Zee Entertainment Enterprises (Z IN, INR 154, Buy)
Most investors are still grappling with ZEE’s 18% YoY ad growth in Q1FY13 and want to know if this is a one-off. The ad growth looks particularly impressive in the backdrop of most print companies posting negative to low single digit ad growth (DB Corp: -0.6%, HT Media: -3% and HMVL: 6%). An improvement in market share has been critical for ZEE, especially in lieu of the recent downgrade in TV ad growth forecast to 5.6% YoY in 2012 by GroupM. Our analysis of declared Q1FY13 results of three consumer companies (HUL, Dabur and Colgate) suggests that on a combined basis, these companies have hiked ad spends by a massive 33.6% YoY. Overall media intensity for FMCG has increased from an indexed base of 103 in Q4FY12 to 107 in Q1FY13 due to expansion in gross margins. Because FMCG contributes ~53% to ZEE’s ad revenues, its ad growth appears sustainable. Also, ZEE will be one of the safest and most attractive stocks to play the digitisation theme. Maintain ‘BUY’.
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Ad revenue growth reflects better ratings, FMCG tussle
We attempt to analyze reasons for ZEE’s strong ad growth as three Consumer companies have reported Q1FY13 results so far. We present the findings:
· HUL, Dabur and Colgate account for ~46% of FMCG ad spends in our coverage universe. FMCG category contributes ~53% of total TV ad revenues.
· On a combined basis for the three, ad spends grew by ~33.6% YoY.
Outlook and valuations: Positive; maintain ‘BUY’
Sturdy free cash flow generation, ~INR12bn in net cash, minimal debt, secular growth and increasing payout earn ZEE an unequivocal place among the best stocks to own in the defensive space. We have a TP of INR166 from a one year perspective (2-year target of INR244). At CMP of INR154, the stock is trading at P/E of 22.2x and 18.8x FY13E and FY14E earnings respectively. Maintain ‘BUY/Sector Outperformer’.
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