Zee Entertainment Enterprises - Advertising revenue bounces back - Centrum

Zee Entertainment Enterprises reported strong Q1FY13 results on the back of 18% YoY ad revenue growth and 19% YoY subscription revenue (23% domestic and 16% international) growth. Continued investment in content has helped the company gain substantial market share across channels. Lower losses in sports and healthy topline growth have helped margin expansion, while high tax rate muted profitability. Maintain Neutral rating on the stock.

- Results better than expectations: ZEEL posted 20.7% YoY increase in net sales to Rs8430mn backed by strong advertising revenue growth of 18% to Rs4472mn. Subscription revenues were up 19.3% led by domestic revenues. Operating profit was up by 49.5% to Rs2333mn led by 533bps margin expansion. PAT was in-line with our expectations at Rs1582mn, up 18.3% YoY.

- Strong advertisement growth: ZEEL posted 18% YoY growth in advertisement revenues on the back of strong market share gain across channels. Sectors such as telecom, auto and banking remain laggards in terms of advertising while FMCG and consumer goods continue to increase their spending in television. Flagship channel Zee TV has become No.2 channel and commands a market share of 21.2% with average GRP of 215. In prime time the channel had 23% market share and has 23 shows among top 100. The company is investing in programming and launches new shows not only on weekdays but also on weekends which has led to rating improvement. Management expects to increase the original programming hours to 32 by the year end. In Zee Bangla, Zee Marathi and Zee Telugu the company has a market of 31%, 28% and 20% respectively. We have modeled 9% ad growth for FY13E.

- Margin expansion to sustain: The company posted a strong 533bps margin expansion to 27.7% during the quarter on the back of 34.2% non-sports margins. Though the company is expected to invest in new content we believe these margins would sustain considering the strong market share gain across the bouquet of channels. During the quarter, the company posted Rs210mn loss in sports business with a topline of Rs992mn. We expect the losses in the sports business to be below ~Rs1bn for FY13 considering the low number of India cricket matches during the year.

- Maintain BUY: The stock currently trades at 21.3x and 18.5x FY13E and FY14E PE. We have marginally increased our estimates for FY13 and FY14 by 7.9% and 5.7% respectively on the back of higher advertising revenues and margin expansion. We value the stock at 20x FY14E PE and arrive at a target price of Rs162 (previous target price 146) and maintain our Neutral rating on the stock.

Source : Equity Bulls

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