Zee Entertainment 1Q: Story playing out :: Macquarie Research,

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Zee Entertainment
1Q: Story playing out
Event
 We retain our cautious view on Zee post the 1Q results and would closely
monitor the advertising revenue trends in the space. Our downgrade of the
stock in early June was based on a potential earnings cut from lower ad
growth and potential surprise in sports losses. Both the factors have played
out in 1Q. Even so, the downside support from the announced share buyback
implies to us that we would need to wait longer for attractive entry point.
Impact
 One-off in the quarter aggravated margin miss. Zee undertook a branding
exercise during the quarter that resulted in a Rs210m cost being booked on
the S&D line in the P&L. Adjusted for that, the company would have delivered
an EBITDA margin of 25.3% (vs. reported margin of 22.3%). We expect
margins to be back at 26% starting next quarter.
 Flat ad revenues: Economic slowdown or loss of share?  The biggest
disappointment in the quarter was flat YoY growth in advertising revenues for
the company. Management expects the full year FY12 ad growth to be in the
region of 8-10% (vs. 12-13% earlier) and maintained that there is no impact to
ad revenues from competition in the Hindi GEC space. Our analysis of the
viewership ratings for the past three quarters indicates that the negative
surprise can partly be attributed to competition in the regional GEC space. We
have cut back our FY12 ad growth est. to 8% (vs. 15% earlier).
 Subscription trends broadly on track. The growth in DTH revenues
remained healthy at 13% QoQ but overall subscription revenue was muted as
pain in the international markets, especially Europe, continues. We do not
expect international business to contribute to growth in FY12.
 Buyback details. Zee has announced a buyback of Rs7bn at a maximum
stock price of Rs126. In its earnings release, the company has disclosed that
it expects to commence the buyback tentatively from July 27.
Earnings and target price revision
 Following 1Q results and a tepid advertising outlook provided by
management, we have cut our FY12/FY13 EPS by 9%/7%. Our revised TP is
Rs130 (vs Rs135 earlier).
Price catalyst
 12-month price target: Rs130.00 based on a DCF methodology.
 Catalyst: Uptick in ad revenues, improved profitability of Sports segment
Action and recommendation
 Remain cautious. We would closely monitor the ad revenues trend across
the TV broadcasting space to ascertain the future outlook. The buyback would
provide downside support to the stock but a lack of earnings upgrades would
keep upside capped, in our view