Reduce Zee Entertainment - Kotak

So far, so good on the ratings front: Several of Zee Entertainment channels have performed strongly in recent past. Zee TV, post weakness in the past few months, has come back strongly with two new shows that appear in top ten programs, and the channel remains in the reckoning for #1 slot. Zee Marathi (along with Star Pravah) has made significant gains in the Marathi GEC space in recent weeks, in additions to gains already made over the past year, at the expense of ETV Marathi. Bengali, Telugu, and Kannada channels continue to hold their ground.

- Competitive intensity likely to escalate, affecting ad-revenue growth: Given that Marathi and Bengali GEC space are largely two-player markets, and that gains have been made significantly at the expense of ETV, Zee channels stand to lose share if competitive intensity heats up from the #3 (i.e. ETV). Recent actions by ETV Marathi, interactions with TV18 management, and media reports indicate that ETV is pulling out all the stops to regain market share in several markets, especially Bengali, Marathi and Kannada. Given the structure of Bengali/ Marathi, we believe there is a strong possibility of Zee channels losing significant share in these. Assuming that Zee TV will not gain market share, there is reason to believe that advertising revenues of Zee Entertainment may underperform the industry in FY14.

- International revenue growth likely to dry up in FY14; gains from DAS rollout unlikely to surprise positively in the medium - term: The international revenue stream of the company has benefited significantly from the weaker rupee in FY13; assuming constant rupee here onward, Zee is likely to report flat/ marginally declining international subscription revenues. We continue to hold the belief that current revenue share of Zee Entertainment in international (subscription) markets (c.60%) are unsustainable over long term. On the issue of domestic subscription revenues, our discussions with the company indicate that Zee Entertainment has already gained significantly from Mediapro JV, and gains from Phase 1 / Phase 2 are unlikely to surprise positively.

- Margin gains unlikely, assuming higher sports losses, impending investments in the Indian market: Zee Entertainment has reported unexpectedly strong margins in FY13YTD, we believe on account of: 1/ lower sports losses, 2/strong gains in advertising (unsustainable, as the management has forthrightly said) and subscription revenues (sustainable on the domestic side, but unlikely to beat estimates), 3/ sports losses have reduced meaningfully in the year. The management has indicated that sports losses will rise in FY14, 4/ we believe Zee Entertainment shall need to aggressively invest in Hindi markets, considering the threat from Life OK/ SAB TV.

- Potential for negative earnings surprise, valuations leave modest room for expansion; Maintain REDUCE: Given competitive concerns in several key markets, and potential for margin contraction, it seems unlikely that ZEEL shall trade at peak valuations over a reasonable length of time; even if Zee TV were to emerge as #1 Hindi GEC for a few weeks. We continue to value Zee Entertainment at 25x PER FY14E, while we think that the likely short-term price band for Zee Entertainment (assuming market shares shall not suffer significant loss) is likely to be in the region of Rs 200-Rs 250; we re-iterate our REDUCE rating on Zee Entertainment with a nine month price target of Rs 217. Key risks to our view on Zee Entertainment are: 1/ continued strength in ratings in key genres, 2/ greater belief in flow of revenues to broadcasters from DAS markets, and 3/ uptick in advertising expenditures.

Source : Equity Bulls

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