Zee Entertainment Enterprises - Topline growth at the cost of margins - Centrum

Zee Entertainment Enterprises reported strong topline in Q2FY13 results on the back of 32% YoY ad revenue growth (partly driven by sports) and 33% YoY subscription revenue growth (44% domestic and 19% international). Continued investment in content to gain substantial market share impacted margins by 607bps. Maintain Neutral rating on the stock.

- Mixed results: ZEEL posted 32.7% YoY increase in net sales to Rs9535mn backed by strong advertising revenue growth of 33.7% to Rs5280mn. Subscription revenues were up 35.7% led by domestic revenues. Operating profit was up by mere 4.9% to Rs2176mn on the back of 607bps drop in margins due to the increase in content cost and losses in new channels. PAT was in-line with our expectations at Rs1877mn, up 14.5% YoY.

- Strong advertisement & subscription growth: ZEEL posted 33.7% YoY growth in advertisement revenues on the back of strong market share gain across channels and buoyancy in sports revenues. The management believes that FMCG, consumer goods, e-commerce and lifestyle retailing will continue to increase their spending in television. Flagship channel Zee TV has taken No.2 slot and commands a market share of 22% with average GRP of 237. In prime time, the channel had 23% market share and has 22 shows among top 100. The company continued to invest in original content which boosted ad growth. Sports revenue was up by 106% YoY on the back of India-Sri Lanka cricket series. Domestic subscription revenues were up by 44%YoY aided by the change in accounting of MediaPro while the underlying growth was ~30%. International subscription revenues were up by 19%YoY due to depreciation in the Rupee.

- Margin under pressure: Company posted 607bps drop in margin to 22.8% in the quarter on the back of 30.4% non-sports margins. Operating cost expanded during the quarter on the back of increase in content cost which was up 48% YoY while selling and other expenses rose by 41.6%. During the quarter, the company posted Rs169mn loss in sports business with the best ever topline of Rs1818mn. 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. The management maintained that the losses in new and growing channels would be Rs1.5-1.8bn and further impact margins.

- Maintain BUY: The stock currently trades at 25.9x and 22x FY13E and FY14E PE. We have marginally increased our estimates for FY13 and FY14 by 1-3% on the back of higher advertising and subscription revenues and factoring in margin pressure. We value the stock at 22x FY14E PE and arrive at a target price of Rs184 and maintain our Neutral rating on the stock. The stock is trading above its historical average and hence we believe there is limited room for further re-rating.

Source : Equity Bulls

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