Ad growth stays subdued, investments to continue • Zee :: ICICI Securities, PDF link

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Ad growth stays subdued, investments to continue
• Zee reported 1.5% YoY revenue growth at | 1117.8 crore (vs.
estimated | 1145.8 crore) due to 7.3% de-growth in subscription
revenues to | 424.5 crore vs. 1.8% expected growth. Subscription
revenues would have grown 5.2% YoY but for the | 58 crore
exceptional impact in the quarter
• EBITDA came in at | 320.5 crore vs. estimate of | 292.2 crore, up
3.2% YoY due to lower-than-expected other operational costs and
administrative expenses. This led to an EBITDA margin expansion to
28.7% vs. our expectation of 25.5%
• PAT came in at | 227.6 crore. The higher-than-expected PAT was on
account of better operating performance and higher other income
Strong bouquet of ~38 channels, launching new channels
Zee Entertainment, one of the leading media conglomerates with a
bouquet of ~ 38 channels has a presence across genres ranging from
general entertainment (GEC) to music, sports and regional. Zee TV, its
flagship GEC, has a viewership share of ~17%, and has consistently
remained second or very close third in the space in last two years. The
company has benefited from improved rating and higher-than-industry
advertisement growth (22.6% over FY12-14 to | 2380.0 crore), on the
back of a strategy shift in favour of higher investment in content (both
movies, fiction). Going ahead, led by a further step up in investments into
programming, we expect advertisement revenue of Zee Entertainment to
grow at a CAGR of 14.0% over FY14-16E to | 3092.1 crore. Though
content investment remains high and Zee TV may continue to outperform
industry, ad revenue growth will remained muted on account of a gradual
recovery in economy and full year impact of Trai’s 12 minute ad cap.
Subscription revenues decline due to several accounting changes….
The Trai related mandate on content aggregators has compelled Zee to
make accounting related changes in revenue recognition for the
distribution of Turner channels. This will lead to a yearly impact of about
| 80 crore. On the international subscription revenues side, changes in
arrangements with operators across international territories has impacted
the quarter by | 38 crore and a similar impact is likely to follow in the
remaining quarters. The discontinuance of the MediaPro JV is also a
deterrent. Absence of any India-related cricket series from its sports
portfolio will also keep its subscription subdued. Owing to these factors
and with no major headway in digitisation, we estimate our subscription
revenue will grow at 3.1% CAGR (FY14-16E) to | 1914.9 crore by FY16E.
Zee in investment phase, another channel expected by FY15
Zee has very recently launched its second GEC Zee Zindagi, which is a
platform for global content. In addition, the company is also exploring
options for new channels by year end. Zee’s strategy to invest in quality
content and higher costs with the increase in channel inventory would
increase its programming costs, going ahead. Though this would help
Zee gain further market share, it could hurt margins. We have factored in
an EBITDA margin of 27.0% and 28.1% in FY15E and FY16E, respectively.
Maintain HOLD – Muted subscription; investments underway
Going ahead, due to higher sports losses and heavy investment in
content, EBITDA margins would take a dip. Also, the management has
guided for relatively lower growth in subscription revenues owing to a
delay in digitisation. We continue to maintain HOLD recommendation
with a revised target price of | 328, valuing it at a 29x FY16E EPS.

LINK
http://content.icicidirect.com/mailimages/IDirect_ZeeEnt_Q2FY15.pdf