Assuming coverage at Buy, TP of INR348
Large subscriber base, current low ARPU in Phase
III/IV to drive domestic subscription revenue
Action/Valuation: Assume coverage; Buy with TP of INR348
Our DCF-based TP of INR348 implies a P/E of 20.1x one-year forward EPS
(18.3x FY16F EPS of INR19.0) adjusted for dividends on preference shares.
This compares with its last four-year average P/E of 21.3x. Zee’s P/E should
decline over the last leg of digitization, as seen with international peers.
Catalyst: Digitization in phase III/IV and billing of digital packages to
drive domestic subscription revenue up 2.7x over FY13-16F
Zee’s domestic subscription revenues should rise 2.7x over FY13-16F, driven
by ~ 52mn analog subscribers to be digitized in phase III/IV and an increase in
Zee’s ARPU from MSOs. We expect Zee’s ARPU from MSO’s will rise during
phase III/IV, from ~INR2-3 now to INR25-26 (Zee’s current ARPU from DTH).
Catalyst: Gross margin expansion in FMCG companies should drive
growth momentum in advertisement revenues
Growth in Zee’s advertisement revenues should remain strong, driven by
gross margin expansion at FMCG companies, which will likely increase their
A&P spending as a result (FMCG firms contribute ~43% of advertisement
volume for broadcasters). Our consumer team expects FY13-16F pa sales
growth of 15-17% for FMCG companies. Zee’s focus on the regional market,
where it has gained market share (Bangle, Marathi), should be another growth
driver for advertisement revenue.
Reduction in carriage fees to expand margin by ~450bps over FY12-16F
Digitization should boost the number of channels MSOs can carry, thereby
reducing carriage fees for broadcasters. Assuming C&P at ~50% of its cable
revenue in CY11 for Zee (vs ~70% for the industry), a 30% reduction in C&P,
and Zee’s total revenues doubling over FY12-16F, we expect ~450bps
EBITDA margin expansion over FY12-16F.
