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Zee Entertainment Enterprises (Z)
Media
Weak cycle, robust drivers. Zee reported weak 1QFY12 EBITDA at Rs1.56 bn (-17%
yoy), marginally below our Rs1.7 bn expectation, led by (1) soft advertising cycle, (2) IPL
Season 4 impact and (3) higher-than-expected sports losses. We remain sanguine on
the advertising cycle given 16X FY2013E valuations already capture the downside. The
long-term drivers include: (1) Robust DTH segment growth, (2) Zee-Star channel
distribution JV, (3) structural overhangs finished (IPL, Colors), (4) likely stable network
market share (soft competition) and (5) robust long-term advertising growth prospects.
Reiterate BUY on 20% EPS CAGR between FY2011 and FY2014E. (1) Planned ~Rs7 bn
buyback program and (2) ~1.5% FY2011 dividend yield other key highlights.
1QFY12 results analysis: Weak cycle but without any significant negative surprises
Zee reported weak 1QFY12 EBITDA at Rs1.56 bn (-17% yoy), marginally below our Rs1.7 bn
expectation, led by the perfect storm of (1) impact of IPL Season 4, (2) softening advertising
cycle and (3) Rs566 mn sports losses (KIE Rs500 mn). Excepting weak advertising cycle post IPL,
the others were not significant negative surprises.
However, Zee is in a much better position to withstand the down-cycle given robust balance
sheet (~RS12.5 bn cash position at end-FY2011; Rs2.3 bn dividend payout in July 2011 as well
as initiation of ~Rs7 bn buyback program). Zee reported 1QFY12 PBT of Rs1.7 bn, lower 10%
yoy decline versus 17% yoy decline in 1QFY12 EBITDA.
Reiterate BUY: Free cash flows, robust long-term drivers, reasonable valuations
Reiterate BUY on Zee with FY2013E TP of Rs180 given (1) 16X FY2013E valuations for 20% CAGR
in earnings over FY2011-14E, (2) strong free cash flow generation in stable C&S broadcasting
business (modest Rs0.5-1.0 bn capex requirement). The economic environment and advertising
cycle remain challenging but Zee is well-positioned to weather the storm led by strong balance
sheet (~Rs12.5 bn net cash at end-FY2011) with further support coming from (1) planned ~Rs7 bn
buyback program (max. Rs126/share) and (2) ~1.5% FY2011 dividend yield. The stock may remain
under some near-term pressure on account of weakness in financials.
The long-term drivers for Zee include: (1) Robust growth in DTH segment in India, (2) Zee-Star
channel distribution JV, (3) structural overhangs finished (IPL, Colors), (4) stable competitive
environment (high likelihood of stable market share) and (5) robust long-term advertising growth
prospects (including continued high competitive intensity in upstream advertising categories such
as FMCG, Autos and BFSI). The key risk to our investment rational: Zee TV channel has witnessed
some pressure on its ratings performance in July 2011 as new content launched alongside the
rebranding has reported weak ratings. The Zee network ratings have not been impacted as
regional channel ratings have picked up the slack; however, Zee TV being the flagship channel,
continued weakness in ratings will impact the Zee network (advertising).
Zee reported sports business revenues of Rs873 mn and operating losses of Rs566 mn,
marginally above our Rs500 mn expectation and largely responsible for the EBITDA
decline. Zee telecast India-West Indies cricket and UEFA Champions League in 1QFY12,
with the former being largely responsible for the losses. Zee maintained its guidance of
~Rs1 bn of sports losses in FY2012E (KIE ~Rs1.2 bn).
Zee reported marginally weak core entertainment business financials with 3% yoy
revenue growth but 6% yoy decline in operating income. The impact was likely on
account of advertising (IPL Season 4, soft advertising environment) as consolidated
subscription revenue growth remained robust (17% yoy). Zee reported 1QFY12 core
entertainment business margin at ~33%.
Zee reported 1QFY12 subscription revenues at Rs3.05 bn (+17% yoy, -2% qoq), below
our Rs3.15 bn expectation, led by robust 1QFY12 DTH subscription revenues at Rs1.11 bn
(+56% yoy, +13% qoq). 1QFY12 cable subscription revenues at Rs968 mn (+8% yoy,
-7% qoq) were impacted by cyclicality and some time-lag in alignment of contracts by
Zee-Star JV. However, 1QFY12 international subscription revenues at Rs976 mn (-3% yoy,
-10% qoq) face structural challenges of declining subscriber base in Europe. However,
annualized 1QFY12 subscription revenues of Rs12.2 bn are in line with our expectation of
Rs12.6 bn overall subscription revenues in FY2012E.
Zee reported 1QFY12 content and employee costs largely in line with expectations but
SG&A expenses were lower versus expectation despite Zee network rebranding in
1QFY12 (Rs210 mn spend). However, the entire spend was not incremental since Zee
maintained its run-rate of 3 new program launches every quarter; 2 programs were
launched alongside the Zee network rebranding. Further, Zee reported savings in other
overhead costs likely distribution costs.
As previously discussed, Zee reported marginally lower 10% yoy decline in PBT versus
17% yoy decline in EBITDA as 1QFY12 net interest income of Rs234 mn was significantly
above Rs76 mn in 1QFY11. We believe Zee is well-positioned to navigate this down-cycle
on account of robust balance sheet position.
Zee reported 1QFY12 adjusted PAT of Rs1.34 bn (+7% yoy, -31% qoq), ahead of our
Rs1.3 bn expectation on account low ~23% effective tax rate. The company continues to
report full ~33% tax rate on standalone financials (Ten Cricket losses are included here).
The low effective consolidated tax rate is on account of low tax rate in the overseas
subsidiaries. We will seek greater clarity on the same even as Zee has guided for ~31%
consolidated tax rate for FY2012E.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Zee Entertainment Enterprises (Z)
Media
Weak cycle, robust drivers. Zee reported weak 1QFY12 EBITDA at Rs1.56 bn (-17%
yoy), marginally below our Rs1.7 bn expectation, led by (1) soft advertising cycle, (2) IPL
Season 4 impact and (3) higher-than-expected sports losses. We remain sanguine on
the advertising cycle given 16X FY2013E valuations already capture the downside. The
long-term drivers include: (1) Robust DTH segment growth, (2) Zee-Star channel
distribution JV, (3) structural overhangs finished (IPL, Colors), (4) likely stable network
market share (soft competition) and (5) robust long-term advertising growth prospects.
Reiterate BUY on 20% EPS CAGR between FY2011 and FY2014E. (1) Planned ~Rs7 bn
buyback program and (2) ~1.5% FY2011 dividend yield other key highlights.
1QFY12 results analysis: Weak cycle but without any significant negative surprises
Zee reported weak 1QFY12 EBITDA at Rs1.56 bn (-17% yoy), marginally below our Rs1.7 bn
expectation, led by the perfect storm of (1) impact of IPL Season 4, (2) softening advertising
cycle and (3) Rs566 mn sports losses (KIE Rs500 mn). Excepting weak advertising cycle post IPL,
the others were not significant negative surprises.
However, Zee is in a much better position to withstand the down-cycle given robust balance
sheet (~RS12.5 bn cash position at end-FY2011; Rs2.3 bn dividend payout in July 2011 as well
as initiation of ~Rs7 bn buyback program). Zee reported 1QFY12 PBT of Rs1.7 bn, lower 10%
yoy decline versus 17% yoy decline in 1QFY12 EBITDA.
Reiterate BUY: Free cash flows, robust long-term drivers, reasonable valuations
Reiterate BUY on Zee with FY2013E TP of Rs180 given (1) 16X FY2013E valuations for 20% CAGR
in earnings over FY2011-14E, (2) strong free cash flow generation in stable C&S broadcasting
business (modest Rs0.5-1.0 bn capex requirement). The economic environment and advertising
cycle remain challenging but Zee is well-positioned to weather the storm led by strong balance
sheet (~Rs12.5 bn net cash at end-FY2011) with further support coming from (1) planned ~Rs7 bn
buyback program (max. Rs126/share) and (2) ~1.5% FY2011 dividend yield. The stock may remain
under some near-term pressure on account of weakness in financials.
The long-term drivers for Zee include: (1) Robust growth in DTH segment in India, (2) Zee-Star
channel distribution JV, (3) structural overhangs finished (IPL, Colors), (4) stable competitive
environment (high likelihood of stable market share) and (5) robust long-term advertising growth
prospects (including continued high competitive intensity in upstream advertising categories such
as FMCG, Autos and BFSI). The key risk to our investment rational: Zee TV channel has witnessed
some pressure on its ratings performance in July 2011 as new content launched alongside the
rebranding has reported weak ratings. The Zee network ratings have not been impacted as
regional channel ratings have picked up the slack; however, Zee TV being the flagship channel,
continued weakness in ratings will impact the Zee network (advertising).
Zee reported sports business revenues of Rs873 mn and operating losses of Rs566 mn,
marginally above our Rs500 mn expectation and largely responsible for the EBITDA
decline. Zee telecast India-West Indies cricket and UEFA Champions League in 1QFY12,
with the former being largely responsible for the losses. Zee maintained its guidance of
~Rs1 bn of sports losses in FY2012E (KIE ~Rs1.2 bn).
Zee reported marginally weak core entertainment business financials with 3% yoy
revenue growth but 6% yoy decline in operating income. The impact was likely on
account of advertising (IPL Season 4, soft advertising environment) as consolidated
subscription revenue growth remained robust (17% yoy). Zee reported 1QFY12 core
entertainment business margin at ~33%.
Zee reported 1QFY12 subscription revenues at Rs3.05 bn (+17% yoy, -2% qoq), below
our Rs3.15 bn expectation, led by robust 1QFY12 DTH subscription revenues at Rs1.11 bn
(+56% yoy, +13% qoq). 1QFY12 cable subscription revenues at Rs968 mn (+8% yoy,
-7% qoq) were impacted by cyclicality and some time-lag in alignment of contracts by
Zee-Star JV. However, 1QFY12 international subscription revenues at Rs976 mn (-3% yoy,
-10% qoq) face structural challenges of declining subscriber base in Europe. However,
annualized 1QFY12 subscription revenues of Rs12.2 bn are in line with our expectation of
Rs12.6 bn overall subscription revenues in FY2012E.
Zee reported 1QFY12 content and employee costs largely in line with expectations but
SG&A expenses were lower versus expectation despite Zee network rebranding in
1QFY12 (Rs210 mn spend). However, the entire spend was not incremental since Zee
maintained its run-rate of 3 new program launches every quarter; 2 programs were
launched alongside the Zee network rebranding. Further, Zee reported savings in other
overhead costs likely distribution costs.
As previously discussed, Zee reported marginally lower 10% yoy decline in PBT versus
17% yoy decline in EBITDA as 1QFY12 net interest income of Rs234 mn was significantly
above Rs76 mn in 1QFY11. We believe Zee is well-positioned to navigate this down-cycle
on account of robust balance sheet position.
Zee reported 1QFY12 adjusted PAT of Rs1.34 bn (+7% yoy, -31% qoq), ahead of our
Rs1.3 bn expectation on account low ~23% effective tax rate. The company continues to
report full ~33% tax rate on standalone financials (Ten Cricket losses are included here).
The low effective consolidated tax rate is on account of low tax rate in the overseas
subsidiaries. We will seek greater clarity on the same even as Zee has guided for ~31%
consolidated tax rate for FY2012E.
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