| Summary of Contents STOCK IDEA Zee Entertainment Enterprises
Recommendation: Buy
Price target: Rs255
Current market price: Rs210 Broadcasting the future Key points -
Prime beneficiary of digitisation: Among the key stakeholders of the domestic television industry, we expect broadcasters to be the prime beneficiary of the mandatory digitisation process initiated by the government. The broadcasters would benefit from higher subscription revenues at the least incremental capital expenditure (capex) as the subscriber declaration improves in the cable industry. The completion of phase I of the digital addressable system (DAS) roll-out on October 31, 2012 (except in Chennai), though with a delay of four months from the earlier deadline, shows the positive intent of the government and the other stakeholders and gives us confidence about the roll-out of the future phases. Zee Entertainment Enterprises Ltd (ZEEL), a leading broadcaster in India with a bouquet of more than 30 channels, would be best placed to benefit from the complete digitisation initiative undertaken by the government. MediaPro Enterprise India Pvt Ltd (MediaPro), a joint venture with Star TV to jointly distribute channels of both the companies as a bouquet, would further drive the company's subscription revenues. We expect the subscription revenues of ZEEL to grow at a compounded annual growth rate (CAGR) of 24.6% over FY2012-15. -
Renewed positioning to boost advertisement share: In the last three quarters Zee TV, the flagship channel of the company, has consistently gained market share among the top four Hindi general entertainment channels (GECs). Zee TV's market share has improved from 16.5% in Q3FY2012 to 22% in Q2FY2013, with gross rating points (GRPs) of 237 in Q2FY2013. After languishing at the fourth place among the top four GECs in CY2011, Zee TV re-emerged in the second or close second spot gaining viewership share in the recent quarters as well as hitting the top spot in weeks 33 and 36 of CY2012. Its advertisement revenues have shown a significant improvement with a 26% year-on-year (Y-o-Y) growth in H1FY2013. In the recent quarters, ZEEL has gradually increased its investments in the reality content ("Dance India Dance" and "Sa Re Ga Ma Pa") as well as acquired satellite rights of big movies ("Agneepath" and "Don 2"). We believe the company's renewed strategy to invest in quality reality content and big-star movies would augur well for the advertisement revenues. We expect ZEEL to grow at a rate higher than the industry average in FY2013-15E. -
Strong balance sheet with healthy return ratios: By FY2015, we expect ZEEL's cash flows to improve significantly with a jump of around 75% from the FY2012 cash and cash equivalents of Rs1,060.7 crore. With the management comfortable with a cash level of around Rs800-900 crore in the balance sheet and expectations of an increase in the cash level to around Rs1,900 crore by FY2015, we expect ZEEL to reward its shareholders with a higher dividend pay-out or share buy-back programme. In the last three years, the dividend pay-out ratio has been around 25-30%, which will increase in the coming years. Also, in the last two years the company has initiated two share buy-back programmes acquiring shares of cumulative value of Rs290 crore. Thus, there is a likelihood of a further reward for the shareholders in the coming years. That's not all, with strong predictability of its earnings the return ratios are set to improve in the next three years. -
Valuation-integrated media baron deserves premium valuation: On the back of an improvement in the earnings predictability driven by significant subscription revenues (a digitisation boost) and above-industry advertisement growth coupled with a gradual improvement in the margin profile, ZEEL's earnings are expected to grow at a CAGR of 25% over FY2013-15. Further, strong cash levels would drive the management's inclination to reward the shareholders which would act as a positive trigger for the stock. Being one of the the largest integrated media broadcasters with a strong reach across the globe ZEEL deserves a premium valuation. At the current market price of Rs210, the stock trades at 23.1x and 18.6x earnings estimates, and 15.7x and 12.4x enterprise value (EV)/EBITDA at FY2014 and FY2015 estimates respectively. We value ZEEL at 25x average earnings per share (EPS) of FY2014-15E, which is in line with the last eight years' average trading multiple of the company. We are taking a longer period trading multiple to capture both the upcycle and the downcycle of the company. We initiate coverage on ZEEL with a Buy recommendation and a price target of Rs255.
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