well
as advertiser demand may largely be satiated by this time.
Zee reported robust core entertainment business financials with flat qoq revenue growth
(versus our expectation of 6% qoq decline) and 6% qoq decline in operating income
(21% ahead of expectations). Zee core business operating margin at 36%, though below
peak 40% margin in 2QFY11, was still strong given seasonally weak 4Q and potential
impact of CWC 2011 on advertising revenues.
We believe advertising revenues of Zee may not have been as negatively impacted
due to the robust ratings performance of Zee TV as well as Zee’s regional channels.
Exhibits 3-8 present the upswing in ratings of flagship Zee TV and Zee Kannada and
stable rating performance of other key channels.
Additionally, core business revenues and margins were likely supported by flagship
events showcased during this quarter, notably Zee Cine Awards 2011 on Zee TV and
Zee Gaurav Puraskar 2011 on Zee Marathi.
Finally, core entertainment business revenues were likely supported by continued
growth in DTH subscription revenues, negating the decline in advertising revenues
on account of seasonal weakness (4Q) and CWC 2011. However, margins continued
to decline highlighting media cost inflation.
We continue to expect pressure on margins of core entertainment business given
rising competitive intensity and media cost inflation. However, we do not adversely
view rising content investments by Zee TV (even though they may deliver significantly
lower margins versus primetime content), since they are likely to have positive
absolute contribution; we discuss this point in detail later.
In consolidated financials, stronger-than-expected advertising and subscription revenues
were largely on account of sports business. As discussed previously, advertising revenues
from the sports business witnessed sharp growth due to India-SA ODI/T20 matches
during 4QFY11. Subscription revenues increased due to traction in Ten Cricket channel,
which found carriage on cable as well as DTH networks in 4QFY11; the revenues are
recurring though 10% qoq growth is not sustainable.
The company noted limited impact of the recent Supreme Court ruling, which has
capped the payout to C&S broadcasters by DTH operators at 42% of analog cable
rates versus 50% previously. The company noted effective DTH realization of ~Rs20
(versus 50% cap rate of Rs26) and majority of content deals on contractual basis,
which have been left untouched by the SC order.
4QFY11 content and programming costs declined 10% qoq also on account of sports
business. Sports business costs were down 21% qoq to Rs1.58 bn as Ten Cricket
showcased less amount of non-India cricket (India cricket days were flat qoq) and lack of
start-up expenses of Ten Cricket (expensed in 3QFY11).
4QFY11 employee costs increased 20% yoy and qoq on account of year-end incentives
paid to employees. More important, 4QFY11 SG&A expenses declined 15% yoy and 1%
qoq to Rs1.16 bn; we also highlight modest 6% yoy increase in SG&A costs for FY2011
despite inclusion of 5 regional GEC channels (from sister company ZEEN) for the whole of
FY2011 versus only one quarter in FY2010 (4QFY10).
Exhibit 11 presents the consolidated balance sheet of Zee for FY2011 and FY2010;
we highlight that the debtor days have increased significantly in FY2011 (122 days).
The company seems to have taken limited provisions for bad and doubtful debts,
which is the norm for media companies in 4Q.
Finally, 4QFY11 subsidiary financials provide for a challenging analysis (see Exhibit 12).
Zee standalone financial position has deteriorated considerably with EBITDA margins
declining to 21.6% while Zee ‘rest’ margins increased sharply to 53.1%. The company
noted the shift of certain content costs associated with sports business (Ten Cricket is a
division of Zee and not part of any subsidiary) to Zee standalone. However, revenue
booking in the subsidiaries seems to continue.
Additionally, Zee reported consolidated tax rate of ~21% in 4QFY11. The company
noted tax benefits on account of various M&A transaction consummated in FY2011
and has guided for 31-32% effective tax rate for future years. However, the tax
benefits seem to be accruing to subsidiaries versus the Zee standalone (~35%
effective rate), which was central to most of the M&A activity.
Earnings, valuations and investment rational
Exhibit 13 presents the revised earnings and valuations of Zee Entertainment, consolidated
as well as breakdown into sports and core entertainment business. We have revised Zee’s
FY2012E and FY2013E earnings to Rs7.0 (Rs6.4 previously) and Rs8.1 (Rs7.8 previously) on
account of the following factors: (1) Lower-than-previously-expected operating losses in the
sports business, (2) higher-than-expected advertising and subscription revenue growth (due
to strong traction in DTH subscriber volumes) and (3) relatively robust core entertainment
business margins driven by focus on cost control. However, we still factor in (1) ~Rs1.2 bn
losses in sports business in FY2011E (FY2014E breakeven), (2) ~100 bps margin decline in
core entertainment business in FY2012E-13E and (3) high debtor days as well as SG&A cost
inflation to adjusted for concerns discussed previously.
Our 12-month forward DCF-based valuation stands increased to Rs145 (Rs130 previously) on
account of changes discussed above as well as DCF roll-forward. We reiterate our positive
view on Zee on account of continued robust traction in core entertainment business (as
reflected in ratings performance of channels in a challenging 4QFY11 due to viewership shift
to cricket – ICC CWC 2011); valuations at 17X FY2012E core business earnings also remain
supportive. However, we expect bumps on the road to relative stability in 2HFY12E on
account of (1) volatility in sports business financials and (2) potential step changes to core
entertainment margins due to competitive and media cost inflation pressures. Finally, we
positively view Zee’s commitment to increased content investment post-IPL; though optically
margin dilutive, more original programming will add to absolute operating income of Zee,
assuming the new programs are ratings accretive.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Zee Entertainment Enterprises (ZEEL)
Media
Surprisingly zesty. Zee reported surprisingly strong 4QFY11 EBIT at Rs2.2 bn, much
ahead of our Rs1.65 bn expectation, led by both (1) lower-than-expected Rs152 mn
losses in sports business as well as (2) higher-than-expected Rs2.35 bn operating profits
from core entertainment business (despite seasonally weak quarter and impact of World
Cup 2011 on advertising revenues). Reiterate ADD with revised TP of Rs145 (Rs130
previously) given supportive 17X FY2012E core earnings; however, quarterly financials
may remain volatile led by (1) likely pressure on core entertainment business margins
and (2) losses in sports business (FY2012E guidance of ~Rs1 bn).
4QFY11 results analysis: Surprisingly zesty but financials likely to be volatile in the near term
Zee reported strong financial performance with 4QFY11 EBIT of Rs2.2 bn turning out to be
much ahead of our Rs1.65 bn estimate. The surprisingly strong performance was led by both
the two key Zee TV verticals: (1) Lower-than-expected losses from sports business and (2)
higher-than-expected operating profits from core entertainment business (see Exhibit 1).
Zee reported sharp decline in operating losses from the sports business at Rs152 mn versus
Rs1.03 bn (excluding extraordinary gains of Rs700 mn) in 3QFY11 and our Rs300 mn
expectation. The company noted sharp revenue gains on the advertising (changed mix of sports
content – more ODI than test matches) and subscription (revenue traction in new channel Ten
Cricket) as the key drivers behind the sharp turnaround.
However, the robust sports business performance in 4QFY11 was also due to accounting
mismatch between revenues and costs, in our view. Zee books costs based on number of
days of cricket while revenues are booked on actual realizations. Thus, revenues derived
from test matches would be lower versus cost expensed and vice-versa for ODI/T20 matches,
resulting in significant volatility in reported financials.
The revenue-cost mismatch is further accentuated by the observation that the company did
not book any syndication revenues in 4QFY11 (other income declined 77% qoq to Rs76 mn);
sports business revenues increased a sharp 48% qoq nonetheless.
The company has guided for sports business losses of Rs0.8-1.0 bn for FY2012E. However,
we continue to expect volatility in sports business performance given sports business revenue
profile remain erratic even if cost structure is manageable. The India-West Indies cricket
series in 1Q-2QFY12E follows ICC CWC 2011 and an expanded IPL Season 4; viewer as well
as advertiser demand may largely be satiated by this time.
Zee reported robust core entertainment business financials with flat qoq revenue growth
(versus our expectation of 6% qoq decline) and 6% qoq decline in operating income
(21% ahead of expectations). Zee core business operating margin at 36%, though below
peak 40% margin in 2QFY11, was still strong given seasonally weak 4Q and potential
impact of CWC 2011 on advertising revenues.
We believe advertising revenues of Zee may not have been as negatively impacted
due to the robust ratings performance of Zee TV as well as Zee’s regional channels.
Exhibits 3-8 present the upswing in ratings of flagship Zee TV and Zee Kannada and
stable rating performance of other key channels.
Additionally, core business revenues and margins were likely supported by flagship
events showcased during this quarter, notably Zee Cine Awards 2011 on Zee TV and
Zee Gaurav Puraskar 2011 on Zee Marathi.
Finally, core entertainment business revenues were likely supported by continued
growth in DTH subscription revenues, negating the decline in advertising revenues
on account of seasonal weakness (4Q) and CWC 2011. However, margins continued
to decline highlighting media cost inflation.
We continue to expect pressure on margins of core entertainment business given
rising competitive intensity and media cost inflation. However, we do not adversely
view rising content investments by Zee TV (even though they may deliver significantly
lower margins versus primetime content), since they are likely to have positive
absolute contribution; we discuss this point in detail later.
In consolidated financials, stronger-than-expected advertising and subscription revenues
were largely on account of sports business. As discussed previously, advertising revenues
from the sports business witnessed sharp growth due to India-SA ODI/T20 matches
during 4QFY11. Subscription revenues increased due to traction in Ten Cricket channel,
which found carriage on cable as well as DTH networks in 4QFY11; the revenues are
recurring though 10% qoq growth is not sustainable.
The company noted limited impact of the recent Supreme Court ruling, which has
capped the payout to C&S broadcasters by DTH operators at 42% of analog cable
rates versus 50% previously. The company noted effective DTH realization of ~Rs20
(versus 50% cap rate of Rs26) and majority of content deals on contractual basis,
which have been left untouched by the SC order.
4QFY11 content and programming costs declined 10% qoq also on account of sports
business. Sports business costs were down 21% qoq to Rs1.58 bn as Ten Cricket
showcased less amount of non-India cricket (India cricket days were flat qoq) and lack of
start-up expenses of Ten Cricket (expensed in 3QFY11).
4QFY11 employee costs increased 20% yoy and qoq on account of year-end incentives
paid to employees. More important, 4QFY11 SG&A expenses declined 15% yoy and 1%
qoq to Rs1.16 bn; we also highlight modest 6% yoy increase in SG&A costs for FY2011
despite inclusion of 5 regional GEC channels (from sister company ZEEN) for the whole of
FY2011 versus only one quarter in FY2010 (4QFY10).
Exhibit 11 presents the consolidated balance sheet of Zee for FY2011 and FY2010;
we highlight that the debtor days have increased significantly in FY2011 (122 days).
The company seems to have taken limited provisions for bad and doubtful debts,
which is the norm for media companies in 4Q.
Finally, 4QFY11 subsidiary financials provide for a challenging analysis (see Exhibit 12).
Zee standalone financial position has deteriorated considerably with EBITDA margins
declining to 21.6% while Zee ‘rest’ margins increased sharply to 53.1%. The company
noted the shift of certain content costs associated with sports business (Ten Cricket is a
division of Zee and not part of any subsidiary) to Zee standalone. However, revenue
booking in the subsidiaries seems to continue.
Additionally, Zee reported consolidated tax rate of ~21% in 4QFY11. The company
noted tax benefits on account of various M&A transaction consummated in FY2011
and has guided for 31-32% effective tax rate for future years. However, the tax
benefits seem to be accruing to subsidiaries versus the Zee standalone (~35%
effective rate), which was central to most of the M&A activity.
Earnings, valuations and investment rational
Exhibit 13 presents the revised earnings and valuations of Zee Entertainment, consolidated
as well as breakdown into sports and core entertainment business. We have revised Zee’s
FY2012E and FY2013E earnings to Rs7.0 (Rs6.4 previously) and Rs8.1 (Rs7.8 previously) on
account of the following factors: (1) Lower-than-previously-expected operating losses in the
sports business, (2) higher-than-expected advertising and subscription revenue growth (due
to strong traction in DTH subscriber volumes) and (3) relatively robust core entertainment
business margins driven by focus on cost control. However, we still factor in (1) ~Rs1.2 bn
losses in sports business in FY2011E (FY2014E breakeven), (2) ~100 bps margin decline in
core entertainment business in FY2012E-13E and (3) high debtor days as well as SG&A cost
inflation to adjusted for concerns discussed previously.
Our 12-month forward DCF-based valuation stands increased to Rs145 (Rs130 previously) on
account of changes discussed above as well as DCF roll-forward. We reiterate our positive
view on Zee on account of continued robust traction in core entertainment business (as
reflected in ratings performance of channels in a challenging 4QFY11 due to viewership shift
to cricket – ICC CWC 2011); valuations at 17X FY2012E core business earnings also remain
supportive. However, we expect bumps on the road to relative stability in 2HFY12E on
account of (1) volatility in sports business financials and (2) potential step changes to core
entertainment margins due to competitive and media cost inflation pressures. Finally, we
positively view Zee’s commitment to increased content investment post-IPL; though optically
margin dilutive, more original programming will add to absolute operating income of Zee,
assuming the new programs are ratings accretive.
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