Firing on all cylinders - Zee Entertainment:: HDFC Securities

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Firing on all cylinders
Zee’s 3QFY15 numbers were ahead of ours and
consensus estimates. The company’s ad revenue
growth continues to surprise positively, growing at
9% YoY with annual ex-sports ad revenue growth in
the range of 12-16%. This was the key reason for
EBITDA beat, which grew 22% YoY notwithstanding a
sharper than expected sports loss of Rs 270mn.
Consolidated net sales grew by 15% YoY, EBITDA by
22% and APAT by 28%.
We resume coverage with a BUY rating and TP of Rs
437 (32x FY17E EPS and a discount of Rs 16 on
account of preference share payout). We believe that
ZEEL is uniquely positioned to capitalize on (1) higher
ad spends on account of improving GDP growth,
incremental spends by FMCG and the emergence of
new categories (2) digitization – ARPU upside from
phase I and II areas as well as digitization of phase
III/IV.
Key risks to our call include (a) weak GDP growth
resulting in lower than expected ad growth (est. 17%
in FY16/17) (b) further delays in digitization, which
could negatively impact subscription revenue growth
(c) failure of ZEEL’s new channel.
 Upbeat advertising outlook: ZEEL continued its
momentum with ahead of industry ad revenue growth
as the company gained market share in the regional
space. Management commentary on industry ad spend
is buoyant, led by an improving economic scenario,
expectation of higher ad spends by FMCGs, emergence
of new advertisers such as e-commerce.
We share management’s optimism on ad growth and
estimate non-sports ad revenue CAGR of 17% over
FY15-17.
 Premium valuations to sustain: ZEEL trades at 34x
FY16E EPS and 28x FY17E EPS. We believe that the
company’s premium valuations can sustain due to high
growth visibility on both advertising and subscription.
We arrive at a target price of Rs 437, valuing the
company at 32x FY17E EPS and adjusting Rs 16/share
for payout to redeemable preference shareholders.

LINK
http://www.hdfcsec.com/Share-Market-Research/Research-Details/StockReports/3010874