Zee Entertainment Enterprises - New channel launches; Operating margins at risk - Centrum

Non-sports operating margins for ZEEL are at risk as the company plans to launch its second Hindi GEC 'Zee Anmol' along with a new Hindi movies channel '&pictures'. These new launches could give the company much needed additional inventory, boosting advertising revenues in the medium term on the back of new TRAI guidelines for (10+2) mins of ad inventory cap per hour. Hence, we re-iterate our Hold rating on the stock and believe it will be difficult for the company to expand margins in the near term.

High marketing & placement cost for movies channel: We believe the company will incur high one time marketing & placement cost while operational cost could be lower as ZEEL has the world's largest Hindi movie library with more than 3500 titles. Our interaction with the management suggests that it could keep some exclusive movie titles for this channel, increasing cost. However, we may see further viewership fragmentation within the genre as the new channel is the 10th entrant.

Positioning of second Hindi GEC critical: We believe a second GEC will help the company position ZEE TV as a premium channel compared to the new channel and offer advertisers a choice in a limited inventory market similar to Life Ok & Star Plus. We believe a channel similar to Life OK will need high investments in the first couple of years but our interaction with the management suggests that the new channel will not have high cost.

Optimum time for new channel launches: We believe television networks will have to cope with increasing inventory demand with the new (10+2) mins TRAI mandate on ad cap from October1, '13. To maintain network volumes, we expect more launches of niche channels across genres because after news genre, movie channels have the maximum advertising inventory of ~18mins while Hindi GEC has about 14-16mins. We believe now companies can invest more in new content/channels to increase market share as digitization too has helped television networks garner a higher share of subscription revenues.

Margins at risk; Valuations rich: Our operating margin estimates are 151bps/171bps below consensus for FY14E/FY15E. ZEEL is currently trading at 28.2x and 24x FY14E and FY15E EPS of Rs8.33 and Rs9.8 respectively which is at a 5 year high valuation. Hence we maintain our Hold rating on the stock with a target price of Rs245 (25x FY15E). Key upside possibility can be substantial gain in viewership market share across channels boosting ad revenues, while downside risk to our estimates can be higher than expected investments in new channel launches.

Source : Equity Bulls

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