Zee Entertainment - Margin pressure on continued investments; SELL - Religare

Zee reported a mixed Q2: (a) Strong ad revenues surprised positively (Rs.5.3 bn, +34% YoY) on TRP share gains/sports events. (b) Subscription income was steady (domestic:8.5% QoQ; international:flat). (c) EBITDA margins were down 610 bps YoY/485 bps QoQ on higher programming costs/continued sports losses. We maintain that Zee's margins would remain under pressure due to content/Sports business investments while ad revenue growth would continue in the medium term. Valuations (28x FY13E / 24x FY14E) appear rich given the growth/margin trajectory. Maintain SELL with a TP of Rs.175 (rolled over to Sep'13; based on 20x 1-yr fwd EPS).

Strong ad revenue growth driven by market share gains and sports events: Zee's Q2FY13 advertising revenues were strong at Rs 5.3bn (+34% YoY) on gains in GRP market share and ad revenues from sports events (~Rs 1bn incremental revenues YoY). We note that the quarter also saw Zee consolidating its position as the no.2 player in the Hindi GEC space with renewed focus on programming.

- Sports losses lower YoY due to India-Sri Lanka series: Zee's sports losses, at Rs 169mn, came in lower due to the India-Sri Lanka series. We expect losses to end up higher than the management's full-year guidance of Rs 650mn!700mn (already at ~Rs 380mn) due to continued investments and absence of rights over any major cricket series involving India in 2H.

- Continued margin pressure ahead: Zee's margins are likely to remain under pressure as original programming hours in Hindi GEC channels continue to go up (currently ~28), and would reach 33 over the next year from ~25 in 4QFY12. Also, while new initiatives like the second Arabic channel Alwan (investment: US$ 100mn), Bangla Movie channel (400+ movie library already) and a Kids channel (investment: Rs 1bn over 3 years) could increase ad revenues (and partly contribute to subscription income too), margins would remain under pressure.

Source : Equity Bulls

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