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Zee Entertainment
Time for commercial break
Event
 We downgrade Zee to Neutral from Outperform as the stock has limited
upside risks at these levels and we could see a potential earnings cut from (a)
a slowdown in domestic growth and (b) a negative surprise in the Sports
segment over the next 3-6 months. We would wait for better entry points to
play the secular growth in the Hindi GEC genre.
Impact
 Sports losses could resurface in 1Q. Our analysis of the Sports calendar
leads us to conclude that Sports could continue to remain a painful point for
Zee even in the current fiscal. After registering a Rs2bn loss in the segment in
FY11, the company has guided to cap its Sports losses to Rs800m-1bn in
FY12. We see upside risk to this estimate and could see an upward revision
as early as the next quarterly result in July.
 Renewal of Sports rights could delay return to shareholders. Its also
worth flagging that 3 out of 5 cricket board TV broadcasting rights held by Zee
are coming up for renewal in 2012. Any escalation in the costs to bid for these
would be a drag on the free cash flow. Estimated cost of the broadcasting
rights of different cricket boards is tabulated in Figure 1.
 Slowdown fears could hurt advertising growth prospects. We are building
in 15% advertising growth for Zee in FY12. Different industry surveys have
estimated the TV advertising pie growing at 15-20% in CY11. If we were to
adjust for the Cricket World Cup that takes place in February 2011, we do not
see more than 15% growth for TV broadcasters. This growth could also be at
risk if the domestic growth story is derailed.
 Valuation not attractive despite raise in EPS forecast. Zee had done a
commendable job to cap sports segment losses in 4Q FY11 but we have limited
clarity from management on the outlook of this segment. We have raised our
margin forecast by 100bp for FY12 and raise our EPS and TP by 8-9%. Even
so, we think the stock is richly valued at 21x FY12E for 14% earnings growth.
Earnings and target price revision
 Our new EPS is Rs6.6 for FY12 and Rs7.6 for FY13. Our revised TP is Rs135
(vs. Rs128 previously). See Fig 10 for summary of changes.
Price catalyst
 12-month price target: Rs135.00 based on a DCF methodology.
 Catalyst: Lower losses in the sports segment and an uptick in advertising rates
Action and recommendation
 Downgrade to Neutral. We stick to our positive thesis on the performance of
Hindi GEC at Zee. Even so, we believe the recent share price appreciation
and lack of further catalysts means its better to wait on the sidelines for a
better entry point. Also, we fear another washout quarter like 3Q FY11 could
again reset earnings estimates for Zee.