Zee Entertainment Enterprises - Investment phase next fiscal to impact margins - LKP Research

Inline Q3 quarter with surprise at the advertising revenues

Zee posted good performance in Q3 buoyed by the surprising element of advertising revenues which grew by 34% yoy on strong market share gain in its flagship GEC channel as well as regional channels like Zee Marathi and Zee Tamil. Blockbuster movie Chennai Express along with success of new channel launches of & pictures and Zee Anmol led to this kind of growth. Heavy sports calendar in the last quarter also led to a hefty ad business revenues. On the subscription side, revenues remained flattish qoq as monetization of the Phase 1 of digitization is getting delayed. On the margin front, EBITDA margins came in at 24.5% due to higher sports losses (Rs 104cr) stemming from the India-SA series. Excluding sports business, margins came in close to 40%. PAT came in at Rs2,136 mn which was a 10.5% growth yoy and a decline of 9.6% qoq.

Outlook and valuation

Zee is expected to post strong subscription revenues going forward as the delayed monetization of Phase 1 digitization gains pace from Q4. Additional impact of Phase 3 and 4 will be seen from FY 16 onwards which gives visibility of revenues going forward. On advertisement business front we believe that Zee will outperform the industry estimate of 12% growth. This will be supported by continuous improvement in content resulting in strong traction in market shares across the channels of Zee. Price increase for all the channels of Zee will continue in Q4 as well thus leading to a seamless transition to the regulatory intervention related with cut in ad inventories and of course leading to a growth in ad revenues. We expect success of low cost new channels like & pictures and Zee Anmol to continue thus leading to a good traction in ad revenues. On the margin front, we have cut our margin expectation for FY 14E/15E to 27%/24% in line with the management's guidance of lower EBITDA margins in FY15 on higher operating costs related with new channel and content investment. Zee will also benefit from the tax benefit coming from the DMCL acquisition from FY 15E onwards. We maintain our BUY rating on the stock with a downward revised target price of Rs 320 from Rs 338.

Source : Equity Bulls

Keywords