Reduce Zee Entertainment Enterprises - Elara Capital

• Zee Entertainment Enterprises
• Rating : Reduce
• Target Price : INR300
• Upside : 2%
• CMP : INR293 (as on 30 August 2010)

Peaked ratings

High ad growth momentum to subside from hereon

Zee Entertainment Enterprises (ZEEL) has come out smartly from ad market slow down phase, with a sharp recovery in its ad revenue growth in recent quarters. However, we believe that the intensity of growth is unlikely to be very high going forward and expect ad revenue growth for the old business of ZEEL (ex-regional channels) to significantly taper down from Q1FY11 levels, caused by the gradual phasing out of the low base effect, heightened competitive pressures on the company's key channels and the presence of Cricket World Cup in Q4FY11E.

Subscription revenue growth facing multiple challenges

ZEEL's subscription revenues during the last two years have grown at a very brisk pace largely helped by the strong contribution from the DTH (Direct to Home) subscription revenues. However, we believe that the company's subscription revenue growth may not be that healthy going forward, despite the robust performance on DTH front as revenues from international and domestic cable side are expected to post a meager growth, pulling down the overall growth for the company.

Content cost inflation to put margins under pressure

ZEEL has been very tight fisted in the past with respect to its programming costs, avoiding high decibel reality shows. During FY07-FY10, company's spend on programming grew at a CAGR of just 12%. While the policy worked fine in the past due to low competition in the space and impressive success of low cost content, we believe that it would be tough for the company not to increase its programming spend going forward given the intense competition and the need to lift up the market share of its key channels, which may put margins under pressure.

Valuation

ZEEL's stock price has continued to languish as compared to its peers in the broadcasting space during the last few months on lower EPS growth in Q1FY11. At current levels, the stock seems to price in most of the expected EPS growth potential for the next two years, trading at a P/E of 25.2x and 19.8x, based upon our expected EPS for FY11E and FY12E respectively. We believe that the share price is unlikely to perform significantly till the visibility over its subscription revenues improves further. Based on an EPS CAGR of 20.3% during FY10-FY12E, we arrive at a target price of 300 for the stock, on a PEG (Price Earning Growth) multiple of 1x. We recommend 'Reduce' on the stock.

Source : Equity Bulls

Keywords