Positives priced in
We maintain Hold rating on ZEEL and believe ad revenue would be under pressure
in the near term on the back of company cutting its ad inventory while higher
sports losses on account of India-SA series would impact margins. While
curtailment of matches for the series and market share gain could be positives for
the company, 19% increase in stock price in the past one month captures all the
positives. In Q2FY14 results, lower sports losses and strong yield improvement
across channels led to healthy growth of 10.5% YoY in ads and 42.7% in operating
profit while non-sports margins were at 34.9% despite two new channel launches.
Subscription revenues continued to grow.
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We maintain Hold rating on ZEEL and believe ad revenue would be under pressure
in the near term on the back of company cutting its ad inventory while higher
sports losses on account of India-SA series would impact margins. While
curtailment of matches for the series and market share gain could be positives for
the company, 19% increase in stock price in the past one month captures all the
positives. In Q2FY14 results, lower sports losses and strong yield improvement
across channels led to healthy growth of 10.5% YoY in ads and 42.7% in operating
profit while non-sports margins were at 34.9% despite two new channel launches.
Subscription revenues continued to grow.
Q2FY14 results above expectations: The company posted a healthy 15.5% YoY
growth in revenues on the back of 10.5%YoY growth (7% expectations) in
advertisement revenues and higher subscription revenues of 19.2%YoY. The 96.4%
YoY growth in other sales & services was the key factor which led to the variance of
5.4% against expectations. Operating profit was up 42.7% on the back of 34.9%
non-sports margins and mere Rs191mn loss in the sports business. PAT was up
25.9% YoY to Rs2,363mn due to healthy operating performance and high other
income (Rs150mn forex gain).
Ad growth continues to surprise positively: Strong growth in regional channels on
the back of higher yields, increase in pricing for GEC channel on the back of higher
impact programmes during the quarter and festive season demand led to a surprising
~20%+ non-sports advertisement growth during the quarter. Sectors such as FMCG,
auto and consumer durables posted healthy growth against BFSI, DTH and telecom
sectors which were laggards. Ad rate hike on the back of TRAI regulation has not
flown into the system despite the company reducing its ad inventory. We believe ad
growth could get impacted going forward.
Margins to compress going forward: Higher sports losses due to the India-South
Africa series in H2FY14, inventory cut on the back of TRAI regulation and increasing
investments in new channels will impact margin in H2FY14. With guidance of ~15%
growth (22.7% in H1FY14) in subscription revenues for FY14E, we do not expect
significant operating leverage to kick-in for H2FY14 impacting margins.
Valuations & Risks: We marginally increase our ad growth assumptions for FY14
coupled with higher operating margins. We believe the 19% increase in the stock
price in the last 1 month has captured all the upsides and hence we maintain our
Hold rating on the stock with a revised target price of Rs280 (25x Sept 2015). We
believe ad revenue will be under pressure in the near term due to the company
cutting its ad inventory while higher sports losses from the India-SA series will
impact margins. Key upside could be the curtailment of India-SA series leading to
lower losses and significant market share gain across channels leading to ad yield
improvement.
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