Upgrade Zee to outperform with a target price of Rs 469. We have upgraded our earnings estimates for FY16E/ FY17E by 6.7%/ 3.9% as we build in lower losses from &TV,at Rs 200 crore vs Rs 260 crore earlier. We also introduce FY18E financials. We are now building in a CAGR of 18.4% in Zee’s consolidated advertising revenues and a CAGR of 16.3% in its domestic subscription revenues over FY15- 18E.
This will result in a CAGR of 19.3% in consolidated Ebitda and 19.5% in earnings. We note that FY16-18E earnings CAGR would be even better, at 28%. Given high earnings visibility over the next two years, we have rolled forward our target valuation to 30x FY18E core EPS and arrive at a target of Rs 469 after deducting DCF value of preference shares.
Broadcasters are a better play on digitisation as they do not have to invest much directly but benefit tremendously from increasing digital penetration in terms of higher subscription revenues. However, the broadcasters do need to invest in content as digitization brings with it fragmentation. Accordingly, Zee has upped the ante in terms of content investment over the past two years. However, large investment (such as for &TV) are now behind for the company, and incremental investments can be easily funded with the ensuing benefits of digitisation.