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ZEE ENTERTAINMENT ENTERPRISES LTD
PRICE: RS.115 RECOMMENDATION: SELL
TARGET PRICE: RS.97 FY12E P/E: 19.4X
We revisit our investment thesis on Zee Entertainment (ZEEL) in light of
continued weakness in competitive position of the company's channels in
key genres, especially Hindi GEC. Short-term, we think there is reason to
believe that ZEEL may disappoint on revenues and earnings, led by
weekness in advertising revenues. Longer-term, ZEEL's subscription streams,
(largely analogue and international streams), appear optimized considering
the somewhat mediocre positioning of its Hindi GEC. Upside risks appear
contained, given continued weakness in advertising expenditures and lack
of traction in ratings. We maintain SELL, and cut price target to Rs 97.
n Zee Entertainment facing stiff competition in key genres: Post fresh season
of KBC, Sony has emerged as the #2 Hindi GEC, while Zee TV has been pushed
to the #4 position (Week 34). Among Marathi channels too, battle has heated
up for #1, with Zee Marathi being pushed to #3 in recent weeks. In theory at
least, high-impact advertising rupees would be distributed among four players
(versus 3 last year) now in Hindi GECs, and among 3 (versus one last year) in
Marathi GECs.
n Sony at #2/#3- "This Time Is Different": While Sony has, in the recent past,
wrestled the #3 position from ZEEL, it has usually done so on the back of blockbuster
movies, or its key non-fiction property, Kaun Banega Crorepati. This time
around, Sony is also helped by a new fiction property, Bade Achhe Lagte Hain.
Since fiction shows tend to have higher predictability in ratings as well as longer
durations, we believe that this factor makes all the difference in whether the loss
of ZEEL is more than a blip.
n Coupled with weak advertising environment, this bodes ill for ZEEL advertising
revenues: Our discussion with the management suggests advertising
environment continued to be weak through August. A circumstance where weak
advertising environment is already hurting industry, weak competitive position
can have a severe impact on yields, impacting company revenue and margins.
ZEEL may fail to meet our weakened (post 1QFY12 results) expectations of 7%
y/y growth in advertising revenues for FY12, posing a clear and apparent earning
risk.
n Subscription streams may come under stress too, if high competition is
persistent: It is difficult for us to see why ZEEL bouquet should gather ~60% of
the total subscription revenues generated (by Indian channels) in international
markets, when the mainstay Hindi GEC could potentially get pushed to #4 position
over the long-term. In the domestic analogue market too (likely starting
2HFY12, as far as it concerns IBN18), ZEEL revenues shall face pressure from
attempts by MSM and IBN18 to raise share in the analogue revenue pie. .
n Benefits from Media Pro awaited, management expectations seem
muted: Whether Media Pro Enterprises, the distribution JV between Star-Zee,
shall be able to substantially alter bargaining equations for ZEEL remains to be
seen, especially considering that ZEEL's position in certain genres has undergone
a drastic change for worse in the recent past. Management comments do not indicate
expectations of a massive step - up in analogue revenues. Moreover, the
ascent of Sony, as well as the fact that MSM (Sony) is reportedly considering
options to raise its bargaining power by buying up regional GECs (ETV) and an
alliance with Sun 18, may play spoilsport for the Zee-Star alliance.
n Retain Negative Stance on ZEEL, Cut Price Target to Rs 97: We retain our
negative stance on ZEEL, on account of substantial and structural risk to earnings,
as well as valuations. We alter our long-term margin and growth assumptions
of Zee Entertainment. On account of these changes, as well as higher
WACC (13.2%, compared with 12.6% earlier), we cut our fair value estimate/
price target on Zee Entertainment to Rs 97 (prior price target: Rs 112). SELL.
Sony has made substantial progress over the past few weeks in the Hindi GEC
space. In the latest week (Week 34, 2011), the channel has emerged as the #2
Hindi GEC, on the back of Kaun Banega Crorepati - Season 4. More significant,
however, we think, is the fact that Sony had already emerged as the #3 in the week
prior to the launch of KBC -4, after being a close #4 in the few weeks prior. ZEEL
has weakened over the past few months as some of its fiction properties have not
gained audience acceptance.
The ascent of Sony is significant for the fact that it is not entirely dependent on KBC-
4, at least in achieving the #3 position. While non-fiction shows and blockbuster
movies are essentially transitory, fiction shows tend to have a longer life. Longer life,
as well as viewer stickiness, allows for greater sampling opportunities that the channel
obtains from the viewer. Sony has had little success with fiction programming -
the key factor behind weak performance of Sony in the past few years.
The success of Sony/ SAB and implications for Hindi GECs: 1/ arguably, four players
(instead of three earlier) shall compete for high impact advertisers (those targeting
reach rather than frequency), therefore reducing bargaining power of the Hindi GEC
industry as a whole. We would expect advertising yields to be impacted negatively
as a result. 2/ SAB TV, MSM's second rung GEC, has emerged as a very clear #5
Hindi GEC. SAB is far ahead of other GECs. This would have an additional impact of
adding to high impact inventory, and the prospect of a rising SAB should be substantial
risks to top-rung GECs. In terms of subscription revenues too, the positioning of
Sony's channels places the company in a strong bargaining position.
In terms of subscription revenues too, we believe ZEEL shall now have to contend
not merely with IBN18's Colors, but also with a more able Sony.
Expenses Curtailment to be Difficult on account of High Competitive
Intensity
Curtailment of expenses shall be difficult to achieve, in our view, in the present circumstance.
Our reasoning runs as follows: 1/ In the last round of the battle between
Hindi GEC incumbents and challengers, the challengers (9X, Imagine, Colors) were
dependent on financing cash flows. As financing cash flows for the challengers were
exhausted, the pressure (on industry) to acquire content / distribution at higher prices
declined, which led to a surprise on margins (2HFY09/1HFY10). In the present contest,
challengers (Colors, Sony) have achieved breakeven. They have a greater staying
power, and a 'verge of victory' position. There is incentive for these players to
step on the pressure on incumbents. 2/ As opposed to the past situations, ZEEL is not
really involved in developing a significant channel at present. Sports, the key loss
generator for the company, is a significant cog in the bargaining power wheel of
ZEEL, and can't be abandoned. 3/ Although ZEEL has maintained that it shall only
incur content/ distribution expenses when the same makes financial sense, we believe
the pressure on ZEEL to retain positions will be immense, and likelihood of the
company surprising us on margins is small.
Longer Term: Hazy Outlook on Analogue, Downside risks in International
Revenues
Zee-Turner, the ZEEL subsidiary involved in aggregation, has signed an agreement in
the distribution space, with Star-Den, forming Media Pro Enterprises (May 2011).
The intent behind the JV is to force the LCO to pay higher amounts to the alliance.
The distribution alliance is meant to provide a bargaining platform for the two concerned
broadcasters. Star and Zee bouquets together account for over 35% of the
total television viewership in India. Although the alliance should, without doubt,
make ZEEL better off(than the two entities bargaining alone) in terms of bargaining
power with LCOs, we doubt that the same shall help ZEEL beat the 3% growth estimates
we have built in. Both MSM and IBN18 are likely to demand higher pay-outs
from LCOs for consistency (IBN18), and achievement (Sony).
International subscription revenues are largely dependent on Zee TV and Zee Cinema.
It is noteworthy that ZEEL already enjoys a 60% share of the international
subscription revenues generated by the Indian broadcasters (largely Star, Zee, and
Sony). While the company views the revenue stream as sticky, it would be nonetheless
strange if a #4 Hindi GEC (cinema channels of the three players Zee, Sony, and
Star are broadly comparable and compete for the #1 position) should dominate
value share.
It is worth understanding the entry barriers that ZEEL enjoys in international markets.
ZEEL has been among the first movers (among Indian broadcasters)in the international
markets, and has signed long-term contracts (mostly 5 years or higher) with
important distributors (cable as well as DTH). Some of these contracts have been
exclusive in nature, thus ensuring that Indian diaspora has taken up these carriers in
preference to others. The carrier chosen by ZEEL thus became the automatic choice
for the new broadcasters (example: Sony) coming into the market. It is important to
note that since the Indian diaspora is still a minority in most of international markets,
the number of channels that can be carried by these distributors is limited (5-10, in
our understanding). This creates an entry barrier for new players - one of the strongest
forces in the robust business model that ZEEL has built.
Even as we appreciate the model, it is difficult for us to see how the same is unbreakable.
We believe that Sony, if it is able to build upon newly acquired competencies,
can emerge as a competitor and gain market share in international markets.
Although IBN18 has bouquet weaknesses, the company may be able to fill the
void in the next few quarters, in our understanding. We think there is substantial risk
to ZEEL's international revenue share as challengers seek higher revenues from distributors
in exchange for rising popularity (This thought/statement treats Indian markets'
viewership as a proxy for Indian diaspora audiences worldwide, and may not
be accurate). We believe that although the timing of the breakthrough for smaller
players (Sony, Colors) in the new markets may be difficult to call, there is a case to
believe that ZEEL's subscription revenues in the international markets could suffer a
sever jolt if the Hindi GEC remains weak relative to these new players. As of now
our estimates do not factor in declines in ZEEL international subscriptions revenues
on this count.
Downside Risk to Earnings, and low probability of beating (already
soft) expectations
Our expectations from ZEEL are low: we see an almost flat EPS through FY11-
FY13E. We also see that the company may actually surprise us on the negative side
in FY12, if advertising environment does not firm up significantly in 2HFY12.
High Risk to Valuations on soft growth - Buyback, Mandatory
Digitization Key Risks
We believe there is a significant risk to valuations in the face of soft growth, given
that we expect ZEEL to exhibit ~0% EBITDA growth over FY11-FY13E. This is reflected
in our price target (Rs 97, or 16.3x FY12 PER), which implies a PER towards
the lower end of ZEEL's PER band. The key risk to our investment view includes
expectations of stronger revenue growth which could be led by: a/ changes in expectations
from domestic market cable revenues, in turn likely to happen if mandatory
digitization becomes a reality, b/ Advertising revenue growth led by improvement
in competitive position of key GECs. We note that buyback of the company is
currently in progress and may act as a support to the stock in the short-term.
Cut in Price target, maintain SELL
We maintain a negative view on ZEEL on the back of the discussion above. We cut
our price target further to Rs 97 (prior target: Rs 112). The cut in our price target is
on account of higher discounting rate (13.2%, from 12.6% earlier), and decline in
our perpetual growth rate assumption (6.5%, from 7% earlier). The decline in perpetual
growth rate assumption is on account of weakening competitive position of
the company's key channels.
We note that our DCF valuation incorporates 9.5% CAGR in revenues of the company
through FY11-FY21E, and incorporates an expansion of 4.6 ppt in margins
through FY11-FY20. We believe that these assumptions are fair, rather than conservative,
considering that: 1/ there is evidence that ZEEL advertising revenues have
been weak when the competitive position of its channels has floundered - note that
ZEEL advertising revenues grew 1.3% in the FY02-FY07 period, 2/ long-term (and
terminal) margins have been set close to the highest margins enjoyed by ZEEL in the
past decade (34% in FY04, 33% in FY05).
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
ZEE ENTERTAINMENT ENTERPRISES LTD
PRICE: RS.115 RECOMMENDATION: SELL
TARGET PRICE: RS.97 FY12E P/E: 19.4X
We revisit our investment thesis on Zee Entertainment (ZEEL) in light of
continued weakness in competitive position of the company's channels in
key genres, especially Hindi GEC. Short-term, we think there is reason to
believe that ZEEL may disappoint on revenues and earnings, led by
weekness in advertising revenues. Longer-term, ZEEL's subscription streams,
(largely analogue and international streams), appear optimized considering
the somewhat mediocre positioning of its Hindi GEC. Upside risks appear
contained, given continued weakness in advertising expenditures and lack
of traction in ratings. We maintain SELL, and cut price target to Rs 97.
n Zee Entertainment facing stiff competition in key genres: Post fresh season
of KBC, Sony has emerged as the #2 Hindi GEC, while Zee TV has been pushed
to the #4 position (Week 34). Among Marathi channels too, battle has heated
up for #1, with Zee Marathi being pushed to #3 in recent weeks. In theory at
least, high-impact advertising rupees would be distributed among four players
(versus 3 last year) now in Hindi GECs, and among 3 (versus one last year) in
Marathi GECs.
n Sony at #2/#3- "This Time Is Different": While Sony has, in the recent past,
wrestled the #3 position from ZEEL, it has usually done so on the back of blockbuster
movies, or its key non-fiction property, Kaun Banega Crorepati. This time
around, Sony is also helped by a new fiction property, Bade Achhe Lagte Hain.
Since fiction shows tend to have higher predictability in ratings as well as longer
durations, we believe that this factor makes all the difference in whether the loss
of ZEEL is more than a blip.
n Coupled with weak advertising environment, this bodes ill for ZEEL advertising
revenues: Our discussion with the management suggests advertising
environment continued to be weak through August. A circumstance where weak
advertising environment is already hurting industry, weak competitive position
can have a severe impact on yields, impacting company revenue and margins.
ZEEL may fail to meet our weakened (post 1QFY12 results) expectations of 7%
y/y growth in advertising revenues for FY12, posing a clear and apparent earning
risk.
n Subscription streams may come under stress too, if high competition is
persistent: It is difficult for us to see why ZEEL bouquet should gather ~60% of
the total subscription revenues generated (by Indian channels) in international
markets, when the mainstay Hindi GEC could potentially get pushed to #4 position
over the long-term. In the domestic analogue market too (likely starting
2HFY12, as far as it concerns IBN18), ZEEL revenues shall face pressure from
attempts by MSM and IBN18 to raise share in the analogue revenue pie. .
n Benefits from Media Pro awaited, management expectations seem
muted: Whether Media Pro Enterprises, the distribution JV between Star-Zee,
shall be able to substantially alter bargaining equations for ZEEL remains to be
seen, especially considering that ZEEL's position in certain genres has undergone
a drastic change for worse in the recent past. Management comments do not indicate
expectations of a massive step - up in analogue revenues. Moreover, the
ascent of Sony, as well as the fact that MSM (Sony) is reportedly considering
options to raise its bargaining power by buying up regional GECs (ETV) and an
alliance with Sun 18, may play spoilsport for the Zee-Star alliance.
n Retain Negative Stance on ZEEL, Cut Price Target to Rs 97: We retain our
negative stance on ZEEL, on account of substantial and structural risk to earnings,
as well as valuations. We alter our long-term margin and growth assumptions
of Zee Entertainment. On account of these changes, as well as higher
WACC (13.2%, compared with 12.6% earlier), we cut our fair value estimate/
price target on Zee Entertainment to Rs 97 (prior price target: Rs 112). SELL.
Sony has made substantial progress over the past few weeks in the Hindi GEC
space. In the latest week (Week 34, 2011), the channel has emerged as the #2
Hindi GEC, on the back of Kaun Banega Crorepati - Season 4. More significant,
however, we think, is the fact that Sony had already emerged as the #3 in the week
prior to the launch of KBC -4, after being a close #4 in the few weeks prior. ZEEL
has weakened over the past few months as some of its fiction properties have not
gained audience acceptance.
The ascent of Sony is significant for the fact that it is not entirely dependent on KBC-
4, at least in achieving the #3 position. While non-fiction shows and blockbuster
movies are essentially transitory, fiction shows tend to have a longer life. Longer life,
as well as viewer stickiness, allows for greater sampling opportunities that the channel
obtains from the viewer. Sony has had little success with fiction programming -
the key factor behind weak performance of Sony in the past few years.
The success of Sony/ SAB and implications for Hindi GECs: 1/ arguably, four players
(instead of three earlier) shall compete for high impact advertisers (those targeting
reach rather than frequency), therefore reducing bargaining power of the Hindi GEC
industry as a whole. We would expect advertising yields to be impacted negatively
as a result. 2/ SAB TV, MSM's second rung GEC, has emerged as a very clear #5
Hindi GEC. SAB is far ahead of other GECs. This would have an additional impact of
adding to high impact inventory, and the prospect of a rising SAB should be substantial
risks to top-rung GECs. In terms of subscription revenues too, the positioning of
Sony's channels places the company in a strong bargaining position.
In terms of subscription revenues too, we believe ZEEL shall now have to contend
not merely with IBN18's Colors, but also with a more able Sony.
Expenses Curtailment to be Difficult on account of High Competitive
Intensity
Curtailment of expenses shall be difficult to achieve, in our view, in the present circumstance.
Our reasoning runs as follows: 1/ In the last round of the battle between
Hindi GEC incumbents and challengers, the challengers (9X, Imagine, Colors) were
dependent on financing cash flows. As financing cash flows for the challengers were
exhausted, the pressure (on industry) to acquire content / distribution at higher prices
declined, which led to a surprise on margins (2HFY09/1HFY10). In the present contest,
challengers (Colors, Sony) have achieved breakeven. They have a greater staying
power, and a 'verge of victory' position. There is incentive for these players to
step on the pressure on incumbents. 2/ As opposed to the past situations, ZEEL is not
really involved in developing a significant channel at present. Sports, the key loss
generator for the company, is a significant cog in the bargaining power wheel of
ZEEL, and can't be abandoned. 3/ Although ZEEL has maintained that it shall only
incur content/ distribution expenses when the same makes financial sense, we believe
the pressure on ZEEL to retain positions will be immense, and likelihood of the
company surprising us on margins is small.
Longer Term: Hazy Outlook on Analogue, Downside risks in International
Revenues
Zee-Turner, the ZEEL subsidiary involved in aggregation, has signed an agreement in
the distribution space, with Star-Den, forming Media Pro Enterprises (May 2011).
The intent behind the JV is to force the LCO to pay higher amounts to the alliance.
The distribution alliance is meant to provide a bargaining platform for the two concerned
broadcasters. Star and Zee bouquets together account for over 35% of the
total television viewership in India. Although the alliance should, without doubt,
make ZEEL better off(than the two entities bargaining alone) in terms of bargaining
power with LCOs, we doubt that the same shall help ZEEL beat the 3% growth estimates
we have built in. Both MSM and IBN18 are likely to demand higher pay-outs
from LCOs for consistency (IBN18), and achievement (Sony).
International subscription revenues are largely dependent on Zee TV and Zee Cinema.
It is noteworthy that ZEEL already enjoys a 60% share of the international
subscription revenues generated by the Indian broadcasters (largely Star, Zee, and
Sony). While the company views the revenue stream as sticky, it would be nonetheless
strange if a #4 Hindi GEC (cinema channels of the three players Zee, Sony, and
Star are broadly comparable and compete for the #1 position) should dominate
value share.
It is worth understanding the entry barriers that ZEEL enjoys in international markets.
ZEEL has been among the first movers (among Indian broadcasters)in the international
markets, and has signed long-term contracts (mostly 5 years or higher) with
important distributors (cable as well as DTH). Some of these contracts have been
exclusive in nature, thus ensuring that Indian diaspora has taken up these carriers in
preference to others. The carrier chosen by ZEEL thus became the automatic choice
for the new broadcasters (example: Sony) coming into the market. It is important to
note that since the Indian diaspora is still a minority in most of international markets,
the number of channels that can be carried by these distributors is limited (5-10, in
our understanding). This creates an entry barrier for new players - one of the strongest
forces in the robust business model that ZEEL has built.
Even as we appreciate the model, it is difficult for us to see how the same is unbreakable.
We believe that Sony, if it is able to build upon newly acquired competencies,
can emerge as a competitor and gain market share in international markets.
Although IBN18 has bouquet weaknesses, the company may be able to fill the
void in the next few quarters, in our understanding. We think there is substantial risk
to ZEEL's international revenue share as challengers seek higher revenues from distributors
in exchange for rising popularity (This thought/statement treats Indian markets'
viewership as a proxy for Indian diaspora audiences worldwide, and may not
be accurate). We believe that although the timing of the breakthrough for smaller
players (Sony, Colors) in the new markets may be difficult to call, there is a case to
believe that ZEEL's subscription revenues in the international markets could suffer a
sever jolt if the Hindi GEC remains weak relative to these new players. As of now
our estimates do not factor in declines in ZEEL international subscriptions revenues
on this count.
Downside Risk to Earnings, and low probability of beating (already
soft) expectations
Our expectations from ZEEL are low: we see an almost flat EPS through FY11-
FY13E. We also see that the company may actually surprise us on the negative side
in FY12, if advertising environment does not firm up significantly in 2HFY12.
High Risk to Valuations on soft growth - Buyback, Mandatory
Digitization Key Risks
We believe there is a significant risk to valuations in the face of soft growth, given
that we expect ZEEL to exhibit ~0% EBITDA growth over FY11-FY13E. This is reflected
in our price target (Rs 97, or 16.3x FY12 PER), which implies a PER towards
the lower end of ZEEL's PER band. The key risk to our investment view includes
expectations of stronger revenue growth which could be led by: a/ changes in expectations
from domestic market cable revenues, in turn likely to happen if mandatory
digitization becomes a reality, b/ Advertising revenue growth led by improvement
in competitive position of key GECs. We note that buyback of the company is
currently in progress and may act as a support to the stock in the short-term.
Cut in Price target, maintain SELL
We maintain a negative view on ZEEL on the back of the discussion above. We cut
our price target further to Rs 97 (prior target: Rs 112). The cut in our price target is
on account of higher discounting rate (13.2%, from 12.6% earlier), and decline in
our perpetual growth rate assumption (6.5%, from 7% earlier). The decline in perpetual
growth rate assumption is on account of weakening competitive position of
the company's key channels.
We note that our DCF valuation incorporates 9.5% CAGR in revenues of the company
through FY11-FY21E, and incorporates an expansion of 4.6 ppt in margins
through FY11-FY20. We believe that these assumptions are fair, rather than conservative,
considering that: 1/ there is evidence that ZEEL advertising revenues have
been weak when the competitive position of its channels has floundered - note that
ZEEL advertising revenues grew 1.3% in the FY02-FY07 period, 2/ long-term (and
terminal) margins have been set close to the highest margins enjoyed by ZEEL in the
past decade (34% in FY04, 33% in FY05).
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