Zee Entertainment - Strong growth - Centrum

Zee Entertainment Enterprises reported strong topline in Q3FY13 results on the back of 24.4% YoY ad revenue growth and 25.6% YoY subscription revenue growth (33% domestic and 9.4% international). Operating margins jumped sequentially on the back of lower programming cost with sports losses under check. We have increased our earnings estimates and upgraded the stock to BUY.

- Strong results: ZEEL posted 24.4% YoY increase in net sales to Rs9389mn backed by strong advertising revenue growth of 28.8% to Rs5094mn. Subscription revenues were up 26%YoY to Rs4098mn led by domestic revenues which were up by 33% YoY. Operating profit was up by 21% to Rs2612mn on the back of lower sports loss. PAT was 2.5% above our expectations at Rs1941mn, up 42.8% YoY.

- Strong advertisement & subscription growth: ZEEL posted 28.8% YoY growth in advertisement revenues on the back of strong market share gain across channels and buoyancy during the festive season. The management believes that FMCG, consumer goods, e-commerce and lifestyle were key drivers for ad growth. Flagship channel Zee TV continued to be in top 3 and commanded a market share of 19% with average GRP of 197. In prime time, the channel had 20% market share and had 18 shows among top 100. The company continued to invest in original content which boosted ad growth as this increased to 29.5 hours from 27 hours sequentially. Domestic subscription revenues were up by 33%YoY aided by the change in accounting of MediaPro while the underlying growth was ~23%. International subscription revenues were up by 9.4%YoY due to Rupee depreciation.

- Margin to expand going forward: Though the company posted 79bps drop in margin to 27.8% in the quarter on the back of higher selling and other expenses, 500bps sequential improvement on the back of 12.6% lower programming cost was very encouraging. 32.5% non-sports margins and lower than expected sports loss at Rs86mn were healthy. We expect the losses in the sports business to be below ~Rs1bn for FY13 and further decline in FY14. Strong ad revenue growth along with incremental subscription revenue due to digitization will help margin expansion from FY14. The management maintained that losses in new and growing channels will be capped at Rs1.5bn.

- Estimates increased; Upgrade to BUY: We have increased our FY13/FY14 earnings by 5.7%/8.9% on the back of increase in advertising revenues, gain from digitization on subscription revenues along with margin expansion. The stock currently trades at 31x and 25.7x FY13E and FY14E PE. We value the stock at 26x Sept 2014 and arrive at a target price of Rs257 and upgrade the stock to BUY.

Source : Equity Bulls

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