Sturdy free cash flow generation, ~INR10bn net cash, minimal debt, secular growth story, two buy-back offers in past few quarters and a stable dividend policy earn ZEE Entertainment (ZEE) an unequivocal place among the best stocks to own in the defensive space. Irrespective of the winner amongst DTH or cable operators, it will be one of the safest and most attractive stocks to play the digitisation theme. With 600bps surge likely in ROE post digitisation, we expect ZEE to re-rate. Our analysis indicates an NPV/share of ~INR73 from mandatory digitisation in spite of considering delays, even though most of the stakeholders are serious on digitisation this time around. Despite conservative estimates, we expect ~80% upside over a two-year timeframe (TP: INR244). Maintain ‘BUY’.
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Humungous untapped potential
A huge under-declared subscriber base of ~75mn (likely to come under its ambit post digitisation) and MediaPro (JV with Star) entail humungous potential for ZEE. Zee TV’s viewership rating is near its one-year high, which bodes well for fresh ad deals.
Overseas investments, sports, HD could reap rich dividends
ZEE is investing in international businesses, which could accelerate overseas revenues over the long term. Even though loss in sports division has often been considered a bane for ZEE, sports channels and HD will aid ARPU growth for ZEE over longer term.
Most negatives already factored in
Current valuations already factor in the key risks/concerns like (a) delay in digitisation; (b) loss of viewership ratings; (c) sports losses.
Outlook and valuations: Future beaming; maintain ‘BUY’
ZEE is one of our top picks in the media and we have a TP of INR166 from one year perspective. At CMP of INR136, the stock is trading at P/E of 19.4x and 16.5x FY13E and FY14E earnings, respectively. We maintain ‘BUY/Sector Outperformer’.
Regards,
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