Zee Entertainment - Kotak

4QFY12 Results affected by accounting changes, FY12 results broadly in line with estimates: Zee Entertainment 4QFY12 results are difficult to interpret on account of strong impact of changes in accounting method. The company reported PAT Rs 1601 mn, modestly ahead of our expectations. Profit numbers for FY12 were broadly in line with our estimates.

Raise earnings estimates on improved advertising and subscription revenue growth outlook: We affect changes in EPS estimates in order to account for stronger growth in advertising revenues (expectation of stronger ratings in key channels in FY13) and domestic subscription revenues (as proven by strong performance in FY12). We expect 12.4%/12.7% revenue growth in FY13/ FY14, and 24.4%/ 25.6% EBITDA margin in the same years. Our revised EPS for FY13 is 8% ahead of our prior estimates.

Strengthening Position of Channels, Digitization poses challenges to our prior view: One of the key reasons for our negative view on Zee Entertainment has been the weakness in the company's channels, and our expectations of flat earnings in FY12 (borne out by results). However, we note that ZEEL channels have improved their performance over the past two quarters, which is an upside risk to our view. The strength in ZEEL channels have long-term implications, especially in the light of DAS, which is to kick off in July, 2013. We believe the expectations from Zee Entertainment's subscription revenues shall be altered meaningfully by the strength in its channels' ratings. Long-term revenue growth as well as margins may receive a significant boost.

Current Environment favors Zee Entertainment, attractive in visibility compared with other media plays: We believe that ZEEL is positioned favorably in an environment, given high reliance on recession-proof subscription revenues and improvement in ratings after weak FY12. While we agree that valuations are stretched at CMP, we believe Zee Entertainment is among the safer stocks to be invested in at present, given revenue streams, and strong balance sheet. On account of higher long-term projections of revenue growth and margin expansion, and strong visibility in earnings of current operations, we raise our rating on Zee Entertainment to ACCUMULATE (SELL earlier), with a price target of Rs 132.

Risks to our investment view include loss of competitive position, weaker growth in industry advertising growth, and investments that may be made in the coming year in new initiatives by the company. We have a few reservations, on account of which we believe the stock could offer better entry opportunities. These include: 1/ possibility of heightened competition in GEC space post IPL season, 2/ risks to earnings on new investments, 3/ risks to cash flows on discretionary capex by the management, which may not necessarily have/perceived to have commensurate benefits to the media business.

Source : Equity Bulls

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