CLSA is bullish on Zee Telefilms and has recommended buy rating on the stock.

CLSA report on Zee Telefilms

Conditional Access System (CAS) implementation in specified areas of three metros continues to roll. In two months “Pay TV” homes are estimated at 30% and we believe it is still "early days". Industry expects a pick-up in conversions with the upcoming cricket World Cup telecast. Government is collecting about 25% as taxes from “Pay TV” homes and we believe improved conversions in metros will hasten CAS rollover to rest of India. We maintain the changing cable TV distribution landscape is a significant opportunity for Zee’s domestic pay revenues and will position it for hyper growth. Maintain BUY

Early day for CAS in metros

CAS rollout in Zone 1 areas of Mumbai, Delhi and Calcutta continues. Industry estimates across three metros, 1.6m of 8m C&S homes are under CAS footprint and in two months the conversion to “Pay TV” is at 30%. Prior to this Zee declared homes stood at only 80,000 in CAS areas. While so far 0.48m homes have taken up STB/DTH connections we believe it is still "early days". There also remain ground hurdles like continuing conflicts in distribution (esp. between MSO/LCO), shortage of Set Top Boxes under rentals schemes and minimum four months subscription in case of ala carte channel choice. Industry, especially DTH and cable operators are of the view a significant number of homes are sitting on the fence and expect a pick-up in conversion with the upcoming cricket World Cup telecast.

Awaiting rollover to rest of India

As per initial comments by Telecom Regulatory Authority of India (TRAI) and industry it is believed that CAS in rest of India should be rolled out voluntarily rather than be mandated. However the same is still under debate (committee being constituted) and there is also a pending TRAI review of pricing/sharing and a la carte issues in coming months. We believe given that government is collecting 25% as taxes from “Pay TV” homes and without regulatory interventions, broadcasters MSOs and LCO have consistently failed to enter into agreeable commercial agreements, CAS will likely be mandated in rest of the country albeit in phases. We believe significant conversions in metros will hasten CAS rollover to rest of the country.

Ad-revenue turnaround and subscriptions

We estimate Zee network’s FY07CL ad-revenue growth at 28%YoY led by gain in viewer-ship ratings. Zee TV continues to have 10-12 shows in top 50 and remains a strong No 2 despite the launch of KBC-3 by Star in Jan 07 and risk of Cricket World Cup telecast in Mar 07. Alongside we see rising visibility for a ramp-up Zee’s domestic subscription revenues with the expansion of DTH services and improving conversions for CAS. We maintain the changing cable TV distribution landscape is a significant opportunity for Zee and will position it for hyper growth. Maintain BUY.