Zee News - Low margins aggravate top-line miss: Macquarie

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Zee News
Low margins aggravate top-line miss
Event
 We spoke with the CEO of Zee News post 2Q results to get an update on the
business. We retain our OP recommendation and tweak our revenue and
EBITDA forecast down by 2% for FY11 and FY12. Our revised TP is Rs18
(vs. Rs17 earlier) as the benefit of DCF roll forward to March 2012 is offset by
reduced earnings.
Impact
 Advertising revenue growth of 16% YoY. 2Q results saw advertising
revenues of Rs407m (up 16% YoY) adjusted for demerger of regional GECs
in January 2010. We learnt from the management that advertisers tightened
their spend on news channels in 2Q, driving a miss in our expectations. This
trend is expected to reverse during the current festive quarter. We believe
momentum in 2H should help ZEEN to deliver 17% YoY (vs 20% assumed
earlier) growth in advertising revenues for FY11.
 Robust performance from existing channels. The existing news channels
Zee News, Zee Business, Zee 24 Taas, Zee Punjabi & 24 Ghanta reported
EBDITA of Rs187m with margin of 32.3%. Flagship channel Zee News
maintained its No. 4 position in the Hindi news genre. Amongst regional
channels 24 Ghanta (Bengali) continues to be the No.1 channel in the West
Bengal news market both in terms of time spent per viewer and relative share
in 2Q.
 EBITDA loss from new channels remains high. 2Q loss due to new
channels remained flat QoQ at Rs117m. Management maintained its
guidance of turning these channels profitable at EBITDA level in 36 months
from the launch date. We have assumed 320bp YoY margin improvement in
FY12 and see upside risks to our margin forecast.
 2Q results. Zee News delivered 2Q FY11 total revenues of Rs616m (down
5% QoQ), EBITDA of Rs70m (down 14% QoQ) and PAT of Rs2m (vs 1Q
profit of Rs33m). EBITDA margin came in at 11.4% (vs 12.5% last quarter).
YoY comparisons are not valid due to demerger of regional GECs business.
Earnings and target price revision
 We update our model for 2010 annual report and 2Q results. Our EBITDA is
only 2% lower vs our previous estimate but reduced interest income and lower
margins drive 14% and 10% cut in our FY11 and FY12 EPS, respectively.
Price catalyst
 12-month price target: Rs18.00 based on a DCF methodology.
 Catalyst: Better 3Q results after subdued performance in 2Q.
Action and recommendation
 Retain OP. We expect the second half of the year to deliver better results
which would drive the stock price.