Zee Entertainment Enterprises Ltd - Digital revolution - LKP Research

Subscription revenues to get a boost from digital dose

In line with digital proliferation in the television industry, we expect subscription revenues of major broadcasters like Zee to witness robust traction. With Phase 1 and Phase 2 already established, we see reduction in underreporting of subscribers leading to higher revenues. ARPU share of broadcasters is also expected to see a surge post deployment of digitization aiding margin performance as well. Establishment of Media Pro JV few years ago has already started to deliver through better price negotiation with MSOs/LCOs. Mushrooming of DTH is anticipated to lead to healthy subscriber addition thus providing cushion to broadcasters' share of revenues. Increase in consumer ARPU is inevitable in the light of superior content access. Considering these assumptions, we foresee a 28% CAGR for the subscription revenues in the period between FY13-16E.

Advertising revenue growth to be aided by increasing FMCG and autos spend and rising market share of leading channels

Zee is fetching the benefits of its change in strategy related with aggression pertaining to improvement of content quality through higher investments. The company has gained market share and is juggling for second spot with Colors and is at a striking distance with Star, the market leader. This has led to a 24% growth in ad revenues much ahead of the industry growth of 11.2% in FY13. Continuation of same coupled with improved ad spends by FMCG, consumer durables and auto companies (50% of TV ad spends) would bolster Zee's ad revenues. Zee's expansion of market shares in Regional markets which are growing at faster pace considering the rural setup will further aid Zee's ad revenues. We estimate revenues in this stream to grow at 14% CAGR between FY13-16E.

Strong product portfolio gives a competitive edge to Zee

A strong bouquet of channels spread across genres along with international presence in 169 countries is the USP of Zee. Presence of Zee among the top three channels in all of its genres lends a competitive edge to its business model.

Improved profitability along with a clean balance sheet and superior return ratios

Expectations of higher revenue growth along with improving profitability stemming from lower carriage fees due to digitization, higher ARPUs, increasing ad rates, lower sports losses from FY15E onwards, lower expenditure on celebrities in big bang reality shows may lead to better margin performance. This will ultimately culminate into higher return ratios. Lower capex, debt free balance sheet, higher FCF and healthy earnings growth would support premium valuations.

Outlook and valuation

Superior product portfolio, expected surge in subscription revenues on digitization growth in India, higher ad revenues on market share growth in Hindi as well as regional GECs, expected lower sports losses from FY 15E and strong debt free FCF positive balance sheet points towards a robust growth in the value of the stock hereon despite the rally observed recently. We value the company at 30x, and assign a BUY rating on the company with a target price of Rs338.

Source : Equity Bulls

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