Initiating Coverage September 25, 2012
Rating Matrix Zee Entertainment Enterprise (ZEETEL) Rating : Hold Target : | 175 | 175 Target Period : 12-15 months Potential Upside : 0% Growth in sight; valuations stretched… Zee Entertainment Enterprise Limited (ZEEL), one of the leading YoY Growth (%) broadcasting companies with a bouquet of 30 channels across genres (YoY Growth) FY11 FY12 FY13E FY14E and languages will be a major beneficiary of the digitisation wave Net Sales 37.0 0.9 10.8 13.3 resulting in doubling of subscription revenues with complete digitisation. EBITDA 34.7 (10.5) 22.1 15.7 Continual investment in high quality content and increasing programming Net Profit 0.4 (7.5) 14.9 18.2 hours have catapulted Zee TV to the No. 2 Hindi GEC slot from No. 4 last EPS (55.5) (5.7) 14.9 18.2
year. We believe the flagship channel would be able to maintain healthy Valuation Summary GRPs, going ahead, resulting in higher than industry ad revenue growth. FY11 FY12 FY13E FY14E Recently formed JV Media Pro would further enhance bargaining power P/E 26.9 28.5 24.8 21.0 to extract better deals from distributors. We expect 12.1% and 16.5% Target P/E 2 6.9 28.5 24.8 21.0 CAGR over FY12-14E in revenue and EPS, respectively. Over aggressive EV / EBITDA 1 9.8 22.3 18.0 15.3 bidding for quality content may be a key risk for ZEEL. We value ZEEL at P/BV 5 .5 4.9 4.3 3.7 21x (in line with last five year average) FY14E arriving at a target price of | RoNW 20.6 17.1 17.2 17.5 175. Though there has been marked improvement in the company’s RoCE 25.9 20.5 21.7 21.7 operating performance, due to the recent run up, the stock looks fairly Stock Data valued at current levels. We initiate coverage on ZEEL with HOLD rating. Market Capitalization | 16782.5 Crore Strategy change to benefit ad growth Total Debt (FY12) | 24 Crore Cash and Investments (FY12) | 328.3 Crore Change in strategy to acquire quality content and increase programming EV | 16478.2 Crore hours has started to pay off, with Zee TV reaching the No. 1 position after 52 week H/L 185 / 112 several years in the Hindi GEC space for week 34 and 36 in 2012 (overall Equity capital | 95.9 Crore No. 2 position post FY12 at weekly GRP of 225 vs. 183 in FY12). Going Face value | 1 ahead, we expect the company to increase programming hours further MF Holding (%) 13.1 and monetise recently acquired movies to sustain leadership position. FII Holding (%) 35.4 High GRP in both GEC and Hindi movie space would enable ZEEL to post
Comparative return matrix (%) higher than industry ad revenue growth of 10.6% over FY12-14E. 1M 3M 6M 12M Digitisation to drive subscription revenue Sun TV Network 7.8 16.6 1.2 8.6 Network 18 -9.3 -9.7 -22.0 -66.9 Subscription revenue is expected to grow at 19.6% CAGR over FY12-14E, ZEEL 4.1 31.7 41.3 52.6 led by the digitisation mandate. It will also enable the company to recover investments in sports and niche channels, which rely primarily on Price movement subscription revenue. Moreover, a gradual decline in carriage fees would help the margins, going ahead. 6,000 200 5,000 Expensive valuation 150 ZEEL has traded at an average multiple of ~21x one year forward EPS 4,000 since 2007. However, during its recent peak in 2007, ZEEL traded at 39x, 3,000 100 over 200% premium to Sensex. It is currently trading at ~84% premium 2,000 to the Sensex vs. its long term average of 48%. Valuing ZEEL at 21x FY14 50 1,000 EPS at | 175, we initiate coverage with HOLD rating. Further improvement in Zee TV’s GRPs and market share could lead to expansion in multiples. 0 0 Oct-11 Jan-12 Mar-12 Jun-12 Sep-12 Exhibit 1: Valuation Metrics Price (R.H.S) Nifty (L.H.S) (Year-end March) FY10 FY11 FY12 FY13E FY14E Net Sales (| crore) 2,199.8 3,013.6 3,040.5 3,370.3 3,819.9 EBITDA (| crore) 613.5 826.6 739.5 903.0 1,044.7 Analyst’s name Net Profit (| crore) 634.4 637.0 589.1 677.0 800.0 EPS (|) 14.6 6.5 6.1 7.1 8.3 Karan Mittal [email protected] P/E (x) 12.0 26.9 28.5 24.8 21.0 Price / Book (x) 2.0 5.5 4.9 4.3 3.7 Anil Shenoy RoCE (%) 14.8 25.9 20.5 21.7 21.7 [email protected] RoE (%) 16.6 20.6 17.1 17.2 17.5
Source: Company, ICICIdirect.com Research
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Shareholding pattern (Q1FY13) Company background Shareholder Holding (%) Zee Entertainment Enterprise Ltd (ZEEL) is a part of the Essel group Promoter 43.87 FII 35.35 promoted by Subhash Chandra. Apart from ZEEL, Essel group also owns DII 13.11 the television network Zee News. Also, it has a presence in print media (DNA), cable distribution (Wire & Wireless), DTH (Dish TV), satellite Others 7.67 communication (Agrani & Procall), theme parks (Essel World and Water Kingdom), online gaming (Playwin), education (Zee Learn), flexible FII & DII holding trend (%) packaging (Essel Propack), infrastructure development (Essel Infraprojects) and family entertainment centres (Fun Cinemas).
37 40 35 36 35 ZEEL owns one of the largest broadcasting networks in India with 30 TV 30 channels including four HD channels and 22 beams in international markets with a global viewership of above 650 million. The company 20 13 13 13 13 launched its flagship channel Zee TV in 1992, which currently operates in a highly competitive market and forms a major part of the revenue. After 10 falling to the No. 4 slot in the Hindi GEC space in FY12, the company 0 changed its strategy to aggressively acquire high cost properties. Post Q2FY12 Q3FY12 Q4FY12 Q1FY13 FY12, Zee TV has improved its ranking and after many years and reached the No. 1 position in week 34 and 36 of CY12 (overall No. 2 position post FII DII FY12). The company’s Hindi movie offerings include four channels, which have collectively been dominating the Hindi movie space. Also, the company has a significant presence in regional markets with a presence in Maharashtra, West Bengal, Karnataka, Andhra Pradesh and Tamil Nadu (newly launched).
With its acquisition of a 50% stake in Taj TV (Ten Sports) in 2007 and a further 50% in 2012, Zee has a strong presence in the sports segment, with four channels viz. Ten Sports, Ten Action, Ten Cricket and Ten Golf.
ZEEL also has a presence in content distribution through both analogue & digital platforms through Media Pro Enterprise India, which is a joint venture between Zee Turner & Star Den Media Services. The bargaining power of Media Pro enables Zee along with Star and Turner channels to command a higher share of the ARPU than their combined market share.
The company derived 52% of its revenues in FY12 from advertising while subscription income accounted for 43% of total revenues. While majority of the subscription revenue (30%) came from domestic operations, international subscription revenues contributed 13%.
Exhibit 2: ZEEL - FY12 revenue split
International Others, 4% Subscription, 13%
The company derived 52% of its revenues in FY12 from advertising while subscription income accounted for 43% of total revenues Ad revenue, 52%
Domestic Subscription, 30%
Ad revenue Domestic Subscription International Subscription Others
Source: Company, ICICIdirect.com Research
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Exhibit 3: Diversified set of channels
Source: Company, ICICIdirect.com Research
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Investment Rationale Ever growing media industry As with every emerging market, India has been home to a growing media industry, which has grown at a CAGR of 9% in CY07-11. The growth has been in spite of the global recession, which led to subdued growth of 1% in CY09. Even in CY11 when the economy started showing signs of slowing down, the media industry grew by 11.7% representing a digital dawn. Going forward, the media industry is expected to grow at a CAGR of 14.9% from | 728 billion in CY11 to | 1457 billion in CY16. Exhibit 4: Media industry | billion 2007 2008 2009 2010 2011 CAGR (07-11) % 2012E 2013E 2014E 2015E 2016E CAGR% (11-16) % Television 211 241 257 297 329 11.7 380 435 514 618 735 17.4 Print 160 172 175 193 209 6.9 226 247 270 295 323 9.1 Film 93 104 89 83 93 0.0 100 110 121 135 150 10.1 Radio 7 8 8 10 12 13.2 13 16 20 24 30 20.7 Music 7 7 8 9 9 6.5 10 11 13 15 18 15.1 OOH 14 16 14 17 18 6.2 20 22 24 26 29 10.3 Animation 14 17 20 24 31 22.0 36 43 51 61 69 17.4 Gaming 4 7 8 10 13 34.3 18 23 29 37 46 28.8 Digital 4 6 8 10 15 40.1 20 26 34 44 57 29.9 Total 516 579 587 652 728 9.0 823 932 1076 1254 1457 14.9
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
The television industry has been the major contributor to the media industry, contributing ~45% of the total revenue of the industry in CY11 up from 41% in CY07. Riding the digitisation wave, the television industry is expected to outgrow the overall media industry, to grow at a CAGR of 17.4% from | 329 billion in CY11 to | 735 billion in CY16 to more than half of the industry.
Exhibit 5: TV as percentage of media industry
55.0 50.4 49.3 47.8 50.0 46.7 45.6 45.2 46.2 43.8 45.0 40.9 41.5
% 40.0 The TV industry will form more than half of the media industry by 2016 35.0
30.0
25.0 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E 2016E
TV as a % of Media Industry
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
Television industry – Ad revenue to show robust growth India is currently the third largest TV market in India with 146 million TV households next only to the US and China. The Indian TV market is characterised by lower TV penetration and lower ARPU as compared to other countries in the world, providing significant room for growth.
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Exhibit 6: Households (HH) data
230 million HHs
While the 28 million terrestrial TV households and 84 million non-TV households (HHS) provide long term 146 million TV HHs 84 million non TV HHs opportunities for digitisation, 68 million analogue cable households are the short term opportunity Immidiate opportunity
28 million Terrestrial TV 118 million Pay TV HHs HHs Long term opportunities
6 million digital cable 68 million analogue HHs 37 million DTH HHs HHs
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
The television industry earned | 115 billion or 35% of the revenue in CY11 from advertisement while | 214 billion was contributed by subscription revenue. While ad revenue accrues to the broadcaster, the subscription income is shared by the broadcaster and the C&S industry including MSOs, LCOs and DTH operators. Exhibit 7: Television - Ad and subscription revenue split
800 700 600 500 505 The television industry earned | 115 billion or 35% of the 400 421
| billion 344 revenue in CY11 from advertisement while | 214 billion 300 287 250 was contributed by subscription revenue 200 194 214 158 169 140 230 100 148 170 197 71 82 88 103 115 130 0 CY07 CY08 CY09 CY10 CY11 CY12E CY13E CY14E CY15E CY16E
Ad revenue Subscription revenue
Source: FICCI KPMG report 2012, ICICIdirect.com Research
Television takes the second highest share of advertising in the media industry next only to print. In CY11, while print formed 46% of the total ad revenue, television formed 39%. However, television has been increasing its share in the ad revenue of the total media from 36% in CY07 to 39% in CY11. With a wider reach, ability to reach illiterate audience as well and a large category of untapped advertisers who are currently using print media, ad revenues for the television industry are expected to grow from | 116 billion in CY11 to | 230 billion in CY16 at a CAGR of 14.7%.
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Exhibit 8: Advertising revenue split
| billion 2007 2008 2009 2010 2011 CAGR (07-11) % 2012E 2013E 2014E 2015E 2016E CAGR% (11-16) % Television 71 82 88 103 116 13.1 130 148 170 197 230 14.7 Print 100 108 110 126 139 8.7 154 172 193 215 241 11.5 Radio 7 8 8 10 12 11.7 13 16 20 24 30 20.7 OOH 14 16 14 17 18 6.2 20 22 24 26 29 10.0 Digital 4 6 8 10 15 40.1 20 26 34 44 57 29.9 Total 196 220 228 266 300 11.2 337 384 440 506 586 14.3
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
Subscription revenue – riding the digitisation wave The lion’s share of the subscription revenue of the TV industry has been going to the C&S industry predominantly due to huge under declaration in the C&S industry. According to a Ficci-KPMG report 2012, in CY11, the broadcasters’ subscription revenue stood at | 49 billion at just 23% of the industry’s subscription revenue. However, with the advent of digitisation, under declaration is expected to go down gradually and eventually be completely eliminated from the system. This would benefit MSOs and broadcasters to a huge extent. While the overall subscription revenue for the industry is expected to grow at a CAGR of 19% from CY11-16 to | 505 billion, broadcasters would witness a subscription revenue CAGR of 29% from | 49 billion to | 176 billion. Exhibit 9: Subscription revenue - share between broadcaster and C&S industry
600
500
400 While the overall subscription revenue for the industry is 329 expected to grow at a CAGR of 19% from CY11-16 to | 505 300 276 billion, broadcasters would witness subscription revenue | billion 238 200 209 growth at a CAGR of 29% from | 49 billion to | 176 billion 188 153 165 100 138 176 106 145 49 62 78 0 31 41 CY09 CY10 CY11 CY12E CY13E CY14E CY15E CY16E
Broadcasters C&S
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
In an analogue system, LCOs typically under declare ~80% of the subscription income collected from subscribers. This results in a considerably lower wallet share of the consumer to the broadcaster. However, with the advent of digitisation, under declaration will be eliminated from the system and the previously under declared revenue would go in a large way to benefit MSOs and broadcasters at the cost of LCOs. Post complete digitisation, the subscription income of the broadcaster is expected to go up to ~2x.
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Exhibit 10: Broadcasters & MSOs to benefit from digitisation Present Scenario Post Digitisation Unit Analog Digital Cable DTH Digital Cable DTH Total Subscibers Million 68 6 37 64* 47 ARPU** | 150 160 160 160 160 Subscription Revenue | crore 12240.0 1152.0 7104.0 12249.6 9062.4
LCO Share % 85 35 35 Post complete digitisation, the subscription income of the MSO/DTH Share % 7.530653065 broadcaster is expected to double Broadcaster Share % 7.535353535
LCO's Share | crore 10404.0 403.2 4287.4 MSO/DTH Share | crore 918.0 345.6 4617.6 3674.9 5890.6 Broadcasters Share | crore 918.0 403.2 2486.4 4287.4 3171.8 Total LCO Share | crore 10807.2 4287.4
MSO/DTH Share (net of LCO | crore 5881.2 9565.4 and Broadcasters costs) Total Broadcaster | crore 3807.6 7459.2
* - Assuming 15% churn to DTH ** - Assuming ARPU to remain stable Source: ICICIdirect.com Research
In Q1FY12, Zee earned | 110.7 crore of subscription income from DTH operators while cable operators contributed | 96.8 crore. The subscription income from DTH operators was more even when the numbers of DTH subscribers stood at ~30 million while the cable subscribers stood at ~81 million. It implies that revenue growth from subscription income will grow ~2x for broadcasters by the time complete digitisation is achieved.
An analogue cable can carry 70-90 channels on its network whereas the number of channels in India is ~623. This led to broadcasters paying a huge carriage fees to MSOs to carry their channel on the MSOs network. Due to digitisation, the channel carrying capacity of cable would significantly increase and with Trai guidelines of increasing the channel carrying capacity to 500 by January 1, 2013, carriage fees are expected to reduce significantly for broadcaster. However, tiering fees (for placement of channel in various packages) would partly offset the decline in carriage fees.
Increasing TV penetration to further fuel subscription revenue growth Subscription revenues for the television industry would also be helped by an increase in the number of TV households, increase in C&S penetration and increase of digital subscribers share in total C&S households.
While TV households are expected to increase from 146 million to 188 million, the C&S penetration is expected to increase from 81% to 88% in CY11-16 resulting in the addressable market increasing from 118 million in CY11 to 165 million in CY16 at a CAGR of 6.9%.
While DTH subscribers are expected to increase from 37 million to 86 million, digital cable is expected to witness an increase from 6 million to 75 million in CY11-16. Analogue cable, which accounts for 68 million subscribers currently, is expected to be negligible by CY16.
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Exhibit 11: C&S penetration
88 200 87 90 86 180 84 160 83 85 81 140 120 78 80
100 % 74 million 80 156 165 75 137 147 C&S HH’s penetration is expected to increase from 81% in 60 118 128 95 108 CY11 to 88% in CY16 40 70 20 129 138 146 154 163 171 180 188 0 65 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16E
TV Households C&S Households C&S penetration
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
Exhibit 12: Digital system to knock out analogue
100 86 90 78 75 80 69 68 68 64 67 70 59 60 50 53 Though the digitisation mandate directs complete digitisation 46 49 50 37
by December 31, 2014, Ficci estimates expect analogue million 32 32 40 28 cable to remain even after that although in small numbers 30 16 19 20 12 6 10 4 5 4 0 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16
Analog Cable Digital Cable DTH
Source: FICCI KPMG report 2012, ICICIdirect.com Research
ARPU growth to also help subscription income The ARPU in the Indian market has been traditionally lower than other countries. ARPUs may continue to remain somewhat pressurised in the near term as DTH operators and MSOs compete to digitise the same subscriber base.
Exhibit 13: India - one of the lowest ARPUs in the world
60 56.9
50 45.4
40
$ 30 The ARPU in the Indian market has been traditionally lower 20 than other countries 20
10 3.5
0 USA UK Malaysia India
Source: Company, ICICIdirect.com Research
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However, as digitisation progresses, the ARPU is expected to increase due to consumer willingness to pay more for higher number of channels at better picture quality. Moreover, as the distribution industry starts focusing on profitability, we expect tariff hikes to take place, which would further propel the ARPU. DTH operators have already raised their tariffs three times in the last year. Along with a raise in tariffs, ARPU is also expected to see an upward pressure as consumers shift from the lower priced base package to higher packages with more channels.
Higher uptake of HD channels will help the growth in ARPU. Currently, there are ~30 HD channels in the industry. The ARPU growth would benefit broadcasters in terms of higher subscription income. Exhibit 14: Ficci - ARPU estimates
ARPU (|) CY11 CY12 CY13 CY14 CY15 CY16 Analog 160 165 170 170 171 171 Digital ARPU to grow from | 160 in CY11 to | 253 in CY16 Digital 160 170 180 201 226 253 DTH 160 170 180 201 226 253 IPTV 160 170 180 201 226 253
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
Exhibit 15: Rising ARPU for Dish TV
160 156
152 152 155 151 150 150 150 Dish TV witnessed an increase in its ARPU from | 139 in Q1FY11 to | 156 in Q1FY13 on the back of tariff hikes 145 142 taken during the period 139 139 140
135
130 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13
Source: Company, ICICIdirect.com Research
Zee TV – Change in strategy starting to yield results ZEEL competes in the most watched Hindi GEC segment through its flagship channel Zee TV. The company currently derives more than half of its revenues from Zee TV. The Hindi GEC market is a highly competitive market with four strong players including Zee TV, Star TV, Sony and Colors.
As per TAM data, Star TV has been dominating the ratings for a long time. Since the launch of Colors, Zee has been consistently in the third spot till Q1FY12 post which Zee further slid to the fourth position when Sony overtook it. The superior performance of other channels was predominantly due to acquisition of high cost movies and higher proportion of non-fiction reality shows. Zee, on the other hand, had shied away from acquiring high cost content till FY12. Though it still had the largest inventory of blockbusters of yesteryears, lack of new movies reflected in its ratings for FY12 as well as ad revenue de-growth of 6.9%. Zee TV commanded a market share of 19.9% among the top 4 Hindi GECs and on an average was in the fourth position in the Hindi GEC space in FY12.
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Exhibit 16: ZEEL picking up movie acquisition in 2012
Zee TV Star Plus Sony Colors All The Best Housefull 3 Idiots Dabangg Kambakkht Ishq De Dana Dan Badmaash Company Ajab Prem Ki Ghazab Kahani Peepli Live Wanted Dil Bole Hadippa Khatta Meetha (Akshay) Veer Do Knot Disturb 2010 Atithi Tum Kab Jaoge Raavan Paa Kites My Name Is Khan Once Upon A Time In Mu Khichdi The Movie Bbuddah Hoga Terra Baap Action Replayy Robot Golmaal 3 Double Dhamaal Singham Band Baaja Baaraat Ready Tanu Weds Manu Bodyguard Mere Brother Ki Dulhan Tees Maar Khan 2011 Anjaana Anjaani Yamla Pagla Deewana Thank You Zindagi Na Milegi Dobara Murder 2 Rascals Aarakshan Haunted Agneepath (Hrithik Roshan) Ra-One Ladies Vs Ricky Bahl Blood Money Desi Boyz Force Tere Naal Love Ho Gaya 2012 Don 2 Kahaani The Dirty Picture Players Rockstar Ek Main Aur Ek Tu Agent Vinod Jodi Breakers Paan Singh Tomar Barfee Dabangg 2 Tere Naal Love Ho Gaya Heroine Housefull 2 Jannat 2 Joker Ghayal 2 Tezz Michael And My Friend Pinto Kaal Returns Razz 3 Kya Super Kool Hain Hum Rowdy Rathore Ek Tha Tiger
Source: TAM, Media Reports, ICICIdirect.com Research
However, the company has now changed its strategy and has been investing in high cost reality shows as well as movies, which got reflected in its Q1FY13 performance wherein the company reported an 18.1% jump in its ad revenue. The company’s superior ratings in Q1FY13 were on the back of reality show Dance India Dance and movies like Agneepath and Don 2. On the back of these high cost content, Zee TV improved its market share in the period post FY12 to 24.5% and on an average stood in second position in the Hindi GEC space. Recently, Zee TV had reached the top position for week 34 and 36 of CY12 as well after many years thanks to the finals of Dance India Dance and Dance India Dance Superkids. The company also has the rights to some of the latest/forthcoming movies like Agent Vinod, Barfi, Heroine, Joker and Michael and my friend Pinto.
The superior ad revenue growth in Q1FY13 is also attributable to an increase in programming hours by the company. The company added three more hours of fresh programming recently with the addition of Fear Files and Ramayan. The management indicated that currently the industry operates with an average of 26-27 hours of fresh programming per week. After lagging behind the industry standards for a long time, ZEEL is currently at par with the industry in terms of programming hours after the introduction of its new shows. The management has guided an increase in fresh programming per week to 32-33 subsequently. We have factored in fresh programming of 29 hours for FY14.
Also, the competitive intensity in the movie space seems to be on the decline with Colors slowing down its activities. According to media reports, in the beginning of CY12 Colors sold its 500 plus movie library to Star India for ~| 500 crore. Also, Viacom18 (Colors) were planning to launch a movie channel, which was cancelled. Colors has acquired only one new movie in 2012.
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Exhibit 17: April 2011 - Present day average weekly GRPs for Hindi GECs
400 FY12 Change in strategy started yielding results post FY12 350
300
The change in strategy yielded immediate results with Zee 250 TV improving its market share post FY12 200
150
100 W2 W6 W15 W19 W23 W27 W31 W35 W39 W43 W47 W51 W10 W14 W18 W22 W26 W30 W34 2011 2012 Colors Viacom18 SONY ENTERTAINMENT TV Star Plus Z Zee TV
Source: TAM HSM, CS4+, ICICIdirect.com Research
Exhibit 18: Effect of GRP market share on quarterly ad growth*
23.0 25.0 21.2 20.0 18.7 20.0 16.5 15.0 18.1 10.0 With the market share improvement, Zee reported a handsome 18.1% growth in Q1FY13 5.0 0.5 0.0 -5.0 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 -10.0 -4.2 -15.0 -10.1 -13.5 -20.0
Market share (%) Ad Revenue growth (%)
* - GRPs of Zee TV, Ad growth of overall company Source: TAM HSM, CS4+, Company, ICICIdirect.com Research
Exhibit 19: Zee TV - shows in top 100 shows week wise
45 40 35 With its market share improvement, Zee has also managed 30 to increase the number of shows in the top 100 shows 25 week wise 20 15 10 5 0 W15 W25 W35 W45 W2 W12 W22 W32 W34 W36 W37 2011 2012 Colors Star Plus Zee TV Sony
Source: TAM HSM, CS4+, ICICIdirect.com Research
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Zee Cinema – Strong movie library ZEEL has a strong presence in the Hindi movie space with four channels including Zee Cinema, Zee Premier, Zee Action and Zee Classic. These channels collectively commanded a market share of 31.8% in FY12 (post IPL Season 4), which is the highest in the Hindi movie space with Star Gold a close second at 30.9%. However, the company had not acquired any new movies for the most part of FY12, which led to inconsistency in its leadership position. For many a week ZEEL gave up its leadership position due to telecast of new movies by other channels.
Exhibit 20: April 2011-March 2012 (excluding IPL) average weekly GRPs - Hindi movie channels
240 220 200 The portfolio of movie channels of ZEEL remained at the top 180 position in FY12 due to its strong library of 3000 plus 160 movies. However, there were weeks when it gave up its 140 numero uno position due to new movie telecasts by 120 competitors 100 80 W2 W4 W6 W8 W25 W27 W29 W31 W33 W35 W37 W39 W41 W43 W45 W47 W49 W51 W53 W10 W12
SONY MAX Star Gold ZEEL
Source: TAM HSM, CS4+, ICICIdirect.com Research
However, near the end of FY12, the company changed its strategy and acquired some high cost movies. Such movies led to an improvement in TRPs of both Zee TV and Zee Cinema as the first telecast of a new movie is done on Zee TV and the subsequent ones find a place on Zee Cinema and other Hindi movie channels of ZEEL. Zee Cinema telecast Don 2 in the last week of FY12, which led to ZEEL leading the Hindi movie space by a clear mile.
Also, post FY12 (excluding IPL season 5) Zee Cinema has benefited significantly from the change in the strategy. Zee Cinema telecast big movies like Agneepath in Q1FY13, which complemented its previously held library and aided ZEEL’s consistency as a leader in the Hindi movie space. Post FY12, the movie business of ZEEL garnered a market share of 33.9%. Continuous acquiring of rights of new movies along with the recently acquired new movies would provide a huge impetus to the company’s ratings in the Hindi movie space and its consistent leadership position.
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Exhibit 21: Post March 2012 (excluding IPL) weekly average GRPs - Hindi movie channels
205
185
165 Post FY12, the company remained a consistent No. 1 thanks to acquisition of new movies 145
125
105
85 W23 W24 W25 W26 W27 W28 W29 W30 W31 W32 W33 W34 W35 W36 W37
SONY MAX Star Gold ZEEL
Source: TAM HSM, CS4+, ICICIdirect.com Research
Considerable presence in regional languages ZEEL has a significant presence in the regional language market wherein the ad growth is expected to be higher than the national channels. ZEEL operates in Maharashtra with Zee Marathi, West Bengal with Zee Bangla, Andhra Pradesh with Zee Telugu, Karnataka with Zee Kannada and Tamil Nadu with Zee Tamil. Also, the company has very recently launched the only movie channel in Bangla – Zee Bangla Cinema. Regional markets are currently under penetrated in terms of ad revenue as the ad revenue per C&S HH in most of the regional segments is considerably less than the overall level. Also, regional channels have a higher exposure to local ads, which are relatively insulated from the macroeconomic environment. In CY11, regional channels grew at 15% while the overall TV industry grew at 12%. Going forward, we expect the trend of regional markets outgrowing the overall TV market to continue. Also, with regional channels in its bag, a national advertiser gets a higher bargaining power, which makes a stronger case for a higher subscription income and lower carriage fees. It is the primary reason for a lot of interest and M&A activity from large broadcasters the latest being the acquisition of Eenadu group of channels by TV18 at a premium. The management of TV18 has indicated that the company’s strategy would now be to increase its subscription revenue. While TV18 and ZEEL have comparable ad revenue, TV18’s (without Eenadu channels) subscription revenue of | 400 crore is considerably less than that of ZEEL signifying the importance of regional channels. Though the company does not give the split of ad revenue, we have estimated the regional channels will form ~ 27% of the total ad revenue in FY12 and expect it to grow at a CAGR of 10.5% from FY12-14E beating the growth of Zee TV.
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Exhibit 22: Regional markets
Total HH's Television HH's (mn) C&S HH's Ad market Ad revenue/C&S HH million million million | crore | crore Tamil 17.5 16.1 15.4 1170 76.0 Telugu 20.5 14.2 13.8 800 58.0 Regional markets are under penetrated in terms of ad Bangla 19.8 8.7 7.4 780 105.4 revenue per C&S household. Regional markets would grow Kannada 13.2 9.3 9.0 560 62.2 faster than national markets Malayalam 8.1 7.4 7.0 575 82.1 Marathi 24.6 16.2 13.3 390 29.3 Oriya 9.8 3.9 3.2 70 21.9 Gujarati 12.4 7.6 7.6 40 5.3 National 230 146 118 11500 97.5
Source: FICCI-KPMG report 2012, ICICIdirect.com Research
In West Bengal, ZEEL operates with Zee Bangla, which has been in the No. 2 slot consistently. The company boasts of 9000 hours of library and rights to over 600 movie titles. The market is currently dominated by Star India’s channel Star Jalsha. Zee Bangla garnered a market share of 39.7% among the top three GECs in West Bengal in FY12. However, post FY12, Star Jalsha has increased its lead, which led to Zee Bangla and ETV Bangla losing market share from 39.7% and 14.3% in FY12 to 36.8% and 12.8%, respectively, post FY12. However, in the recent few weeks, Zee Bangla has been closing the gap with Star Jalsha. Exhibit 23: Bangla GEC - average weekly GRPs in FY12
700 600 500 400
In West Bengal, ZEEL operates with Zee Bangla, which has 300 been in the No. 2 slot consistently 200 100 0 W1 W4 W7 W15 W18 W21 W24 W27 W30 W33 W36 W39 W42 W45 W48 W51 W10 W13 2011 2012 ETV Bangla Star Jalsha Z Bangla
Source: TAM All West Bengal,, CS4+, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 14
Exhibit 24: Bangla GEC - Average weekly GRPs post FY12
600
500 Zee Bangla has been closing the gap with Star Jalsha in 400 the recent few weeks 300
200
100
0 W14 W16 W18 W20 W22 W24 W26 W28 W30 W32 W34 W36
ETV Bangla Star Jalsha Z Bangla
Source: TAM All West Bengal,, CS4+, ICICIdirect.com Research
ZEEL also has a presence in Andhra Pradesh with its channel Zee Telugu, which has been in the fourth position in FY12 behind Gemini TV, Maa and ETV Telugu. Zee Telugu had a market share of 18.1% in FY12 among the top 4 GECs in FY12. However, post FY12, the channel has improved the market share to 19.6% and has currently overtaken ETV Telugu to grab the third position in Telugu GEC. The channel has a library of over 7000 hours and rights to over 575 movie titles. Exhibit 25: Telugu GEC - Average weekly GRPs in FY12
1200
1000
800
ZEEL also has a presence in Andhra Pradesh with its 600 channel Zee Telugu, which has been in the fourth position 400 in FY12 behind Gemini TV, Maa and ETV Telugu with a market share of 18.1% 200
0 W1 W4 W7 W15 W18 W21 W24 W27 W30 W33 W36 W39 W42 W45 W48 W51 W10 W13 2011 2012 ETV GEMINI MAA Z Telugu
Source: TAM All Andhra Pradesh,, CS4+, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 15
Exhibit 26: Telugu GEC - Average weekly GRPs post FY12
800 700 Post FY12, the channel has improved the market share to 600 19.6% and has currently overtaken ETV Telugu to grab the 500 third position in Telugu GEC 400 300 200 100 0 W14 W16 W18 W20 W22 W24 W26 W28 W30 W32 W34 W36
ETV GEMINI MAA Z Telugu
Source: TAM All Andhra Pradesh,, CS4+, ICICIdirect.com Research
In Karnataka, the company operates Zee Kannada, which has been in a consistent third position behind Udaya TV and Suvarna. Zee Kannada garnered a market share of 19.0% among the top 4 GECs in FY12, which reduced to 18.3% post FY12. The company has a library of over 6500 hours of programming and rights of over 150 movies in Kannada.
Exhibit 27: Kannada GEC - Average weekly GRPs in FY12
800 700 600 In Karnataka, the company operates Zee Kannada, which 500 has been in a consistent third position behind Udaya TV 400 and Suvarna with a market share of 19.0% 300 200 100 0 W1 W4 W7 W15 W18 W21 W24 W27 W30 W33 W36 W39 W42 W45 W48 W51 W10 W13 2011 2012 ETV Kannada Suvarna UDAYA Z Kannada
Source: TAM All Karnataka,, CS4+, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 16
Exhibit 28: Kannada GEC - Average weekly GRPs post FY12
600
500
400 The market share of Zee Kannada reduced to 18.2% post 300 FY12 200
100
0 W14 W16 W18 W20 W22 W24 W26 W28 W30 W32 W34 W36
ETV Kannada Suvarna UDAYA Z Kannada
Source: TAM All Karnataka,, CS4+, ICICIdirect.com Research
In Maharashtra, ZEEL operates Zee Marathi. The Maharashtra GEC space is dominated by three strong players who command ~90% of the market share. Zee Marathi has been in the third spot in the Maharashtra market with a market share of 27.7% in FY12 and 26.9% post FY12. For several weeks in that period, Zee Marathi has been at the second spot as well. The company has a library of over 9000 hours and rights to over 400 movie titles.
Exhibit 29: Marathi GEC - Average weekly GRPs in FY12
300
250
200
150 The Maharashtra GEC space is dominated by three strong players who command ~90% of the market share. Zee 100 Marathi has been in the third spot in Maharashtra market 50 with a market share of 27.7% in FY12 0 W1 W4 W7 W15 W18 W21 W24 W27 W30 W33 W36 W39 W42 W45 W48 W51 W10 W13 2011 2012 ETV Marathi Star Pravah Z Marathi
Source: TAM All Maharashtra,, CS4+, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 17
Exhibit 30: Marathi GEC - Average Weekly GRPs post FY12
300
250
200
150
100
50
0 W14 W16 W18 W20 W22 W24 W26 W28 W30 W32 W34 W36
ETV Marathi Star Pravah Z Marathi
Source: TAM All Maharashtra,, CS4+, ICICIdirect.com Research
Sports Business– losses to continue ZEEL acquired a 50% stake in Taj TV India Ltd, which operated Ten Sports in 2007 and added another 50% stake in 2010. The company currently has four channels operating in the sports space including Ten Sports, Ten Action, Ten Cricket and Ten Golf. Currently, the sports segment in India is dominated by cricket especially matches where India is playing, which makes the rights to Indian cricket properties very costly. The company does not have rights for any home matches of India but boasts of rights of cricketing boards of five countries including Sri Lanka, Pakistan, South Africa, Zimbabwe and West Indies. The company has acquired the satellite rights for Cricket for South Africa (CSA) for eight years for $180 million. Prior to that, the company had acquired the CSA rights for four years for $75 million and yet incurred losses on it. The company has also renewed its rights to cricket in Zimbabwe. The management indicated that the cricket rights for the other three nations would be up for renewal in FY13. ZEEL is keen to re-bid for them.
ICICI Securities Ltd | Retail Equity Research Page 18
Exhibit 31: CSA cricket calendar
Opponent Period Test ODI T20 New Zealand Dec 2012 - Jan 2013 2 3 3 Pakistan Feb 2013 - Mar 2013 3 5 2 India Nov 2013 - Jan 2014 3 7 2 Australia Feb 2014 - Mar 2014 3 0 2 West Indies Dec 2014 - Feb 2015 3 5 2 The CSA rights for the next eight years for $180 million England Dec 2015 - Feb 2016 4 5 2 Australia Mar 2016 - Mar 2016 0 5 3 involves 290 days of cricket Sri Lanka Nov 2016 - Jan 2017 3 5 3 Bangladesh Oct 2017 - Nov 2017 2 3 1 India Nov 2017 - Jan 2018 3 7 2 Australia Feb 2018 - Mar 2018 3 0 0 Zimbabwe Oct 2018 - Oct 2018 0 3 1 Pakistan Dec 2018 - Jan 2019 3 5 3 Sri Lanka Feb 2019 - Mar 2019 3 5 3 England Dec 2019 - Feb 2020 4 5 1 Australia Mar 2020 - Apr 2020 0 5 3
Source: ICC, ICICIdirect.com Research
Other key properties of the company include UEFA Champions League, US Open tennis, WWE, Moto GP and Tour de France. The company has followed the strategy of focusing on subscription revenue from non cricket categories. In line with the strategy, the company launched Ten Golf – a niche channel to cater to ~2 lakh registered golfers in India. The channel was launched at a premium of | 200/subscriber.
Exhibit 32: Key properties in sports
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 19
Exhibit 33: Sports segment - Average weekly GRPs
180 160 140 120 100 The company has garnered a 27.7% market share in the 80 sports segment since April 2011 60 40 20 0 W2 W6 W15 W19 W23 W27 W31 W35 W39 W43 W47 W51 W10 W14 W18 W22 W26 W30 W34 2011 2012
Neo Cricket Star Cricket Ten Cricket Ten Sports ESPN & Star Sports
Source: TAM HSM, CS4+, ICICIdirect.com Research
The sports business has been making losses since FY10 and has been a drag on the company’s margins. The ad revenue from the sports business is highly dependent on properties telecast in a particular period, which tend to vary across quarters. The revenues from the sports business stood at | 393 crore in FY12 with an EBITDA loss of | 148 crore. The company missed its guidance of | 100 crore loss on the sports business by a huge margin in FY12. Currently, the sports business reports a higher loss when the number of key properties telecast is higher as higher costs are allocated to the properties in the period when they are telecast. The management indicated that like the worldwide model for sports, the company plans to reach profitability in the sports business on the back of growth in subscription revenue. Sports channels are charged at a premium to increase the subscription revenue from them. Also, they do not form a part of Media Pro. Currently, the management has refrained from guiding for sports losses for FY13 but expects it to reduce predominantly due to the increase in subscription revenue owing to increasing digitisation. Sports channels are charged at a premium to other channels. Hence, the sensitivity to digitisation would be more for sports business. Exhibit 34: Sports business
200 166.5 142.4 150 119 127.9 106 99.2 87 87.3 88.1 90.1 100 83.2 60.4 61.7 Losses in sports to continue until subscription revenue 50 picks up | crore 2 0 Q1FY10-4.9 Q3FY10 Q1FY11 Q3FY11 Q1FY12 Q3FY12-10 Q1FY13 -15.2 -22.6 -21.1 -50 -27.2 -27.6 -35.4 -33 -54.2 -56.6 -58.8 -100
Revenue EBITDA
Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 20
Ad revenue– to benefit from change in strategy The change in the conservative strategy of the company to acquire high cost content and recently released movies has already started yielding results with the company reporting an 18.1% growth in its ad revenue in Q1FY13. The company is expected to up the ante and continue investing in high cost content including reality shows and new movies, which are expected to drive the GRP ratings of its channels, going forward. Also, an increase in fresh programming hours would drive the GRPs of its channels. Though it is somewhat premature to form a view on the company’s dominance in its segment, of late, with Zee acquiring big starrer movies like Agneepath, Don 2 and Agent Vinod, other channels, most notably Colors, are seen to be on the back foot. We expect the ad revenue to grow at a CAGR of 10.6% from FY12-14E. Exhibit 35: Ad revenue to grow strong
2500.0 59.4 70.0 1937.2 60.0 2000.0 1701.0 1760.0 50.0 1584.1 40.0 1500.0 30.0 1067.0 11.1 10.1 20.0 We expect the ad revenue to grow at a CAGR of 10.6% | crore 1000.0 from FY12-14E backed by higher investment in content 0.7 10.0 -6.9 500.0 0.0 -10.0 0.0 -20.0 FY10* FY11 FY12 FY13 FY14
Ad revenue Growth
* - Does not include financials of channels acquired from Zee News Source: Company, ICICIdirect.com Research
Investing in high cost content would take a toll on the margins. However, investing in high cost content is expected to lead to better GRPs, which would drive ad revenue growth. Going forward, the cost pressure on EBITDA is expected to be more than offset by ad revenue growth resulting in an expansion of margin.
Subscription revenue – to be driven by digitisation ZEEL earned 30% of its revenues from domestic subscription income while 13% of its revenues were contributed by international subscription income in FY12. The domestic subscription income is set to grow by leaps and bounds owing to the impending digitisation. The company has stopped reporting the split of domestic subscription revenue post the formation of Media Pro. Prior to that, the subscription revenue from cable grew at a CQGR of mere 1.6% from | 80.4 crore in Q1FY09 to | 96.8 crore in Q1FY12 while DTH grew at a CAGR of 13.2% from | 24.9 crore to | 110.7 crore. Subscription income from DTH was more than cable in Q1FY12 in spite of DTH households being about one third of cable homes. Going forward, we can expect the cable subscription revenue to follow a similar growth trajectory to the one witnessed by DTH, with increasing digitisation.
ICICI Securities Ltd | Retail Equity Research Page 21
Exhibit 36: Fast growing DTH subscription income
120 103.9 110.7 Subscription income from DTH was more than cable in 96.1 98.6 89.4 Q1FY12 in spite of DTH households being about one-third 100 84.0 84.4 84.9 85.1 86.3 82.1 82.1 80.4 96.8 98.4 of cable homes. Going forward, we can expect the cable 80 subscription revenue to follow a similar growth trajectory 78.7 82.1 60 to the one witnessed by DTH, with increasing digitisation 68.3 71.0 63.2 40 51.4 46.7 20 38.1 24.9 27.1 28.3 0 Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11 Q1FY12
DTH Cable
Source: Company, ICICIdirect.com Research
The company’s recent joint venture with Star-Den to form Media Pro, a distribution company, would benefit the company in terms of higher subscription income. The combination of ZEEL channels along with Star India channels would give Media Pro a higher bargaining power. The management has indicated that Media Pro commands a higher share of the broadcasters’ share of the ARPU than their corresponding channels’ market share due to the bargaining power of Media Pro. Exhibit 37: Media Pro bargaining power
350 Media pro effect 300 250 Zee Turner’s joint venture with Star Den to provide a higher 200 bargaining power for subscription income 150 100 50 0 Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11 Q1FY12 Q3FY12 Q1FY13
Domestic subscripton revenue
Source: Company, ICICIdirect.com Research
The international subscription revenue has remained more or less stable from FY09 to FY12. However, in Q1FY13, the company reported a growth of 16.5% YoY in its international subscription revenue. The international subscription revenue is expected to remain more or less stable. The company had 22 international beams in FY12 with a significant presence in the US, UK and the Middle East in terms of viewership within South Asian channels. Also, the company launched Zee Cinema International with English subtitles in Indonesia, Myanmar and Hong Kong in FY12. Though the company has been adding a number of channels abroad, the management has indicated that they are only for value addition. The international subscription revenue would be linked to the number of subscribers more than the number of channels.
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Exhibit 38: International subscription revenue trend
120.0 114.7 113.3 113.7 115.0 111.5 109.7 109.2 108.4 110.0 105.8 103.8104.9 105.0 101.4100.9101.0 101.1 98.9 97.6 100.0 95.9 | crore 95.0 90.0 85.0 80.0 Q1FY09 Q3FY09 Q1FY10 Q3FY10 Q1FY11 Q3FY11 Q1FY12 Q3FY12 Q1FY13
Source: Company, ICICIdirect.com Research
Going forward, we expect the domestic subscription revenue to grow at a CAGR of 26.2% from | 872.1 crore in FY12 to | 1389.8 crore while international subscription revenue is expected to grow by 3.7% from | 402.2 crore to | 432.9 crore. Overall, we expect the subscription revenue to grow from | 1274.3 crore in FY12 to | 1822.7 crore in FY14 at a CAGR of 19.6%. Exhibit 39: Subscription revenue to grow handsomely
2000 1800 1600 432.9 1400 424.4 1200 1000 402.2 We expect the subscription revenue to grow from | 1274.3 409.4 | crore 800 417.3 crore in FY12 to | 1822.7 crore in FY14 at a CAGR of 19.6% 1389.8 600 1120.3 872.1 400 718.2 565.2 200 0 FY10* FY11 FY12 FY13E FY14E
Domestic International
* - Does not include financials of channels acquired from Zee News Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 23
Financials Robust revenue growth We expect the ad revenue for the company to grow at a CAGR of 10.6% in FY12-14E on the back of a change in strategy of the company to invest in content and increase its fresh programming hours. The subscription revenue would grow at a CAGR of 19.6% hugely benefiting from increasing digitisation. Overall, we expect revenues to grow at a CAGR of 12.1% in FY12-14E from | 3040.5 crore to | 3819.9 crore. Exhibit 40: Revenue growth trend
37.0 4500 40 3819.9 4000 35 3370.3 3500 3013.6 3040.5 30 3000 25 2500 2199.8 20
13.3 % 10.8
| crore 2000 15 We expect revenues to grow at a CAGR of 12.1% in FY12- 14E from | 3040.5 crore to | 3819.9 crore 1500 10 1000 1.0 0.9 5 500 0 0 -5 FY10* FY11 FY12 FY13E FY14E
Revenue Growth
* - Does not include financials of channels acquired from Zee News Source: Company, ICICIdirect.com Research
EBITDA to grow even higher The EBITDA of the company is expected to grow at a CAGR of 18.9% backed by strong revenue growth and an improvement in margins. EBITDA margins are expected to improve from 24.3% in FY12 to 27.4% in FY14 on the back of a robust ad revenue growth and reduction in carriage fees paid to the MSO. However, investment in costly programmes including reality shows would put downward pressure on margins. Exhibit 41: EBITDA growth trend
1200 27.4 26.8 27.4 30 24.3 1000 25
800 20
600 11.9 15 % The EBITDA of the company is expected to grow at a | crore CAGR of 18.9% backed by strong revenue growth and an 400 10 improvement in margins from 24.3% in FY12 to 27.4% in 200 5 FY14 613.5 826.6 739.5 903.0 1044.7 0 0 FY10* FY11 FY12 FY13E FY14E
EBITDA EBITDA margin
* - Does not include financials of channels acquired from Zee News Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 24
PAT to grow at 16.5% CAGR from FY12-14 PAT is expected to grow at a CAGR of 16.5% in FY12-14 on the back of growth in revenue and improvement in EBITDA margins. We expect PAT to grow from | 589.1 crore in FY12 to | 800.0 crore in FY14. Exhibit 42: PAT & PAT margin trend
900 30 800 23.8 21.1 20.9 25 700 19.4 20.1 600 20 500
15 % 400 PAT is expected to grow at a CAGR of 16.5% in FY12-14 on | crore the back of growth in revenue and improvement in EBITDA 300 10 200 margins 5 100 634.4 637.0 589.1 677.0 800.0 0 0 FY10* FY11 FY12 FY13E FY14E
PAT PAT margin
* - Does not include financials of channels acquired from Zee News Source: Company, ICICIdirect.com Research
Return ratios to improve We expect growth in ad revenue to come from investment in costlier content including reality shows and big starrer movies. Hence, we expect return ratios to improve slightly in the next two years. We expect RoE to improve from 17.1% in FY12 to 17.5% in FY14 while RoCE is expected to improve from 20.5% to 21.7%. The growth in return ratios seems subdued due to huge cash flows. Consequently, the RoIC would improve significantly from 23.8% to 27.7%. Exhibit 43: Return ratios to improve
35.0 29.8 30.0 27.7 25.9 23.8 26.3 25.0 21.7
% 20.5 21.7 We expect RoE to improve from 17.1% in FY12 to 17.5% in 20.0 17.5 20.6 17.2 FY14, while RoCE is expected to improve from 20.5% to 16.6 15.0 17.1 17.5 21.7%. 14.8 10.0 FY10* FY11 FY12 FY13E FY14E
ROCE ROE ROIC
* - Does not include financials of channels acquired from Zee News Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 25
Risk & Concerns Macroeconomic environment CY11 has, thus, far been a tough year with GDP growth falling to below 6% levels (5.3% in Q4FY12 and 5.5% in Q1FY13). This has caused advertisers across the economy to cut down on their ad spends. Companies across the media sector ranging from print to broadcasters have felt the heat of the economic slowdown with most reporting a stagnant growth or de-growth in ad revenue. However, Zee has outgrown the industry in terms of ad revenue due to its improvement in market share. However, if the economic scenario continues to remain challenging, the overall ad pie could contract resulting in lower-than- expected growth for the company. Investment in high cost content may not yield desired results The company’s change in strategy of investing in high cost content may not yield an ad revenue growth in proportion to its cost as the popularity of the content is highly dependent on consumer taste and shows telecasted on other channels simultaneously. Also, the company would be launching new channels in the future based on the current library as well as acquisition of new content. The success of new channels depends on the quality of programming, price, marketing, etc. It is not assured that the new channels would be as successful as some of its existing ones. Margins would be under pressure if the high cost content fails to drive in expected ad revenue growth. Moreover, it is yet to be seen if the strategy of paying huge amounts on the satellite rights of movies would generate suitable returns. The broadcasters started the practice of acquiring new movies at high prices only two or three years back while the license period is typically five to seven years. It remains to be seen if broadcasters can monetise the movie rights to generate profitable ratios over the life of the license. Delay in digitisation If there is a delay in digitisation, the subscription revenue may not grow as much as expected. The sports business would be the most affected due to the delay in digitisation as sports channels are more dependent on subscription revenue than advertisement revenue and, hence, are more sensitive to digitisation.
ICICI Securities Ltd | Retail Equity Research Page 26
Valuation At a time when Hindi GECs were dominated by three GECs including Star Plus, Zee TV and Sony, Zee TV was a strong second player in the industry and the company was trading at a significant premium to Sensex forward PE. ZEEL’s P/E multiple reached a peak of over 200% over Sensex PE. However, with Colors coming into the picture and competition toughening up resulting in a reduction in Zee TV’s market share in Hindi GEC, Zee’s premium to the Sensex started fading. Also, during the period of global recession, companies across the sector saw immense pressure on their ad revenue with lead Zee trading at a discount to Sensex PE.
Exhibit 44: Sensex vs. ZEE P/E
250% 40% 35% 200% 30% 150% 25% 100% 20% 15% 50% 10% 0% 5% -50% 0% Jul-12 Jul-11 Jul-10 Jul-09 Jul-08 Jul-07 Oct-11 Oct-10 Oct-09 Oct-08 Oct-07 Apr-12 Apr-11 Apr-10 Apr-09 Apr-08 Apr-07 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07
ZEEL P/E Premium to Sensex Average Premium Zee TV Market Share among top 5 Hindi GEC
Source: Company, ICICIdirect.com Research
At the fag end of FY12 when the company started investing in high cost content, Zee TV witnessed an increase in its market share in Hindi GEC, which led to the company trading at a significant premium to the Sensex again. The average premium of Zee to Sensex since January 2007 has been ~ 48%. The stock has traded at a maximum PE of 38.8x and a minimum PE of 6.8x since January 2007. The average PE for the same period has been 21.0x. Sun TV network had been trading at PE of 21-27x before the promoter was named in a CBI charge sheet relating to the Airtel-Maxis deal. We believe that though Sun TV is fundamentally stronger than ZEEL owing to its leadership position in all the markets it operates in, ZEEL would also get a growth premium especially after improving its market share in Hindi GEC and step up in investments in quality content.
ICICI Securities Ltd | Retail Equity Research Page 27
Exhibit 45: ZEEL - one year forward PE chart
45 Max P/E, 38.8 40 35 30 Average P/E, 21.0 25
The stock has traded at a maximum PE of 39.8x and a (x) 20 minimum PE of 7x since January 2007. The average PE for 15 the same period has been 21.0x 10 Min P/E, 6.8 5 0 Jan-12 Jan-11 Jan-10 Jan-09 Jan-08 Jan-07 Sep-12 Sep-11 Sep-10 Sep-09 Sep-08 Sep-07 May-12 May-11 May-10 May-09 May-08 May-07
Source: Company, ICICIdirect.com Research
Though the stock is trading at more than its five year average premium to the Sensex, it is trading at its long term average P/E of 21.0x one year forward earnings. The last few years have been marked by ZEEL’s underperformance to its peers due to low investment in content. However, with a pick-up in investment and improvement in GRP, the multiple and premium to the Sensex have started to expand as visible from the above charts. We expect the company to continue to invest in high cost content, which would help improve its market share further. With increasing market share, the stock is expected to move further towards higher premium to Sensex multiples and the maximum one year forward PE of 38.8x. We have valued Zee at 21x FY14E EPS to arrive at a target price of | 175. Though there has been a marked improvement in the company’s operating performance, due to the recent run up, the stock looks fairly valued at current levels. We initiate coverage on ZEEL with HOLD rating.
ICICI Securities Ltd | Retail Equity Research Page 28
Financial summary
Profit and loss statement Cash flow statement
(| Crore) (| Crore) (Year-end March) FY11 FY12 FY13E FY14E (Year-end March) FY11 FY12 FY13E FY14E Total operating Income 3,013.6 3,040.5 3,370.3 3,819.9 Profit after Tax 637.0 589.1 677.0 800.0 Growth (%) 37.0 0.9 10.8 13.3 Add: Depreciation 28.8 32.3 41.0 43.1 Operational Cost 1,436.9 1,431.1 1,576.1 1,795.3 (Inc)/dec in Current Assets -64.3 -179.3 -337.2 -429.3 Employee Expenses 273.8 292.5 303.6 334.2 Inc/(dec) in CL and Provisions -3.9 79.0 93.2 127.0 Marketing Expenses 189.6 0.0 0.0 0.0 Others 10.4 5.0 7.2 7.2 Administrative Expenses 286.6 577.4 587.5 645.6 CF from operating activities 607.9 526.1 481.1 548.1 Total Operating Expenditure 2,187.0 2,301.0 2,467.3 2,775.1 (Inc)/dec in Investments -376.1 -103.5 0.0 0.0 EBITDA 826.6 739.5 903.0 1,044.7 (Inc)/dec in Fixed Assets 1,083.4 -125.9 -100.0 -80.0 Growth (%) 24.2 -9.5 7.5 15.2 Others -15.6 -123.1 0.7 3.4 Depreciation 28.8 32.3 41.0 43.1 CF from investing activities 691.7 -352.5 -99.3 -76.6 Interest 10.4 5.0 7.2 7.2 Issue/(Buy back) of Equity 48.9 -1.9 0.0 0.0 Other Income 85.1 138.4 124.7 160.0 Inc/(dec) in loan funds -117.8 22.3 0.0 0.0 Exceptional Items (19.7) - - - Others -1,431.4 -251.5 -174.4 -174.4 PBT 892.2 840.6 979.6 1,154.4 CF from financing activities -1,500.3 -231.1 -174.4 -174.4 Minority Interest (11.8) 1.7 4.1 8.1 Net Cash flow -200.7 -57.5 207.4 297.2 PAT from Associates 0.0 0.2 - - Opening Cash 586.6 385.8 328.3 535.8 Total Tax 267.1 250.0 298.5 346.3 Closing Cash 385.8 328.3 535.8 832.9 PAT 637.0 589.1 677.0 800.0 Source: Company, ICICIdirect.com Research Growth (%) 0.4 -7.5 14.9 18.2 EPS (|) 6.5 6.1 7.1 8.3 Source: Company, ICICIdirect.com Research
Balance sheet Key ratios
(| Crore) (Year-end March) FY11 FY12 FY13E FY14E (Year-end March) FY11 FY12 FY13E FY14E Per share data (|) Liabilities EPS 6.5 6.1 7.1 8.3 Equity Capital 97.8 95.9 95.9 95.9 Cash EPS 6.8 6.5 7.5 8.8 Reserve and Surplus 2,997.0 3,335.0 3,844.8 4,477.7 BV 31.6 35.8 41.1 47.7 Others - 4.6 4.6 4.6 DPS 2.0 1.5 1.5 1.5 Total Shareholders funds 3,094.9 3,435.5 3,945.3 4,578.2 Cash Per Share 3.9 3.4 5.6 8.7 Total Debt 1.7 24.0 24.0 24.0 Operating Ratios (%) Minority Interest (11.9) (3.2) 0.9 9.0 EBITDA Margin 27.4 24.3 26.8 27.4 Total Liabilities 3,084.7 3,456.3 3,970.2 4,611.1 PBT / Total Operating income 29.6 27.6 29.1 30.2 PAT Margin 21.1 19.4 20.1 20.9 Assets Inventory days 65.4 88.1 100.0 110.0 Gross Block 973.5 1,120.5 1,220.5 1,300.5 Debtor days 108.5 104.3 104.3 104.3 Less: Acc Depreciation 167.0 200.6 241.6 284.7 Creditor days 64.4 70.2 70.2 70.2 Net Block 806.4 919.9 979.0 1,015.8 Return Ratios (%) Capital WIP 39.9 20.1 20.1 20.1 RoE 20.6 17.1 17.2 17.5 Total Fixed Assets 846.4 940.0 999.1 1,035.9 RoCE 25.9 20.5 21.7 21.7 Investments 696.4 799.9 799.9 799.9 RoIC 29.8 23.8 26.3 27.7 Inventory 539.6 733.9 923.4 1,151.2 Valuation Ratios (x) Debtors 895.5 869.0 963.2 1,091.7 P/E 26.9 28.5 24.8 21.0 Loans and Advances 480.5 488.9 541.9 614.2 EV / EBITDA 19.8 22.3 18.0 15.3 Other Current Assets 1.3 4.3 4.8 5.4 EV / Net Sales 5.4 5.4 4.8 4.2 Cash 385.8 328.3 535.8 832.9 Market Cap / Sales 5.6 5.5 5.0 4.4 Total Current Assets 2,302.6 2,424.4 2,969.1 3,695.5 Price to Book Value 5.5 4.9 4.3 3.7 Creditors 531.5 584.5 647.9 734.3 Solvency Ratios Provisions 248.6 274.6 304.4 345.0 Debt/EBITDA 0.0 0.0 0.0 0.0 Total Current Liabilities 780.1 859.1 952.3 1,079.3 Debt / Equity 0.0 0.0 0.0 0.0 Net Current Assets 1,522.6 1,565.3 2,016.8 2,616.2 Current Ratio 3.0 2.8 3.1 3.4 Other non current assets 19.3 151.0 154.5 159.1 Quick Ratio 2.3 2.0 2.1 2.4 Application of Funds 3,084.7 3,456.3 3,970.2 4,611.1 Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 29
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
Pankaj Pandey Head – Research [email protected]
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ICICI Securities Ltd | Retail Equity Research Page 30