EdelStar - Buy Zee Entertainment Enterprises Ltd

CMP: Rs.193 Target Price: Rs.225

ZEE is one of the largest media companies in India. It owns and operates Zee TV and Zee Cinema, both leading channels in the Hindi GEC and movies segment respectively. Besides these two, the company has an attractive bouquet of several other channels including Ten Sports, Ten Cricket, Ten Action +, Zing, Zee Jagran, Zee Premier, Zee Classic, Zee Action, Zee Cafe, Zee Studios, and Zee Trendz. With the likes of Zee Marathi, Zee Bangla, Zee Telugu and Zee Kannada, ZEE has an impressive bouquet of regional channels.

With the advent of digitization, we expect the revenues for the media industry to spur on the back of higher subscription revenues as more subscribers are legally reported versus current structure of high level of under-reporting by local cable operators.

In our view, the biggest beneficiaries of digitization will be broadcasters as the incremental uptick in subscription revenues will see a complete flow-through to bottom-lines as there is no incremental cost involved for them. Additionally, with bandwidth capacity increasing on digital cable network, we expect a reduction in the carriage and placement fees that broadcasters currently pay to cable operators to display their channel. Thus, increase in revenues on one side and reduction in expenses on the other side puts broadcasters like Zee Entertainment in a very sweet spot.

ZEE has an impressive bouquet of more than 30 channels including seven regional channels. Zee TV contributes ~45% to ZEE's total ad revenue. ZEE's dependence on Zee TV is likely to decrease as it now has key regional channels like Zee Cinema, Zee Marathi, Zee Bangla, Zee Kannada and Zee Telugu. Moreover, due to digitization, dependence on ad revenues of ZEE to reduce from ~52% in FY12 to ~41% in FY16.

Typically, regional advertisers are long-tail in nature with lesser global pressures. Though the FMCG category has increased ad spends in print, the total contribution of FMCG to print remains at ~9%. Thus, even if the Consumer Goods companies increase their ad spends, the positive rub-off on print companies will be lesser than that of TV broadcasting companies. We expect ZEE is well poised to benefit from this favorable environment over the longer term.

Source : Equity Bulls

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