Motilal Oswal neutral on Zee Entertainment; target Rs 110

“ZEE has been losing viewership share in Hindi GEC, Marathi GEC and Hindi Movies. However, it has recorded market share increase in the Bengali and Kannada GEC markets. After declining 5% in FY12, we expect ad revenue (including Sports) to grow 10% in FY13. We also model acceleration in domestic subscription growth from ~12% in FY12 to ~18% in FY13. EBITDA loss in Sports business is likely to be below INR1b in FY12 and decline further in FY13. We expect EPS growth of 4% in FY12 and 10% in FY13. The stock trades at 19x FY12E EPS of INR6.2 and 17x FY13E EPS of INR6.8.”

“Competition for Zee Entertainment Enterprises’ (ZEE) flagship channel, Zee TV continues to intensify in the Hindi GEC space, with its viewership share declining to ~12% over the last six weeks from 14.5% YTD and 16.8% in FY11. With Sony overtaking by a wide margin, pushing Zee TV to the number-4 slot and launch of new GEC, Life OK by Star (in place of Star One), we expect competition to remain tough, exerting pressure on yields. While Star One was garnering ~40 GRPs/week, we expect Life OK to clock ~100 GRPs on the back of strong promotions and fresh content. Other genres that have seen competitive position weakening for ZEE in FY12 are Marathi GEC (share down by >10 percentage points YoY) and Hindi Movies (lost number-1 slot to Star Gold). However, ZEE has recorded market share increase in the Bengali and Kannada GEC markets.”

“Ad revenue for the broadcasting industry is now expected at mid-single digits during FY12, as against the expectation of ~15% growth at the start of the year. ZEE is likely to underperform the industry, given (1) market share/leadership loss in some key genres like Hindi GEC, Hindi Movies and Marathi GEC, and (2) lower ad revenue from Sports business due to lack of India-specific cricket content. Our recent industry interactions indicate continued weakness in advertising market post the festive season in October; we believe our estimate of 5% decline in ZEE’s ad revenue (including Sports) for FY12 could have downside risks. Our 10% ad growth estimate for FY13 assumes recovery in ad markets (no history of back-to-back singledigit/ low growth years) as well as relatively better ratings performance by the flagship channel. Every 1% change in ad growth impacts EPS by ~2%. We model acceleration in ZEE’s domestic subscription growth from ~12% in FY12 to ~18% in FY13, driven by (1) renegotiation of cable contracts by Media Pro (distribution JV with Star Den), and (2) increased revenue from digitization. Subscription revenue momentum in the international markets remains weak. We continue to model 4/5% decline during FY12/13 despite INR depreciation.”

“Post our recent company visit, we are keeping estimates unchanged. Our estimates imply ~7% ad revenue decline in 2HFY12 v/s 2% decline in 1HFY12. We expect EPS growth of 4% in FY12 and 10% in FY13. Zee has till date made a buyback of 15.7m shares (v/s minimum of 12.6m shares) for a total outlay of ~INR1.9b (v/s maximum of INR7b). The average price of the buyback is ~INR116 (v/s maximum buyback price of INR126). Continued buy-back could provide downside support to the stock price. The stock trades at 19x FY12E EPS of INR6.2 and 17x FY13E EPS of INR6.8. Maintain Neutral with a price target of INR 110 (16x FY13E EPS)," says Motilal Oswal research report.

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