A strong digitisation play

Average weekly GRP for Zee TV is near its six-quarter high

We met the management of Zee Entertainment Enterprises (ZEE) for an update on the business trends and outlook. Following are the key highlights:

While the industry ad environment remains sluggish (ZEE expects 7-9% industry growth), strong rating performance and favourable year-on-year base should drive outperformance for ZEE. We expect ZEE?s ad revenue to grow 11% in FY13 against a 7% decline in FY12. The ad environment for the industry continues to be challenging, given persistent slowdown and negative news on the economic scenario impacting business confidence. However, ZEE is benefitting from improved ratings?the average weekly GRP (gross rating point) for Zee TV is near its six-quarter high (215 in Q1FY13 vs 220 in Q4FY11).

The improvement in ratings for Zee TV has come despite no significant increase in original programming hours (OPH) as yet. We expect an increase in OPH, going forward. Zee TV is launching new shows like the weekend bi-weekly ?Fear Files? starting June 30, 2012. Sustenance of ratings would be critical for ZEE to better monetise the benefit of improved ratings in the festive season. In the last two years, Zee TV?s ratings declined in the seasonally strong Q3 due tocompetition from large shows introduced by other general entertainment channels (GECs).

Subscription revenue momentum has been strong since the formation of Media Pro, ZEE?s distribution JV with Star Den. However, likely postponement of deadlines (June 30, 2012 for the metropolitan cities) implies uncertainty on the potential upside from mandatory digitisation. We expect 20/17% domestic subscription revenue growth in FY13/14.

Implementation of mandatory digitisation in phase-I (in four metros) by the deadline of June 30, 2012 appears challenging, given the slow progress in seeding set-top boxes in analog cable homes.

While the Media Pro JV has resulted in improved subscription revenue for ZEE, we believe digitisation can be a significant long-term catalyst.

There could be upside risk to ZEE?s sports loss guidance of R0.65bn-0.7 bn for FY13, given the continued depreciation of the Rs vs the USD. The bulk of the operating costs for the sports segment (R5.4bn in FY12) is denominated in USD, implying a double-digit cost rise at the current exchange rate. We model higher sports loss (R1b/0.8bn in FY13/14).

Over the past one year, the stock has remained flat y-o-y, outperforming the Sensex by 5% despite a challenging ad environment, as subscription outlook improved due to Media Pro and digitisation mandate by the government. While Zee is a strong play on digitisation, we maintain Neutral due to weak ad markets, low visibility on successful implementation of mandatory digitisation and full valuations (20.4x FY13e EPS). We expect EPS (earnings per share) CAGR (compound annual growth rate) of 13% over FY12-14. Our target price is R120 (16x FY14e EPS).

?Motilal Oswal