Zee Entertainment: Rich valuations likely to limit near-term upside

Last Updated: Fri, Jan 25, 2013 06:35 hrs

Zee Entertainment Enterprises outperformed the Street's expectations on the back of reviving ad revenues and strong growth in subscription revenues in the December quarter. The company's healthy performance is expected to continue, thanks to the improving dynamics of the media industry.

Zee is expected to be a key beneficiary of the ongoing digitisation process, which will drive strong double-digit growth in its subscription revenues, alongwith improving margins. Analysts believe the sports business break-even is still some time away (around FY15-16). On the flip side, while ad growth is expected to pick up in the near term, Zee's volatile viewership ratings are a key monitorable. Analysts would also keenly watch the company's investments in new businesses, which would have a bearing on margins.

The Zee scrip has outperformed the Sensex over the past year. It now trades at a valuation of 29.5 times FY14 estimated earnings, which is rich.

In Rs crore Q3'FY13 FY13E FY14E
Revenues 939 3,667 4,283
Y-o-Y change (%) 24.4 20.6 16.8
Ebitda margins (%) 27.8 25.9 27.3
Y-o-Y change (bps) -80 160 140
Net profit 194 706 870
Y-o-Y change (%) 34.0 19.8 23.3
P/E (x) - 31.9 25.9
RoCE (%) - 27.9 29.5
E: Estimates
ROCE: Return on capital employed
Source: Sharekhan

"Zee is trading at 100 per cent premium to market price/earnings – close to the last five-year highs versus 42/30 per cent average premium in the last three/five years. This makes risk-reward unfavourable, in our view. However, sharp subscription Arpu (average revenue per user) increases and index entry may give some technical support," says Surendra Goyal of Citigroup.

Overall, most analysts remain confident of Zee's longer term business prospects. But, given the limited near-term upside (about 10 per cent), they advise that longer term investors could wait for a better entry point.

Q3: All-round growth
Zee surprised the Street with better-than-expected performance on the top line, margin and bottom line fronts. Robust growth in both ad revenues (up 29 per cent) and subscription revenues (up 26 per cent) drove its revenue growth in the December quarter. Notably, both these revenue streams posted strong double-digit growth for the third quarter in a row. While higher spends by consumer durables and fast-moving consumer goods (FMCG) giants during the festive season boosted ad growth, Zee's subscription business gained from the ongoing digitisation process.

"The ad growth recovery has been faster and sharper than our expectations. Further, FMCG companies' (Hindustan Unilever Ltd in particular) healthy ad and promotion spend increases give us added comfort on ad growth visibility. This, together with a better-than-expected margin performance, has led to an earnings upgrade for Zee," says Ballabh Modani, a media analyst at Religare Institutional Research.

The contraction in earnings before interest, taxes, depreciation, and amortisation (Ebitda) margin was much lower than Street expectations, driven by lower losses in Zee's new ventures and sports channel. This is important in the backdrop of higher programming hours and investments in new channels, which pushed up Zee's operating expenses by 26 per cent. The management expects its margins to be above 25 per cent levels.

Zee's losses in its sports businesses narrowed to Rs 8.6 crore (versus Rs 17 crore in the September 2012 and Rs 10 crore in the December 2011 quarters). Further, lower tax rates of 32.5 per cent (versus 36.2 per cent last year) boosted net profit, which grew 34 per cent to Rs 194 crore.

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