Published on 15/03/2017 3:52:30 PM | Source: Sharekhan
Buy Zee Entertainment Enterprises Ltd For Target Rs.580.00 - Sharekhan
* Advertising revenue to return to normal by Q1FY2018, margins to be ~30% comfort range:
Though growth in advertising revenue is expected to be muted in Q4FY2017 (as the key sectors like FMCG, Telecom, Auto and e-commerce have lowered their ad spends in the wake of demonetisation), the management expects the ad revenue growth to rebound to pre-demonetisation level from Q1FY2018 onwards. FY2018 would not suffer from the adverse impact of demonetisation, as the management foresees higher ad spends from Telecom and Auto sectors, besides pent-up spends from the FMCG pack amid a host of new launches. The management remains confident of surpassing the overall industry growth in advertising revenue in future (industry level growth will be ~8-11%). On margins, the management is comfortable with the level of 30%, and will reinvest the savings from the exit in the Sports business back into the core business (likely to add 300-350BPS in FY2018).
* Rating worries on flagship Zee channel to reduce in the next few quarters, regional portfolio continues to see traction:
In the last 3-4 months, ZEEL’s flagship channel ZEE TV has witnessed a drop in its rating, which the management has attributed to change in leadership six months back (new channel head). ZEEL expects to introduce new content on ZEE TV and will do away with unviable content. The management expects programming hours to increase to 28-30 from 24.5 currently. The strategy to achieve breakeven for &TV is working well (breakeven expected in FY2018-FY2019). The programing hours for &TV will improve to 25 hours from 23 hours now (20 hours in Q3FY2017). As far as the regional channels are concerned, Marathi, Telugu, Bangla and Kannada channels are doing well, while Tamil has done fairly well with significant improvement in viewership and market share in the last 2-3 years. Sarthak TV (acquired last year) continues to maintain its leadership position in the Odisha market. With the acquisition of Big Ganga channel in Q2FY2018, ZEEL will have a leadership position in the Bhojpuri-centric region in North India (will consolidate in H2FY2018).
* Subscription revenue expected to see full impact of Phase III digitalisation by FY2019:
The domestic subscription revenue growth is expected to be in the range of mid-teens to high-teens, whereas the international subscription revenue growth will remain flat on account of saturation in the key markets. The ZEEL management expects double-digit growth in subscription revenue in the medium term, as the benefits of phase III digitalisation will be reflected in the next 12-15 months.
* Strong earnings momentum to be intact; maintain Buy:
ZEEL continues to be focused on five pillars to drive long-term growth. We expect the successful execution of this strategy to have a material long-term sustainable growth. In the short term, we expect the announcement of RPS redemption (cash already received) from the sale of Sports business, which will expand the return ratios besides improving its ratings, and the continued strength in the regional portfolio to justify premium valuation of ZEEL. We have introduced FY2019 estimates in this note. We continue to remain positive on ZEEL, as it is one of the key beneficiaries of the structural pan-India consumption theme. We maintain our ‘Buy’ rating with a revised price target of Rs580.
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