Published on 15/05/2017 2:19:19 PM | Source: LKP Securities Ltd

Buy Zee Entertainment Enterprises Ltd For Target Rs.568.00 - LKP Sec

Decent set of numbers in difficult times

Zee’s topline fell by a slight 0.3% as domestic subscription revenues and international revenues posted weak performance. Domestic Advertising revenues showed resilience by growing 8.6% (ex-sports business) despite the DeMo pangs having a negative impact on the FMCG sector. Subscription revenues were down by 6% mainly on the high base of last year Q4 which had a major chunk of catch-up revenues. Weak international revenues were due to some regulatory issues in Middle East and Bangladesh. However, through prudent cost cutting and maintaining a lean cost structure along with improvement in content performance and increasing market share in the regional markets the company managed to stay buoyant at operational level, posting margins at 30.7%. Although Zee was a bit weak on Hindi GEC front, it remained strong in all the regional businesses (#1 in Marathi and Oriya, while #2 in Bangla, Kannada, Tamil and Telugu spaces). Zee completed the first phase of sales of their Ten Sports business to Sony Pictures Network and received USD330 mn. Content expenses as a % of sales moved down to 42.7% (270 bps yoy and 20 bps qoq) on account of cost control and lower spending on new content. Other expenses and ad revenues as a % of sales too came down at 16.2% from 19.6%. Higher depreciation and amortization resulted along with a subdued topline performance led to a 10.8% yoy fall, which was s till better than our expectations. Reported PAT came in at an ₹14 bn. In FY17, the topline grew by 10.7% on the back of 9.2% ad revenue growth and 10% subscription revenue growth. FY17 margins came in at a robust 29.9%, while adjusted PAT grew by 32% yoy at ₹12.2 bn.


Regional excellence and decent ad revenues across srsthe sectors led to higher than industry growth

Zee’s domestic advertisement revenues in Q4 came in at 8.6% excluding international revenues and sports revenues in difficult times of DeMon and FMCG industry cutting their ad spends. This growth indicates a decent market share growth as the TV industry ad revenues were in the negative territory. We believe that new players coming in the telecom space like Reliance Jio and cut throat competition happening over there, the de-growth in FMCG and e-com space got offset by the spurt in the telecom domain. New launches by the auto companies too supported the cause and are expected to continue in to do so in the ensuing quarters. Dominance in the regional space, mainly in the Marathi (>50 % market share) & Oriya aggressively climbing up ladder in Tamil markets ( jumped up to 2nd position) along with resilience in the Bangla (2nd), Telugu( 2nd) and Kannada (2nd) markets will further provide a traction in the ad revenues growth. Furthermore, market share will receive a traction from higher spends coming on the movie basket (mainly Hindi and Marathi) by Zee. Acquisition of Reliance Broadcasting Network (to get a final approval from the regulators in July) will provide Zee an altogether new geography- Eastern UP and Bihar, through the #1 channel over there Big Ganga and entry into the comedy genre through Big Magic. Post the inclusion, we may see a good bump up in the ad revenues. Zee is expected to further raise its investments in those genres and regions where it is lacking currently. We believe Zee to post better than industry growth at 14%/18% in FY18E/19E on the ad revenue front given the above mentioned factors.


New tariff regime, Phase III monetization and Phase IV implementation to drive Subscription revenues

Zee’s domestic subscription revenues in the quarter witnessed a fall of 6% yoy and qoq. Going forward the hopes of monetization of Phase III and implementation of Phase IV of digitization are strong. With continued expansion of DTH, we see a stable growth in subscription revenues in FY18E and a higher growth in FY19E. Implementation of new tariff regime may result into some early hiccups in FY18E however, it is expected to be a long term positive as it may bring transparency and structural change in industry dynamics and may provide higher financial benefits to the broadcasters. This coupled with digitization will bring radical reforms within the industry value chain. Finalization of some of new contracts with the MSOs may result into catch up revenues on and off in FY18. Management expects the domestic subscription revenues to grow at mid-teens if the tariff order gets implemented. On the international revenues front, new content may help Zee to offset the issues in Middle east and Bangladesh.


Management maintains strong outlook

on margins Q4 witnessed margins at 30.7% (including sports financials), lower & TV launch losses, better content performance, increasing regional market share, lower ad spending and tight cost control at the sales and distribution levels. Going forward, the sale of sports business will reduce the uncertainty surrounding it permanently thus elevating margins by a good 2-3% from hereon. Higher subscription revenues and increasing original programming hours may lead to higher market share and thus margins. However, management believes higher investments may pull the margins a bit but still let them stay afloat above 30% on a steady state basis. We now expect 30.5%/32% EBITDA margins in FY18E/FY19E respectively


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