The Zee Entertainment stock has risen 24 per cent since July, buoyed by a strong performance in the June quarter, higher gross rating points and mandatory digitisation.
One of the reasons for the spurt in prices has been the growth in advertising revenues. With some of its key channels gaining market share, advertising revenues for the quarter were up 18 per cent year-on-year. While advertising revenue growth is likely to fall (to 12 per cent in the current financial year), JPMorgan analysts feel the company will record higher-than-industry growth on the back of improved viewership share, higher programming hours and a favourable base. In contrast, industry ad revenues are likely to be in the eight to nine per cent range.
The second trigger for the scrip is digitisation, which is expected to be completed in phases by the end of 2014.
Parag Gupta of Morgan Stanley Research, in a recent report says Zee is likely to be a key beneficiary of mandatory digitisation, helping the company achieve a 13.6 per cent annual growth in subscription revenues during FY12-15. While the stock finds a place in the core portfolios of leading brokerages, given the recent run-up to Rs 182 currently, it is trading at a high 22.2 times its FY14 earnings estimates.
| PROFITABILITY BOOST IN FY14 | |||
| In Rs crore | FY12 | FY13E | FY14E |
| Sales | 3,040 | 3,433 | 3,790 |
| % change y-o-y | 3.4 | 12.9 | 10.4 |
| Ebitda | 739 | 806 | 928 |
| % change y-o-y | -1.6 | 9.1 | 15.1 |
| Ebitda (%) | 24.3 | 23.5 | 24.5 |
| Bps change y-o-y | -39 | -83 | 101 |
| Net profit | 589 | 623.0 | 724 |
| % change y-o-y | 10.2 | 5.8 | 16.2 |
| E: Estimates Source: Morgan Stanley | |||
This is slightly above its five-year average one-year forward PE ratio of 21 times. Investors with a one to three year perspective could consider it on dips.
While the company gets 43 per cent revenues from subscriptions, the share of domestic subscriptions is 30 per cent. This number is likely to improve as more analogue-based subscribers switch to digital networks. Currently, even though cable subscribers are more than two-and-a-half times the direct-to-home (DTH) subscribers, revenues from DTH are higher than cable.
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While revenue growth from DTH between the June 2008 quarter and June 2012 quarter has been 16 per cent, it has been less than two per cent for cable. Most analysts say cable subscription revenue for broadcasters such as Zee has the potential to triple over the next four years and follow a similar growth trajectory as the one achieved by DTH.
Further, the formation of MediaPro, a distribution joint venture between Star-Den and Zee Turner is likely to help Zee negotiate lower carriage fees that it pays to cable distributors. Since contracts with cable distributors for the year are already signed and digitisation is on-going, incremental benefits on both counts will accrue to the company only in FY14.
Ad growth but costs increase
The jump in advertising revenue growth is attributed to the change in the company’s conservative strategy towards content. Investment in high-cost reality shows (Dance India Dance) and movies (Agneepath and Don 2) have helped the company register ad revenue growth of 18 per cent in the June quarter as against a fall of seven per cent in FY12, say Karan Mittal and Anil Shenoy of ICICI Direct.
The strategy has also helped it to improve its market share and has pushed it to the second position in the general entertainment category (GEC) in the June quarter. The company held the number one position for a brief period in the current quarter. The company has also increased the original programming hours from 24-25 hours per week at the beginning of the year to 27-28 hours currently. Zee management has a target of achieving 32-33 hours by the end of FY13. The increase in costs is likely to lead to margin compression in the coming quarters, if ad revenue growth falls as projected by analysts.
Regional focus
In addition to the GEC, the company is also increasing its focus on regional markets. Apart from the recently launched 24-hour Bengali movie channel, Zee Bangla Cinema, it also added new regional channels in the form of Zee Tamizh and Zee Alwan. With regional channels growing at a faster pace (15 per cent in CY11) than the TV industry and forming 27 per cent of Zee Entertainment’s ad revenues for FY12 (ICICI Direct estimates), the focus should help Zee improve its revenues.
Given the positives, the stock is now also counted among defensives on the back of robust free cash flow generation, cash of Rs 1,100 crore, low debt and high dividends.