Updates from Management interaction – Upgrade to BUY from ADD
Advertising revenues: While overall ad environment continues to be weak, TV broadcasting is faring better than other mediums , higher spends from FMCG being the major driver. ZEEL’s cause is also helped by the drastic improvement in ratings of Zee TV that shall help it outperform peer group on ad revenue growth in FY13. Management guided that the ad revenue growth rate for non sports business has tapered in 2Q (from the high 18% yoy in 1Q) which could be due to advertisers conserving budgets for spend in festive season (3Q). Going by the trends, we see ZEEL’s non sports business ad revenue growing by 10-12% in 2Q and ~ 12% in FY13.
Quantum of loss in sports business: India centric cricket continues to be a loss making proposition for ZEEL due to the high cost of rights, though important to retain relevance for a sports channel in India. The India-Sri Lanka ODI cricket series in July-Aug’12 should lead to higher losses in the sports biz in 2Q. Doordarshan opting not to air the series with preference for the Olympics meant loss of revenues for the cricket event further impacting its profitability. Higher sports losses shall thus impact overall earnings performance for 2Q. However, this being the only India cricket broadcast for the year management guides for lower losses in the sports business in FY13 Vs Rs1.48bn loss in FY12. We see losses of ~Rs1.2bn in FY13.
Subscription revenues: Digitization remains a key trigger for domestic subscription revenues (potential to triple) of broadcasters including ZEEL over the next 3-4years along with reduction in carriage and placement costs. Given the strength of Mediapro, management guided that the ongoing contract renewals with MSO’s/ DTH should yield good traction. We expect domestic subscription increase ~20% in FY13. While international subscription has matured, yoy growth is driven by a weak rupee.
Programming costs: Competitive intensity/ content spends have been on the rise across most genres. With key players in Hindi and Regional GEC’s upping the ante in terms of hours of fresh content as also spending more on quality of content ZEEL has also mirrored the same. Content focus has in recent months reflected in far improved ratings for Zee TV and helped sustain viewership share in other genres. Zee TV’s prime time reality shows DID, Fear files and fiction series as Pavitra Rishta have tasted good viewer acceptance leading to it regaining its position amongst the top 3 channels in the genre. However, given the intense competition for eyeballs that is seen in terms of forthcoming new programs both in reality/ fiction from competitors especially Sony, Colors, Star Plus; Zee sticks to its target of increasing original programming hours to 34 per week from 26 earlier. Also similar efforts are planned in case of regional GECs. While the prices of satellite rights of Hindi movies continue to be high, ZEEL management maintains movie acquisition budgets at ~Rs1.5-2bn for FY13 against ~Rs3.3bn in FY12. Company recently acquired rights for movies Joker, Barfi and Heroine. Targeting better viewership in Tamil GEC genre company has started increasing spends on fiction programming/ movies and has plans to gradually keep increasing original content. Apart from these, the addition of new channels Ten Golf, Zee Alvan, four HD channels and digital initiatives are seen leading to an increase in programming cost by ~15% yoy.
Views & Valuation: While improved ratings and lower losses in sports biz should help put up a good show in near term we see ZEEL having potential to deliver an earnings CAGR of ~28% from FY12-16E led by jump in subscription on digitization. Thus to us is must hold in a portfolio. ZEEL being the best play on digitization and a decent visibility of continuous strong earnings traction over the next 3-4 years we raise our one year (Sep’13) target price to Rs206 (24x FY14E i.e. ~18x FY15E). Upgrade to BUY from ADD.
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