Buy Zee Entertainment Enterprises - Motilal Oswal

• Mkt Cap USD3.1b
• CMP Rs306
• Buy

- 1QFY11 operating results below estimates on higher losses in sports business: ZEEL's reported 1QFY11 PAT grew 64.3% YoY and 16.5% QoQ to Rs1.5b, inline with estimates. However, adjusting for Rs328m one-time gain, earnings were below estimates. While advertising and domestic subscription growth remained strong, high losses in the sports business dragged proforma earnings.

- Strong traction in advertising and domestic subscription: Ad revenue increased 7.2% QoQ to Rs3.77b. While ZEEL has not disclosed the break-up of R-GEC business (merged wef 4QFY10), we estimate proforma ad revenue growth (incl. RGEC numbers) of 35-40%. Subscription revenues increased 4% QoQ driven by 9% QoQ growth in domestic cable and DTH while international subscription revenue remained flat QoQ.

- Core (ex-sports) margins at 37%; sports business drags performance: ZEEL reported EBITDA of Rs1.87b, up 59.8% YoY and 1.8% QoQ. While reported EBITDA margin was 27.6%, we estimate EBITDA margin ex-sports at 37.5% (up 650bp QoQ and 40bp YoY). Sports business reported sales and operating loss of Rs832m and Rs354m vs an operating profit of Rs20m in 4QFY10. ZEEL management expects operating loss in sports business to be contained within Rs576m loss reported in FY10. Ex-sports, 1QFY11 EBITDA grew of 54% YoY and 22% QoQ to Rs2.22b.

- Downgrading earnings by 4-5%; maintain Buy: We are downgrading earnings by 4-5% due to higher losses in the sports business. While 1QFY11 earnings were impacted by weak sports business, we believe strong traction in advertising revenues and margins in core business (ex-sports) are positive. The stock trades at a P/E of 25.6x FY11E and 19.9x FY12E. Maintain Buy with a price target of Rs355.

Source : Equity Bulls

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