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Zee Entertainment Enterprises (Z)
Media
FY2011 annual report analysis . The Zee stock has corrected lately on account of (1)
weak advertising revenue market in India (cyclicality) and (2) weak ratings in flagship
channel, Zee TV (volatility led by uptick in Sony TV). Our investment rational is driven by
robust free cash flow generation (Rs4.8 bn and Rs4.9/share in FY2011, net cash of
Rs12.7 bn and Rs13.0/share) in the large, well-diversified Zee bouquet. The Zee stock
trades at 15X FY2013E EPS for 20% earnings CAGR between FY2012E and FY2014E
(20X FY2011 EV/FCFF). Reiterate BUY with FY2013E DCF-based TP of Rs160 (Rs180
previously).
Advertising cyclicality and ratings volatility play spoilsport in the near term
The Zee stock has corrected lately (13% decline in the past 1 month, 3% underperformance
versus the BSE-30 Index) largely on account of two factors: (1) Weak advertising revenue market in
India currently (FMCG advertising) and (2) weak ratings in the flagship Hindi GE channel, Zee TV.
The former is a characteristic feature of advertising spends (cyclicality) led by rising interest rate
and likely weak economy in FY2012E and expected to reverse in FY2013E. The latter is driven by
inter-segment competition led by Sony TV (volatility); weak ratings performance will hurt but Zee
may also revamp its underperforming content. Our revised FY2012E-13E EPS estimates at Rs6.2
(Rs6.7 previously) and Rs7.7 (Rs8.2) factor in ~3% advertising growth in FY2012E.
Industry and operational drivers remain intact; valuations remain attractive
Zee continues to benefit from robust long-term industry and operational drivers: (1) Advertising
growth prospects (high competitive intensity in upstream advertising categories such as FMCG,
Auto and BFSI; robust growth in SME advertising), (2) structural impact of advertising overhangs
(Colors, IPL) behind us, (3) continued robust growth in DTH segment in India incrementally adding
to subscription revenues of large Zee bouquet and (4) Zee-Star channel distribution JV likely to
deliver improved subscription revenues from cable. The acquisition of regional channels has
reduced Zee Network’s dependence on Zee TV channel. Finally, mandatory digitization envisaged
by the government of India (timing and implementation are uncertain) could be significantly valueaccretive.
Reiterate BUY with FY2013E TP of Rs160 (Rs180 previously).
FY2011 annual report provides comfort on cash flows; other clarifications
Exhibit 15 presents the summary of Zee’s FY2011 annual report. We highlight robust free cash
flow generation of Rs4.8 bn (Rs4.9/share) in FY2011 (including acquisition of incremental 45%
stake in Ten Sports), which is a characteristic feature of a large, well-diversified broadcasting
bouquet (such as Zee). With the reduction in ICDs to sister companies such as Dish TV and WWIL
between FY2009 and FY2011, the net cash balance at end-FY2011 stood at Rs12.7 bn (Rs3.9 bn
cash and equivalents + Rs6.3 bn liquid investments + Rs2.5 bn loans to third parties), to be partly
deployed in dividend payout (Rs2.3 bn) and share buyback (Rs7.0 bn) in FY2012E. The Zee stock is
trading at 15X FY2013E EPS for 20% earnings CAGR between FY2012E and FY2014E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Zee Entertainment Enterprises (Z)
Media
FY2011 annual report analysis . The Zee stock has corrected lately on account of (1)
weak advertising revenue market in India (cyclicality) and (2) weak ratings in flagship
channel, Zee TV (volatility led by uptick in Sony TV). Our investment rational is driven by
robust free cash flow generation (Rs4.8 bn and Rs4.9/share in FY2011, net cash of
Rs12.7 bn and Rs13.0/share) in the large, well-diversified Zee bouquet. The Zee stock
trades at 15X FY2013E EPS for 20% earnings CAGR between FY2012E and FY2014E
(20X FY2011 EV/FCFF). Reiterate BUY with FY2013E DCF-based TP of Rs160 (Rs180
previously).
Advertising cyclicality and ratings volatility play spoilsport in the near term
The Zee stock has corrected lately (13% decline in the past 1 month, 3% underperformance
versus the BSE-30 Index) largely on account of two factors: (1) Weak advertising revenue market in
India currently (FMCG advertising) and (2) weak ratings in the flagship Hindi GE channel, Zee TV.
The former is a characteristic feature of advertising spends (cyclicality) led by rising interest rate
and likely weak economy in FY2012E and expected to reverse in FY2013E. The latter is driven by
inter-segment competition led by Sony TV (volatility); weak ratings performance will hurt but Zee
may also revamp its underperforming content. Our revised FY2012E-13E EPS estimates at Rs6.2
(Rs6.7 previously) and Rs7.7 (Rs8.2) factor in ~3% advertising growth in FY2012E.
Industry and operational drivers remain intact; valuations remain attractive
Zee continues to benefit from robust long-term industry and operational drivers: (1) Advertising
growth prospects (high competitive intensity in upstream advertising categories such as FMCG,
Auto and BFSI; robust growth in SME advertising), (2) structural impact of advertising overhangs
(Colors, IPL) behind us, (3) continued robust growth in DTH segment in India incrementally adding
to subscription revenues of large Zee bouquet and (4) Zee-Star channel distribution JV likely to
deliver improved subscription revenues from cable. The acquisition of regional channels has
reduced Zee Network’s dependence on Zee TV channel. Finally, mandatory digitization envisaged
by the government of India (timing and implementation are uncertain) could be significantly valueaccretive.
Reiterate BUY with FY2013E TP of Rs160 (Rs180 previously).
FY2011 annual report provides comfort on cash flows; other clarifications
Exhibit 15 presents the summary of Zee’s FY2011 annual report. We highlight robust free cash
flow generation of Rs4.8 bn (Rs4.9/share) in FY2011 (including acquisition of incremental 45%
stake in Ten Sports), which is a characteristic feature of a large, well-diversified broadcasting
bouquet (such as Zee). With the reduction in ICDs to sister companies such as Dish TV and WWIL
between FY2009 and FY2011, the net cash balance at end-FY2011 stood at Rs12.7 bn (Rs3.9 bn
cash and equivalents + Rs6.3 bn liquid investments + Rs2.5 bn loans to third parties), to be partly
deployed in dividend payout (Rs2.3 bn) and share buyback (Rs7.0 bn) in FY2012E. The Zee stock is
trading at 15X FY2013E EPS for 20% earnings CAGR between FY2012E and FY2014E.
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