Zee Entertainment Enterprises - Q2FY14 RESULT UPDATE - Sushil Finance

CMP Rs.266, Maintain HOLD, increased Target of Rs.270

Zee Entertainment Enterprises Ltd. (ZEEL) has reported better than expected Q2FY14 results with Revenue & PAT growth of 15.5% & 25.9% respectively. The key highlights of the quarter are summarized as below:

- For Q2FY14, ZEEL's revenues increased by 15.5% YoY to Rs.11,013 mn led by 10.5% growth in Advertisement aided largely by price hike resulting from natural demand from Industry due to festive season and better regional market growth for ZEEL, 19.3% growth in domestic subscription & 7.9% growth in International subscription income aided mainly by rupee depreciation. The PAT increased by 25.9% YoY to Rs.2,363 mn with EBITDA margins of 28.2% (+537 YoY). Other income includes Rs.120 mn on account of favorable currency movement.

- ZEEL increased its advertisement rate during H1FY14 which helped it outperform the industry by ~120-220 bps. Excluding Sports, ads revenue growth for Q2FY14 was more than 20%. Increase in advertisement rate was backed by consistent improvement in Hindi speaking markets as well as growing regional market share.

- The company' sports Revenue de-grew 14.3% YoY to Rs. 1,558 mn and reported losses of Rs. 191 mn vs. Rs.95 mn in Q1FY14 & Rs. 169 mn in Q2FY13. With digitization, subscription revenues are likely to increase in the sports business which will help in likely turnaround of the business over the next 2-3 years. For FY14, the management has guided that the sports losses will remain higher than FY13 losses (Rs. 870 mn) on account of high sporting activities & telecast of couple of India series in the forthcoming quarters.

- Though we have observed 22.7% growth in domestic subscription in H1FY14, the management has guided for 14-15% for FY14 citing major benefit of Phase-1 & 2 digitization is already factored in. However, monetization of Phase 2 (shift towards per-sub billing by MSO's) is likely to start from H2FY14 which we believe could result in higher growth in the subsequent quarters. The management expects weak growth in International subscription in dollar terms over the coming quarters.

- TRAI mandate on advertisement minutes per hour will be applicable from Oct 1, 2013 wherein Zee has to bring down its advertisement inventory from current average of 14-15 minutes across network to 12 minutes (incl. promotional advertisement of 2 minutes). This may negatively impact the advertisement revenues of the broadcasters; however, they maintained that this will not have any major impact on its revenue monetization. We feel that there may be some impact on its domestic advertisement income in the short-term which will be gradually offset through price hikes by ZEEL in the medium-term. The management expects healthy growth in International advertisement income over the coming quarters.

- ZEEL management indicated that newer channels/business losses for FY14 will be higher than FY13 losses of Rs. 150 Cr.

- ZEEL does not expect any major impact due to its considerable market share (~20% for ZEE entire bouquet) even if the distribution arm like 'Mediapro' is not allowed to bundle bouquet or channels of more than one broadcaster as per TRAI's consultation paper released on 6th Aug'13.

- Other Points: a) ZEEL highlighted that nothing alarming about delay in getting receivables from MSOs due to digitalization & b) expects to close the issuance of bonus preference shares by the end of FY14.

OUTLOOK & VALUATION

ZEEL reported better than expected results for Q2FY14. However, the management has guided towards moderation in earnings growth led by higher costs in the subsequent quarters on account of investments in new programs/channels launches (e.g. Zee Anmol launched on 1st Oct 2013) and higher sports activities. We continue to recommend HOLD with a revised price target of 270 (based on 26.0x FY15E EPS). At the CMP of Rs.266, the stock is trading at 29.1x & 25.9x its FY14E & FY15E EPS of Rs.9.1 & Rs.10.3 respectively. Our estimates are based on delay in shift to per sub model from current fixed fee model which provides considerable room for outperformance. Also, we believe there could be further re-rating in the media space (Broadcasters) as increased share of subscription income will provide better revenue visibility (reducing cyclicality and dependence on Advertisement revenues) going forward. In addition, timely monetization of Phase-2 is likely to result in higher subscription growth.

Source : Equity Bulls

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