ZEEL Q2FY14: Ahead of estimates; Maintain Neutral - PhillipCapital

Zee Entertainment's (ZEEL) reported Q2FY14 results were ahead of expectations on account of EBITDA margin beat. The company's revenue growth too was ahead of estimates on account of double digit ad revenue growth (ex-Sports, ad revenue growth was +20% YoY), while subscription revenue grew 16% YoY, in-line with estimates. EBITDA margins were much ahead of ours and consensus estimates as the company continued to surprise through its cost control. We believe that H2FY14 is likely to be challenging given the implementation of the 10+2 ad cap guidelines and slowing monetisation of DAS by MSO's. We marginally upgrade both our FY14 & FY15 estimates while maintaining our neutral rating on the back of rich valuation. Below we outline key highlights of the results and management commentary in the earnings call:

Advertising revenue ahead of estimates while subscription revenue in-line with estimates - ZEEL's total revenue stood at Rs 11.0bn, up 16% YoY and 13% QoQ; ahead of estimates. The company's advertising revenue growth surprised positively, growing 11% YoY and 10% QoQ to Rs 5.8bn. Additionally, the company highlighted that ex-sports ad revenue growth was above 20% YoY, significantly ahead of the ~12% industry ad revenue growth. Price increases to offset decline in ad inventory will be taken in Q3FY14. Subscription revenue growth was in-line with estimates, growing 16% YoY and 8% QoQ. Domestic subscription revenue grew 19% YoY while declining 6% QoQ while international subscription revenue grew 8% YoY due to currency tailwinds. Considering the resurgent ratings performance and weakness of challengers, we expect ad revenue growth of 13.5% YoY in FY14 implying 12.7% ad revenue growth in H2.

EBITDA surprises positively on account of sharply lower programming costs - ZEEL's EBITDA stood at Rs 3.1bn, up 43% YoY and 7% QoQ, while its EBITDA margins improved by 537bps YoY and declined 176bps QoQ to 28.2%. The positive surprise on EBITDA is due to subdued operating expenses inflation (ex-sports), which were up 15% YoY & 11% QoQ despite the launch of two new channels - Zee Anmol, & Pictures. Sports losses too were below estimates at Rs 191mn, despite the company telecasting India's tour of West Indies (3 India ODI's). The company maintains that the operating losses in the sports business will be higher than the FY13 level of Rs 870mn on account of the INR's deprecation against the USD. We have increased our FY14 EBITDA margins implying a YoY improvement of 180bps YoY in FY14 due to continued operating leverage benefits.

PAT surpasses estimates owing to EBITDA beat - ZEEL's PAT stood at Rs 2.4bn, up 26% YoY and 5% QoQ. The current quarter's other income included Rs 120mn of realized forex gains on investments against a gain of ~Rs 400mn in Q1FY14 and a loss of Rs 50-60mn in Q2FY13. We estimate earnings growth of company's earnings to grow at a 24% CAGR from FY13-15 on account of healthy advertising revenue growth coupled with continuing subscription gains.

Valuations capture robust growth prospects; maintain Neutral - We marginally upgrade our estimates on account of the better than expected EBITDA performance of the company. We continue to value the company at 24x FY15 earnings assigning a target price of Rs 275. Considering the limited upside from CMP, we maintain our neutral rating on the company.

Source : Equity Bulls

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