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UBS Investment Research
Zee Entertainment Enterprises Ltd
M aintain long-term positive view
Event: Q1 FY12 results, conference call takeaways
Q1 revenues grew 3% YoY to Rs6,983m (UBS-e Rs7,267m). The EBITDA margin
declined 530bps YoY to 22.3% (UBS-e 23.0%), partly due to high sports losses
(Rs566m) and brand revamp expenses (Rs210m). Net profit declined 13% YoY to
Rs1,337m (UBS-e Rs1,245m). Net profit was ahead of our estimates due to lower
tax. Zee maintained its full-year sport losses guidance at Rs800m-1bn and lowered
its advertising revenue guidance from 12-14% to single digits for FY12.
Impact: maintain earnings estimates
We expect advertising revenues to grow 10% in FY12 as we believe ad volumes
will bounce back during the festive season in H2 FY12. We believe the distribution
JV with Star should contribute to subscription revenue growth starting FY13.
Action: maintain long-term positive view
Zee’s share price has underperformed the BSE Sensex 12% in the past one month
on expectations of a bad quarter, in our view. We view this share-price weakness
as a buying opportunity as we believe Zee benefits from increasing digitisation and
the distribution JV with Star is positive in the medium term. Zee has a sound
balance sheet with Rs14bn net cash and strong FY12E FCF yield of 4.7%. We
believe there is limited downside to the share price at current levels as Zee is likely
to buy back c6-7% of shares outstanding at a price below Rs126 starting 27 July.
Valuation: maintain Buy rating with DCF-based PT of Rs160
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 12% WACC.
Key takeaways from conference call
Zee management highlighted that it continues to invest in the sports business
and expects sports losses to continue for the next few quarters. However, the
quantum of losses is likely to reduce. Zee maintained its full-year sport
losses guidance at Rs800m-1bn for FY12 and targets breakeven in FY13.
Most of Zee’s current sports telecast rights are due for renewal in 2013.
Management believes the weakness in advertising revenue is likely to
continue in Q2 and has lowered its advertising revenue guidance from 12-
14% to single digits given the weak sentiment. Zee management highlighted
that it is seeing a slowdown from the following sectors: FMCG, telecom and
financials. We maintain our FY12 advertising revenue growth forecast at
10% as we believe an ad rebound is likely in H2.
Zee expects its programming costs to increase in FY12 as it plans to increase
the number of original hours of content—from 29 hours currently to 34 hours,
partly depending on the advertising revenue scenario.
Zee incurred one-time brand revamp expenses of Rs210m (3% of revenue) in
Q1 FY12. Adjusting for this one-time expense, the EBITDA margin would
have been higher by 300bps (at 25.3%).
The decline in international subscription revenues is due to subscriber churn
in Europe.
The tax rate was lower in Q1 due to the high sports losses booked in the
India entity. The tax rate is likely to be c31% for FY12.
Zee Entertainment Enterprises Ltd
Zee Entertainment Enterprises (Zee) is a cable and satellite channel operator
with Hindi language and regional language programming. The relaunch of Star
as a Hindi language network in July 2000 raised competitive pressure in the
domestic broadcasting business. Zee is building up pay revenue as a second
driver of its earnings growth, as advertising revenue is faltering because of weak
advertising spend by companies and Zee's low audience share. Zee was the first
to launch a direct-to-home service in India.
Statement of Risk
We believe Zee faces multiple risks in its content and broadcasting business in
terms of the success or failure of its programming. It also faces intense
competitive pressure from competing networks, which could impact its
viewership ratings and advertising revenues.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Zee Entertainment Enterprises Ltd
M aintain long-term positive view
Event: Q1 FY12 results, conference call takeaways
Q1 revenues grew 3% YoY to Rs6,983m (UBS-e Rs7,267m). The EBITDA margin
declined 530bps YoY to 22.3% (UBS-e 23.0%), partly due to high sports losses
(Rs566m) and brand revamp expenses (Rs210m). Net profit declined 13% YoY to
Rs1,337m (UBS-e Rs1,245m). Net profit was ahead of our estimates due to lower
tax. Zee maintained its full-year sport losses guidance at Rs800m-1bn and lowered
its advertising revenue guidance from 12-14% to single digits for FY12.
Impact: maintain earnings estimates
We expect advertising revenues to grow 10% in FY12 as we believe ad volumes
will bounce back during the festive season in H2 FY12. We believe the distribution
JV with Star should contribute to subscription revenue growth starting FY13.
Action: maintain long-term positive view
Zee’s share price has underperformed the BSE Sensex 12% in the past one month
on expectations of a bad quarter, in our view. We view this share-price weakness
as a buying opportunity as we believe Zee benefits from increasing digitisation and
the distribution JV with Star is positive in the medium term. Zee has a sound
balance sheet with Rs14bn net cash and strong FY12E FCF yield of 4.7%. We
believe there is limited downside to the share price at current levels as Zee is likely
to buy back c6-7% of shares outstanding at a price below Rs126 starting 27 July.
Valuation: maintain Buy rating with DCF-based PT of Rs160
We derive our price target from a DCF-based methodology and explicitly forecast
long-term valuation drivers using UBS’s VCAM tool. We assume a 12% WACC.
Key takeaways from conference call
Zee management highlighted that it continues to invest in the sports business
and expects sports losses to continue for the next few quarters. However, the
quantum of losses is likely to reduce. Zee maintained its full-year sport
losses guidance at Rs800m-1bn for FY12 and targets breakeven in FY13.
Most of Zee’s current sports telecast rights are due for renewal in 2013.
Management believes the weakness in advertising revenue is likely to
continue in Q2 and has lowered its advertising revenue guidance from 12-
14% to single digits given the weak sentiment. Zee management highlighted
that it is seeing a slowdown from the following sectors: FMCG, telecom and
financials. We maintain our FY12 advertising revenue growth forecast at
10% as we believe an ad rebound is likely in H2.
Zee expects its programming costs to increase in FY12 as it plans to increase
the number of original hours of content—from 29 hours currently to 34 hours,
partly depending on the advertising revenue scenario.
Zee incurred one-time brand revamp expenses of Rs210m (3% of revenue) in
Q1 FY12. Adjusting for this one-time expense, the EBITDA margin would
have been higher by 300bps (at 25.3%).
The decline in international subscription revenues is due to subscriber churn
in Europe.
The tax rate was lower in Q1 due to the high sports losses booked in the
India entity. The tax rate is likely to be c31% for FY12.
Zee Entertainment Enterprises Ltd
Zee Entertainment Enterprises (Zee) is a cable and satellite channel operator
with Hindi language and regional language programming. The relaunch of Star
as a Hindi language network in July 2000 raised competitive pressure in the
domestic broadcasting business. Zee is building up pay revenue as a second
driver of its earnings growth, as advertising revenue is faltering because of weak
advertising spend by companies and Zee's low audience share. Zee was the first
to launch a direct-to-home service in India.
Statement of Risk
We believe Zee faces multiple risks in its content and broadcasting business in
terms of the success or failure of its programming. It also faces intense
competitive pressure from competing networks, which could impact its
viewership ratings and advertising revenues.
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