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Research
Zee Entertainment - Impressive ad growth led by market share gains; unlikely to recur - Antique
Posted On : 2013-01-27 01:26:47( TIMEZONE : IST )
ZEE reported strong 3Q with ad revenue growth of 29% YoY, 11% ahead of our estimates. Gains from improved market share at its flagship channel (18% YoY growth in ratings), occurrence of festivals during 3Q vs. 2Q & 3Q last year, and an improved ad spend environment led to robust ad growth during the quarter.
While ad environment likely to remain buoyant, market share led gains unlikely to recur in 4Q (base effect). Even factoring robust growth in subscription (17% CAGR FY13-15e) and consequent improvement in margins, valuations in our view provide limited scope for upside. Stock trades at 26x FY14e at higher end of its trading band of 7-27x. Post 3Q beat, we raise earnings estimates by 5-6% for FY13/14e. Re-rate the stock to 24x FY14e and raise target price to INR220. Retain HOLD.
Results highlights
In line subscription revenues, ad growth much stronger...
Ad revenues grew by 29% YoY to INR5bn, 11% ahead of our estimates. Management highlighted that ability to monetise on its improved ratings and improvement in ad spends led to strong ad growth during the quarter. Its market share at its flagship channel has improved from 12% to 18% on a YoY basis. Subscription revenues grew by 26% YoY and 4% QoQ, in line with our estimates.
...leading to margin expansion
EBITDA margins stood at 27.8%, down 80bps YoY and 264bps higher than our estimates. While hike in content cost was in line with our estimates, a strong ad growth led to margin beat during the quarter. ZEE increased its programming hours by 2.5hrs during the week through launch of new program at 11:00pm slot. Sports losses at INR86m were lower than 3Q last year (INR100m). Consequently, PAT increased by 40% YoY to INR1.9bn, 11% ahead of our estimates. Post 3Q, we raise our margin assumption for FY13e by 76bps to 27% and for FY14e by 100bps to 29%.
Valuation and outlook
The stock has outperformed the broader index by 30% over last six months and now trades at 27x FY14e, at higher end of its trading band of 7-27x. It trades at premium of 100% to Sensex as compared to historical average of 35-40%. Even assuming strong growth of 15-17% in ad and subscription revenues over next two years and a 300bps expansion in margins, valuations for FY15e is at 22x currently, rich in our view. We believe upside is capped at current levels and retain HOLD rating on the stock.
