Zee: Not prime time

The broadcaster faces keen competition.

Zee Entertainment has underperformed the broad market by about 30 per cent over the past year. It's not that the television broadcaster isn't seeing good ratings for its programming""the focus on content is paying off and it commands a viewership share of 30 per cent plus during prime time.

Moreover, advertisers seem to be biting: sales for the December quarter were driven by strong advertising revenues and saw a smart rise of 24 per cent to Rs 520 crore.

However, sales from subscriptions are taking their time coming: they were flat in Q3FY08. Also, continuous investments in new channels are taking their toll on margins.

In the December quarter for instance, higher transmission and programming costs for channels like Ten Sports and Zee Next, hurt operating margins, which fell 220 basis points to 30.3 per cent.

This, coupled with the increasing competition from new channels means the stock might trade at lower multiples from now on.

In an increasingly fragmented market, where players such as Inx Media, NTDV Imagine and Viacom compete for viewers, it will not be easy for Zee to hold on to its market share. Most of them are established, own large bouquets, and already enjoy good viewership for their existing channels.

Their presence in the general entertainment space is already pushing up costs for scarce content and people. The arrival of global media giants ""NBC Universal with NDTV for instance""will accentuate the trend.

While the audience for these players may be very different from the one Zee is catering for today, tastes will change over time when more options are available to viewers.

That would mean more fragmentation and smaller shares for individual players. Even Zee which is well-entrenched does see small dips in viewership in some months.

As peak TRPS fall, a trend that is already being seen, so could advertising rates that channels command. At the current price of Rs 238,the stock trades at 22 times estimated FY09 earnings and is not too expensive because earnings should grow at about 25 per cent in the next couple of years.

Ranbaxy: Prescription for growth

Indian drug firms are looking at ways to unlock value for shareholders as also bring down R&D costs. Close on the heels of Sun Pharma, the Rs 4,366 crore Ranbaxy plans to demerge its new drug discovery research unit, Ranbaxy Life Science Research (RLSRL).

Shareholders will get one share of RLSRL for every four held in Ranbaxy. In CY 07, Ranbaxy's R & D costs at Rs 416 crore, were higher by about 8 per cent than that in the previous year. In CY06, however, the R&D spend actually fell over that in CY05.

However, as a percentage of total operational income, R & D costs remained at more or less the same level of 9.5 per cent in both years. The annual savings for Ranbaxy, post the demerger could be about Rs 100 crore.

Meanwhile, the next 18 months should see Ranbaxy ramp up overseas sales. That's because it has managed to acquire permission to exclusively sell certain drugs that treat benign prostatic hyperplasia and herpes. Typically these exclusivity periods last for six months.

Besides, the management has said it will increase focus on some geographies. In CY07, overseas sales contributed 72.5 per cent Ranbaxy's top line. Over the past one year, Ranbaxy has gained 32 per cent as compared to a 38 per cent rise in the Sensex.

Sun Pharma's research subsidiary SPARC, trades at Rs 99, and has gained about 14 per cent since listing. At Rs 445, Ranbaxy trades at 19 times estimated CY 08 earnings, estimated at 23 levels, with a seven per cent upside coming in from the savings on R&D.

Sun, at Rs 1259, trades at a slightly lower multiple of 18 times estimated FY 09 earnings and both stocks are likely to be outperformers.