Zee Entertainment network - market share gains but first quarter of reduced ad volumes - Kotak

Zee reported strong 3QFY14 in rating terms with about 100 bps gain in network market share, led by (1) strong performance of Zee TV in a traditionally weak quarter (competing channels with high profile content such as KBC and Bigg Boss have delivered weak-average ratings), (2) strong performance of regional channels (notably Zee Marathi) and (3) first full-quarter of operations of &pictures (7% market share). Zee reduced its ad volumes to 14 minutes/hour (12 minutes of commercials + two minutes of promos) for the first time in 3QFY14, from 16-16.5 minutes/hour. However, the impact would be largely negated by (1) strong network market share, (2) new channel launches (16-17% like-to-like decline in ad volumes moderates to 9-10% when we include &pictures) and (3) rate hikes and continuous rate renegotiations with advertisers (discussed in our note Management meeting takeaways—a straight path on December 20, 2013). We expect Zee to manage the transition to TRAI ad cap regulation without much disruption with 15% ad growth (recent 20% ad growth may be difficult).

We retain REDUCE on Zee stock (fair value: Rs. 250). Robust revenue growth is likely to continue but a film accounting policy (revenue-cost mismatch) implies aggressive earnings and estimates (the Street's and ours); valuations are at 26X FY2015E earnings at 25% premium to the historical. Correspondingly, valuations at over 40X FY2015E FCF at 100% premium to the sector.

Source : Equity Bulls

Keywords