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Last Updated : Jul 27, 2016 06:52 PM IST | Source: Moneycontrol.com

Regional biz, auto & telco ad drive Zee but valuations expensive

In terms of sector ad break up, while FMCG and internet saw some softening, telcos and autos increased spending. However, the company has said that FMCG was below average this quarter, a few more quarters will be needed to ascertain if this is a continuing trend.

 
 
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With industry beating ad growth and regional business push, Zee Entertainment may see strong performance in FY17. Analysts are bullish on the media company but few think that its current valuations are not cheap.


According to Citi, stock valuations (30.5x/33x FY18 pre/post-RPS P/E) price medium term gains and are rich considering the business returns ratios and high expectations. Though the media company which owns flagship channel Zee TV has seen ad growth of 19 percent as opposed to industry ad growth of 13-14 percent, the brokerage firm says that Zee Entertainment is likely to see slower ad growth than before.


In terms of sector ad break up, while FMCG and internet saw some softening, telcos and autos increased spending. However, the company has said that FMCG was below average this quarter, a few more quarters will be needed to ascertain if this is a continuing trend.

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Citi has maintained sell rating on the stock but raised profit estimates and target price by 3-4 percent. It adds that while Zee Entertainment is befitting from a healthy performance in regional channels and Anmol, the flagship has been under pressure. The management is taking steps to improve its ratings as it revamps content and there is a drop in original programming hours (now at 24 hours per week from estimated 30 hours in Q1FY16).


Macquarie agrees that Zee Entertainment's current valuations are not cheap. However, it believes that given its market leadership, dependence on stable subscription revenue and high affinity to ad spends by consumer companies it deserves a premium multiple.


It is optimistic that in second half of FY17 ad spends by sectors like telecom (4G related spending) would continue to aid Zee Entertainment’s ad growth. Zee TV’s market share has improved by 200 basis points (bps) in July 2016 which augers well for ad growth.


"It will be stepping up investments in key areas like higher original programming hours for Zee TV, launch of few regional HD channels and higher sports losses in the remaining quarters of FY17. We are factoring in an EBITDA margin of 27.3 percent and are building in a Rs 80 crore sports loss for Zee in FY17, with the bulk of the losses coming in Q2FY17," Macquarie says.


It has an outperform rating with an increased target of Rs 540 per share and 8 percent upgrade in FY17 and FY18 EPS largely due to higher margins.

Bank of America Merrill Lynch has reiterated buy rating with a target price of Rs 520 per share. It says that subscription revenues growth were slower due to seasonality and Q3, Q4 show higher growth because of catch up revenues being registered.

Shares of Zee Entertainment rallied 4 percent intraday on Wednesday. It closed at Rs 487.90, up Rs 13.35, or 2.81 percent on the BSE.

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First Published on Jul 27, 2016 04:59 pm
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