Equity Research September 10, 2013 BSE Sensex: 19270 Media

Content - The trump card

ZEEL (Rs222– Reduce) Target price Rs240

Sun TV (Rs389– Buy) Target price Rs500

Dish TV (Rs43– Buy) Target price Rs60

Analogue: Content is King and Distribution is GOD; GOD chose the KING.

Digital: Content is King and Consumer is GOD; GOD will still choose the KING.

• Digitisation to give way to Content over Distribution.

Vikash Mantri • ZEEL lags in investments. Star India raises the bar [email protected] +91 22 6637 7161 Satish Kothari Sun TV Network is the preferred bet among broadcasters [email protected] • +91 22 6637 7510 Akhil Kalluri [email protected] • Dish TV is the preferred bet among distribution plays +91 22 6637 7339

Please refer to important disclosures at the end of this report

Equity Research INDIA September 10, 2013 BSE Sensex: 19270 Media

Content - The trump card Reason for report: Sector update

Digitisation is the most common theme for investment in the Indian media sector,

with broadcasters sensing windfall gains as addressable digital cable opens the floodgates to pay-TV revenues. While this thesis is theoretically true, it only showcases one side of the equation. Digitisation is a double-edged sword and is likely to transform the broadcast space with power shifting from distribution / broadcasting networks to content. In such a scenario, we believe broadcasting

networks like ZEEL, Star India and Sun TV Network face a huge challenge of investing in compelling content in an era of accessible distribution. Star India has

upped the ante by large audacious bets on sport (cricket) and movie satellite rights. ZEEL, with low investments in broadcasting, is lagging in the race and can

continue to lose market standing. Sun TV Network continues to be the dominant player in the South and is sitting high and mighty, but needs to invest to maintain ground. In this report, we analyse the relative positioning of each broadcaster in the three key genres of content – GEC, sport and movies. We showcase how Star India and Sun Network have delivered better results owing to investments in content. We also forecast that the key gains from digitisation are likely to be long drawn as addressability lags digitisation and might take up to 10 years. Key findings: f Star India is clearly the leader in the Hindi broadcast space and has made audacious bets in sport which, if it goes right, can further strengthen its leadership position. f Sun TV Network is clearly the strongest player in South India and has built strong moats by launching multiple channels and acquiring a huge movie library, thus making it very difficult for new players to eat into its market share. f ZEEL has lost the first-mover advantage owing to its focus on profitability. In a digitised environment, as distribution opens up, the company can no longer gain from its distribution strength and needs to invest in content to fortify its market share. Investment call: f Sun TV Network (BUY, TP Rs500) remains our preferred bet in the Indian

broadcast space driven by strong market standing, gains from digitisation and strong content ownership through its movie library. f ZEEL (REDUCE, TP Rs240) remains a strong player in the Hindi broadcast space, but can slip to lower market shares if it fails to increase the intensity of investing in Vikash Mantri sport and movies and launching more channels. [email protected] +91 22 6637 7161 f Dish TV (BUY, TP Rs60) is the best bet among distribution companies given its Satish Kothari ownership over last-mile and stands to be a major beneficiary of rising ARPU levels [email protected] +91 22 6637 7510 and digitisation. Akhil Kalluri [email protected] +91 22 6637 7339 .

Please refer to important disclosures at the end of this report

Media, September 10, 2013 ICICI Securities

TABLE OF CONTENTS

Has investing in content delivered? ...... 3 Investments in content – stacking order...... 3 Sport broadcast – the gamechanger ...... 4 Sport – the killer app in digitised cable industry ...... 4 Star India has made an audacious bet on sports ...... 5 ZEEL and Cricket – Checkered past ...... 6 Who owns entertainment? ...... 11 Hindi GEC – Star Plus at pole position; fight on for no.2 slot...... 12 Investment in movies – From luxury to necessity ...... 14 Digitisation – from a content perspective ...... 17 Subscription revenue from cable to triple by FY18 ...... 17 Digitisation gains will be best driven by ARPU ...... 18 Consumers willing to pay high price for quality ...... 19 Subscription revenues to triple in next five years ...... 20 But, will the gains flow through to EBITDA? ...... 21 Index Tables and Charts ...... 22

Companies Zee Entertainment ...... 23 Sun TV Network ...... 33 Dish TV ...... 41

Share price and Sensex as on September 6, 2013 unless otherwise mentioned

Media, September 10, 2013 ICICI Securities

Has investing in content delivered? We compare the revenues of the past five years of the leading broadcasters, which shows that Star India has witnessed a 32% CAGR in revenues during the period as against 10% for ZEEL. Also, Sun TV Network has done better on growth during the same period as compared to ZEEL. So, while ZEEL’s financial performance in terms of EBITDA has been good, we believe it has been driven by lack of sufficient investments (please read our report EBITDA focus eats into growth 1 & 2 dated 5th October 2010 and 26th July 2011 respectively). We believe – as content takes precedence in a digitised environment – financial performance is going to be increasingly determined by content rather than ownership and control over distribution.

Chart 1: ZEEL underperforming Star India and Sun TV Network

60 ZEEL Sun TV -Standalone Star India CAGR 32% 50

40 CAGR 10%

Revenue (Rs bn) 20 CAGR 16%

0 FY09 FY10 FY11 FY12 FY13 * Star India’s FY13 revenues include eight months of sport broadcast ** ZEEL’s FY09 and FY10 revenues are adjusted for R-GECs. FY10 data is as per I-Sec estimates Source: Company data, I-Sec research

Investments in content – stacking order We compare the investments of leading Indian media broadcasters from a content perspective to compare who is better placed to gain in the digitised regime. Our focus is look at the key mass content of sports, movies and GEC to judge the preparedness of the players. Table 1: Star India and Sun Network boast of best quality content Star India ZEEL Sony India TV18 Sun Network Movies Library New movie acquisition

Sport India cricket International cricket Non-cricket sport

GECs Second GEC NA Top slots Share of top 50 shows Source: Company data, TAM, I-Sec research. Shaded area represents strength of the network in that genre

Media, September 10, 2013 ICICI Securities

Sport broadcast – the gamechanger

Sport broadcast is all set to be the new gamechanger in a digitised environment as pay-TV revenues take precedence over advertisement revenues in this format. The importance of sport broadcast stems from multiple aspects as it is: a) one of the few ways to reach male audience thereby reducing broadcasters’ dependence on FMCG or female-focused advertisers, b) a key driver of ARPU as is reflected in higher a-la- carte rates of Sport vis-à-vis any other genre, and c) live content cannot be time- shifted and will continue to garner high advertising rates.

Sport – the killer app in digitised cable industry

With cable ARPUs among the lowest in India, sport stands out to as the key content which can drive ARPUs. Cricket, India’s most followed sport, is among the only genres for which consumers are ready to pay a higher price and could drive choice between selections of MSOs/DTH and packages. In the analogue mode, cricket was available to everybody and broadcasters were unable to price cricket channels separately. Also, viewers had the opportunity to watch all cricket as the relevant cricket channel, which was carrying the latest fixtures, was always made available to the subscriber. However, this is now going to change as consumers will have to pay for Sport channels separately and more so will have to make this choice regularly, thereby increasing the importance of Sport content throughout the year.

Sport a-la-carte the most expensive… Sport channels across DTH and MSO packages are add-ons and not available in base packages. Also, the consumer will now have to remember which cricket series is being carried on which network, and therefore needs to be subscribed. Over a period of time, channels with better rights will be able to garner higher interest. Broadcasters with compelling Sport content will be able to negotiate higher pay-TV rates and better placement.

Table 2: Sport genre commands premium ARPU Genre a-la-carte rate per month (Rs) Hindi movies 35 Regional 25 Music 35 Kids 45 English movies 60 English news 30 English entertainment 55 ESPN Star 65 Neo 40 Ten* 85 *excluding Ten Golf Source: Industry; I-Sec research

Media, September 10, 2013 ICICI Securities

Star India has made an audacious bet on sports

Star India recently has invested Rs38.5bn (US$750mn) in sport to buy the rights of India cricket (2012-18) at a price tag of ~Rs400mn per match. It has further invested in properties like England and Australia cricket rights (four cumulative Indian tours and four Ashes series), FIFA World Cup, Olympics, etc. While Sport has been a drag on the financial performance of broadcasters till now, digitisation is likely to enhance the need to continue to invest in the segment despite its poor economics, because of the rub-off effects of Sport on the network. Sport broadcast in India is a loss-making proposition due to skewed viewership in favour of cricket and the high costs of cricket rights. The need of the hour for broadcasters is to develop non-cricket properties and localising cricket content promoting domestic cricket like Ranji Trophy fixtures, commentary in regional languages, etc.

Table 3: Star India leading the pack by acquiring major cricket broadcast rights Country/ Amount Total matches India related cricket Network Board (US$ mn) Test T20 ODI Days Test T20 ODI Days Period Remarks Star India England 200 47 15 63 313 10 2 10 62 2013-19 Two India tours Star India Other bidder was Sony India 750 34 13 50 233 34 13 50 233 2012-18 (US$727mn) Star India Australia NA 27 12 44 191 4 2 11 33 2013-17 Two India tours ZEEL South Africa 180 39 32 68 295 6 4 14 48 2013-20 Two India tours Cost of India tour: ZEEL Sri Lanka 60 22 22 56 188 3 2 5 22 2013-20 US$25.5mn Two Indian tours: ZEEL West Indies NA 34 20 60 250 6 2 10 42 2013-20 FY16 and FY20 ZEEL Zimbabwe NA 22 13 45 168 2 0 6 16 2012-19 Two Indian tours Two Indian tours: Neo New Zealand NA 36 16 65 261 6 3 10 43 2013-20 FY14 and FY19

Star India CL T20 900 2008-17 ICC Star India Tournaments 1,100 2007-15 18 ICC tournaments ROFR for next three Neo India Asia Cup 2014 Asia Cups till 2020 Was increased after Sony IPL 1,600 2009-17 first year CL T20 – Champions League T20; ICC- International Cricket Council; IPL – Indian Premier League. Source: Cricinfo, media articles, I-Sec research.

Media, September 10, 2013 ICICI Securities

ZEEL and Cricket – Checkered past

Date: 2000: ICC cricket rights from 2000 to 2006. ICC rights were sold to News Corp’s Global Cricket Corporation for US$550mn despite ZEEL bidding highest at US$625mn. ZEEL’s insufficient sport marketing experience was cited as the reason. Date: Sept’04: Five-year telecast rights, with Board of Control for Cricket in India (BCCI), of all matches to be played in India. • Zee Telefilms (ZEEL now) bags India home telecast rights from Oct’04 to Sep’08 for US$308mn. • ESPN moves court on ZEEL, insisting ZEEL was not eligible as it did not possess the required two-year experience in "producing" live international cricket matches. • BCCI files affidavit in Bombay High Court cancelling the tender process for telecast rights.

Date: Apr’06 -May’07: Five-year telecast rights of all India’s matches to be played on neutral non-ICC venues, with BCCI • ZEEL and the BCCI sign a five-year deal in Apr’06 worth US$219,000 (Rs9mn) for global overseas media rights for all matches played by India overseas on neutral non-ICC member venues from Apr’06 to Mar’11. • BCCI awarded India rights for four years (2006-10) to Nimbus Sports (Neo) for US$612mn. • Sport Broadcasting Bill was introduced making it mandatory to share live feed of national Sport events with Doordarshan and All India Radio on free-to-air basis. • BCCI agrees to slash prices for Nimbus by 12%, but no such deal signed with ZEEL. • BCCI terminated the agreement with ZEEL in May’07. • In 2012, Arbitral tribunal held BCCI guilty of exploiting its dominant position for arbitrarily terminating its five-year broadcast rights contract with ZEEL and was asked to pay Rs1.4bn as penalty.

Date: Nov’06: Launch of Indian Cricket League (ICL) • Apr’07: Launch of ICL. ICL was termed illegal by BCCI and subsequently BCCI launched IPL in April 2008 in similar format as ICL. • May’09: Closure of ICL with amnesty granted to all the players by the respective boards.

Media, September 10, 2013 ICICI Securities

Economics of Sport broadcast weak in India Sport broadcast economics is currently weak in India as reflected in ZEEL’s and Neo Sports’ heavy losses from the segment. We believe the weak economics is mainly on due to: a) over-dependence on cricket, b) near-absence of subscription revenues and c) Short duration of rights. Further, broadcasters are at the mercy of cricket boards as was evident in the deal between Sony Network and BCCI, where Indian Premier League (IPL) rates were renegotiated post success of the format.

IPL – Success formula is here – BUT most gains captured by BCCI

Chart 2: Net surplus for BCCI from IPL Chart 3: Net surplus for BCCI from Champions League

3,000 600 2,651 483 2,500 500 476

2,000 393 400

1,500 1,188 300

(Rs mn) (Rs 1,000 mn) (Rs 200 500 149 0 100 (42) 13 (500) 0 FY09 FY10 FY11 FY12 FY09 FY10 FY11 FY12 Source: BCCI, I-Sec research

Chart 4: Sport segment has reported losses for both Nimbus and ZEEL over past few years

FY06 FY07 FY08 FY09 FY10 FY07 FY08 FY09 FY10 FY11 FY12 FY13 0 500 313 (500) 57 0 (1,000) (936) (1,500) (500) (2,000) (576) (1,960) (1,000) (859) (870) (2,500)

EBITDA (Rs mn) (3,000) (2,746) (1,500)

EBITDA (Rs mn) (1,480) (3,500) (3,417) (3,347) (2,000) (4,000) (2,078) Neosports (2,500) ZEEL sports segment

Source: Company data, I-Sec research

Media, September 10, 2013 ICICI Securities

But, sport broadcast economics can change for GOOD under digitisation… Sport broadcast in India has been a loss-making proposition as all gains from rights have been appropriated by the rights-holder – in this case of cricket, the BCCI. This is largely due to the short periods of BCCI rights, viz. 3-5 years. However, this recently has changed, with IPL rights being for 10 years, and Star India recently gaining home (domestic and international) cricket rights for seven years. Also, ZEEL has been able to sign longer-term deals for South Africa, Sri Lanka, West Indies and Zimbabwe tour – which would mean the upsides of digitisation will be there for broadcasters in the event that things go right.

Table 4: Broadcasters signing longer-term deals Shift in deal duration Previous deal Current deal Duration Amount (US$ mn) Duration Amount (US$ mn) from 4-5 years to 6-8 India 2010-14 400 2012-18 750 years should help South Africa 2008-12 75 2013-20 180 improve economics Sri Lanka 2009-13 65 2013-20 60 West Indies 2008-12 60 2013-20 NA New Zealand 2007-12 50 2013-20 NA IPL 2008-17 1,026 2009-17 1,600 ICC 2007-15 1,100 Source: Media articles, I-Sec research

There will be clear winners and losers … Given that most cricket broadcast rights have been blocked by the leading broadcasters for longer periods – how the economics of Sport changes will be decide winners and losers. Clearly, Star India has made maximum bets followed up by Sony’s US$1.6bn bet on IPL whereas ZEEL is cautious given its checkered past in cricket. Sports broadcasting performance in the next 4-5 years could determine the winners and losers in Indian broadcasting space.

Change in fortune of Sport broadcasters will depend on: a) successful implementation of digitisation, which will drive pay-TV revenues, b) localisation of content to penetrate regional markets leading to larger advertiser base, and c) higher adoption of non-cricket Sport in India. Developing of non-cricket Sport and regional cricket can help broadcasters gain viewership with low cost rights on a sustainable basis, which can aid profitability.

Table 5: Most cricket broadcast rights locked till FY18 Network 2012 2013 2014 2015 2016 2017 2018 2019 2020 India Australia England ICC tournaments Star India Champions League T20 South Africa Sri Lanka West Indies ZEEL Zimbabwe Neo New Zealand Sony Network IPL Source: Media articles, I-Sec research

Media, September 10, 2013 ICICI Securities

Local tournaments in non-cricket sport – the future of sport broadcast in India? With the success of IPL, broadcasters in India have started focusing on developing non-cricket Sport as well. ESPN Star Sports (ESS) recently telecasted Indian Badminton League, an IPL style format promoting badminton in India. Further, ESS and Neo Sports have ventured into Hockey with Hockey India League and World Series Hockey respectively. Sony recently partnered with NBA to launch NBA Jam, a travelling interactive basketball festival in India. Reliance IMG has acquired all commercial rights of basketball and football in India for the next 15 years and has launched IPL-style league in football with the first season to be played in Jan’14. Big bets by broadcasters and corporates to promote non-cricket Sport in India could finally shift attention away from cricket – and deliver a more economical solution to target the male audience in India.

Table 6: Broadcast rights across networks Star India ZEEL Sony Network Neo India South Africa IPL New Zealand Australia Sri Lanka Asia Cup Cricket England West Indies ICC tournaments Zimbabwe Champions League T20 FIFA World Cup 2014 UEFA Champions League Euro 2016 German Bundesliga English Premier League French Ligue 1 FIFA World Cup 2018 qualifiers Football FA Cup Spanish La Liga Italian Serie A Australian Open US Open French Open Tennis Wimbledon Chennai Open Davis Cup ATP series FED Cup Wrestling/ SFL WWE UFC martial arts TNA Wrestling Masters Tournament PGA European Tour PGA Tour Golf The Open Championship PGA Championship The US Open Ryder Cup Winter Olympics (2014) Tour de France NBA Rugby World Cup Summer Olympics (2016) Commonwealth Games (2014) Rugby Six Nations Others Formula 1 Euroleague Basketball Super Rugby Major League Baseball Rugby Championship Cricket PGTI (Golf) Basketball World Hockey series Hockey India League I-League (Football) Domestic Indian Badminton League Indian Federation Cup (Football) Kabaddi Source: Cricinfo, Media articles, I-Sec research

Media, September 10, 2013 ICICI Securities

Sport also to exert rub-off effect on network Sony ventured into sport broadcast in India in 2003 by acquiring telecast rights for ICC World Cup. But the game changer was their big bet on IPL whose success we believe has had a rub-off effect on the entire network. Sony Network’s GRPs have increased from 250 levels in 2008 (pre-IPL) to 450 levels currently. While increase in market share was primarily led by higher viewership of Set Max (especially during IPL), we believe the success gave Sony enough firepower to invest in acquiring superior content (e.g. telecast of KBC, higher intensity of satellite rights acquisition), which has aided the entire network in gaining market share. Presence of strong Sport properties will also help in better bouquet selling / packaging by networks.

Chart 5: Sony Network ratings improving significantly post IPL

600 550 500 450 400

(GRPs) 350 300 250 200 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14

Source: TAM CS4+ HSM, I-Sec research

Media, September 10, 2013 ICICI Securities

Who owns entertainment? The importance of content is set to increase with the advent of digitisation. In the analogue market, networks with legacy distribution ruled. More often, broadcasters themselves owned the distribution enabling better reach for its channels. However, with digitisation, we expect content to be the key driver of market shares as distribution just becomes an enabler. We believe digitisation will further escalate the importance of content due to: a) reduced entry barriers for competition, and b) greater emphasis on customer to choose and pay for content he/she prefers. While one cannot deny the role of distribution, we believe there will now be a fair playing field for quality content, which will open up the market for anybody with quality content. Networks have ruled in the past Group DTH Cable In the analogue mode, large broadcasting networks with investments in distribution Essel 9 9 controlled the market. In that mode, the cost of entry for a new player was Star India* 9 9 Sun Group 9 9 abnormally high owing to carriage fees. ZEEL, Sun Network and Star India have had Sony active investments in cable and DTH platforms. This was essential in the analogue TV18 mode initially to promote distribution and later to control distribution. However, the Source:I-Sec research. *Star India exited Hathway relevance of control over distribution is likely to reduce in the digitised environment, Cable in 2012 and benefits are likely to be limited to those of scale. We believe ownership of distribution is unlikely to play a major role in a content-driven market. Bouquet owners: Genre-wise leaders Star India and ZEEL have been the key leaders across genres in the Indian broadcast space. However, over the last few years, Star India has emerged a stronger player in the GEC space with the additional launch of Life OK, significant gains in the regional space by dislodging ZEEL in the Bengali and Marathi market, and gaining strong traction in the Kannada market. Zee TV has failed to fortify its position in the Hindi GEC space as Colors has been a close competitor and Sony TV along with Sab TV has a higher share. TV18’s presence is largely limited to the GEC space and infotainment, whereas its regional channels have lost market share to Star India and ZEEL. Sun Network continues to have an unchallenged market standing in South India, which has been further strengthened with launches of multiple channels. Table 7: Network wise positioning Sony ZEEL Star India Network TV18 Sun Network Hindi GEC Hindi movies Bengali Marathi Tamil Telugu Kannada Malayalam Sport English entertainment Infotainment HD Source: Company data, TAM, I-Sec research; Shaded area represents strength of the network in that genre

Media, September 10, 2013 ICICI Securities

With digitisation, we expect significant increase in the number of channels as the cost of entry reduces. Digitisation allows an easier option for entry of new players like Times Television Network with four channels and planned launch of one more niche channel. Among the networks, we see huge gaps in children’s, comedy and regional Marathi and Bengali channels, which need to be filled. Also, we see a huge increase in niche channels as digitisation enables economics for channels in sport (golf), cookery, home-shopping, etc. It is up to the networks to fill this gap or leave it for new players to enter.

Hindi GEC – Star Plus at pole position; fight on for no.2 slot

In the digitised mode, strength of a genre is likely to be decided by the number of channels in the particular genre, quality of programming - originality of content and scale of investment in programming.

Star Plus is the clear leader in the Hindi GEC space in terms of market share – all- day and prime time, or share of top programmes. As a network, Star India and Sony Network have the advantage of having two strong channels each in the GEC space. ZEEL needs to invest in another GEC channel to fortify its genre standing, despite an earlier failure as Zee Next failed to take off in 2007. The initiative of ZEEL to launch a new channel Anmol seems a half-hearted approach as it is slated to air re- runs of Zee TV’s popular old and current shows. The channel is similar to Star Utsav, which airs re-runs of popular shows earlier telecast on Star Plus. With Star Utsav reporting weekly ratings of ~50 GRPs (4% market share among GECs), we fear that Zee Anmol too could find it challenging to grab significant additional market share for ZEEL.

Table 8: Tier-2 GECs picking up steam with increasing share of top programmes (number of programmes) Q3FY11 Q4FY11 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q4FY13 Q1FY14 Q2FY14* Colors 26 29 32 30 24 23 23 23 27 27 SAB - - - 3 5 5 5 8 6 9 Sony 7 6 6 14 17 15 14 7 7 9 Life OK - - - - - 0 2 5 4 1 Star Plus 45 39 37 34 39 36 33 30 35 33 Zee TV 21 25 24 18 15 20 23 27 21 21 Total 100 100 100 100 100 100 100 100 100 100 Colors 13 16 16 15 11 9 10 15 14 14 SAB - - - 1 0 3 1 5 5 6 Sony 3 1 0 8 10 6 5 0 1 2 Life Ok ------0 0 0 - Star Plus 27 20 21 19 26 27 26 20 21 22 Zee TV 7 13 12 7 2 4 7 9 9 6 Total 50 50 50 50 50 50 50 50 50 50 *Q2FY14 data as of Jul’13 Source: TAM CS4+ HSM, I-Sec research

Media, September 10, 2013 ICICI Securities

Also, the quality and scale of programming stands to gain importance and networks are likely to invest in bigger and better shows to woo viewers. While the cost of a programme has low correlation with its performance, there are certain time-tested international formats, which are usually high on ratings. While international format shows garner better ratings for the channel, they come with a heavy price tag which all networks except ZEEL seem to be willing to pay. We also believe that the scale of programming is to rise as costume drama and big-budget shows become a high attraction.

Zee TV prefers home-grown formats of content as against more expensive international formats used by other networks. While indigenous content has worked for Zee TV in the past with its flagship dance reality show Dance India Dance outperforming peers, unwillingness to try expensive international formats could hurt the channel’s prospects in the long run.

Table 9: Networks investing in big-budget international format shows ZEEL is refraining Show International format Channel Bigg Boss Big Brother Colors from investing in India's got talent America's got talent Colors international format 24 24 Colors Fear Factor Fear Factor Colors shows Jhalak Dikhla Jaa Dancing with the stars Colors KBC Who wants to be a millionaire Sony Indian Idol American Idol Sony Entertainment ke liye kuch bhi karega 30 seconds to fame Sony Master Chef India Master Chef Star Plus Survivor India Survivor Star Plus Source: Company data, I-Sec research

Table 10: Investment in costume dramas by all players All networks are Show Channel Maa Durga Colors investing in costume Mahadev Life OK dramas Ramleela Life OK Mahabharat Star Plus Maharana Pratap Sony Jai Bajrang Bali Sahara One Ramayan Zee TV Jodha Akbar Zee TV Buddha Zee TV Source: Company data, I-Sec research

Media, September 10, 2013 ICICI Securities

Investment in movies – From luxury to necessity

Acquiring satellite rights of movies is another way to safeguard network viewership share and garner viewership for new fiction programmes. While cost of movie rights has seen very high inflation, movies still make good economic sense due to the network benefits of self-promotion and the ability to pull up during patches of lean programming (case in point: Sony TV’s current performance). In a digitised environment, the importance of satellite movie rights is likely to rise as it is among the most important genre with sport and GEC for influencing package selection.

Table 11: Big-budget movie premieres garnering high ratings 2012 2011 2010 Film Network TRP Film Network TRP Film Network TRP Ra. One Star 6.7 Bodyguard Star 10.3 3 Idiots Sony 10.8 Bol Bachchan Star 4.8 Singham Star 8.8 Dabangg TV18 9.2 Agneepath ZEEL 4.7 Golmaal 3 TV18 5.0 Ajab Prem Ki Gajab Kahani TV18 7.5 Ek Tha Tiger Sony 4.6 Zindagi Na Milegi Dobara Star 4.1 Khatta Meetha TV18 4.8 Source: TAM HSM CS 4+, FICCI KPMG report, I-Sec research While there is plenty of availability of movie content with 100+ new Hindi movies released every year, competition to garner satellite rights for big-budget / popular star-cast movies is high as reflected in the rising satellite right costs in the past 2-3 years. Further, Star India has signed deals for forthcoming movies of two popular Bollywood actors (Salman Khan and Ajay Devgan) for Rs5bn and Rs4bn respectively, which highlights broadcasters’ clamour for popular content. Currently, Star India and ZEEL boast of a strong library of ~5,000 and >3,500 movies respectively. We believe, for movie content to become a differentiator, networks need to buy-in exclusive rights for long periods of time.

Chart 6: Cable and satellite rights prices witnessing strong growth

Cable and Satellite Rights Growth (RHS) 30.0 35.0

25.0 30.0 25.0 20.0 20.0 15.0 (%)

(Rs bn) (Rs 15.0 10.0 10.0

5.0 5.0

0.0 0.0 2008 2009 2010 2011 2012 2013E 2014E 2015E 2016E 2017E

Source: KPMG, FICCI KPMG report

Media, September 10, 2013 ICICI Securities

Among the networks, from a library perspective, ZEEL and Sun Network are well placed in the Hindi and South India markets respectively. However, in the new Hindi movie library space, there is high competition, with Sony Network and Star India the most aggressive accumulators. Further, some of the movie studios have also ventured out into broadcasting with their own movie channels (UTV - UTV Movies, Eros - HBO Hits and HBO Defined). However, we believe this will encompass only a small chunk of the overall movies produced and majority of the satellite rights would still need to be bid for)

Table 12: Satellite rights prices going through the roof 2013 2012 2011 Satellite rights Satellite rights Satellite rights Film Network (Rs mn) Film Network (Rs mn) Film Network (Rs mn) Chennai Express ZEEL 400+ Ek Tha Tiger Sony 750 Bodyguard Star 280-300 Yeh Jawani Hai Diwani Sony 250 Jab Tak Hai Jaan Sony 350-400 Don 2 ZEEL 320 Krish 3 Sony 380 Rowdy Rathod Sony 350 Ra. One Star 400 Dhoom 3 Sony 750 Dabaang 2 Star 440 Talaash Sony 400 Agneepath ZEEL 400 Source: Media articles, I-Sec research

Chart 7: ZEEL inventory of movies and programs have increased considerably over last 3 years

10,000 ZEEL's rising inventory of 9,000 programs and movies 8,000 7,000 6,000 5,000

(Rs mn) (Rs 4,000 3,000 2,000 1,000 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company data; I-Sec research

Table 13: ZEEL catching up to Sun Network’s investment intensity (Rs mn) Sun TV FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Acquisitions 402 807 1,051 1,073 1,749 1,992 2,925 4,288 Amortisation 434 835 714 1,065 1,401 1,803 2,519 3,132

ZEEL Acquisitions 2,160 3,281 NA Amortisation 1,551 1,531 NA Source: Company data; I-Sec research

Media, September 10, 2013 ICICI Securities

Table 14: Sony Network and Star India most aggressive in satellite rights acquisition Colors Star India ZEEL Sony FY14 Raanjhanna Mental Chennai Express Yeh Jawani Hai Diwani Go Goa Gone Nautanki Saala Krish 3 Ishkq in Paris Chashme Buddor Dhoom 3 Kochadaiyaan Satyagraha Lootera Once upon a time in Mumbai 2 Aashiqui 2 Ek thi daayan Aurangzeb Shootout at Wadala FY13 Cocktail Housefull 2 Barfi! Jab Tak Hai Jaan Khiladi 786 Dabaang 2 Joker Rowdy Rathore Shirin Farhad Ki Toh Nikal Padi Bol Bachchan ABCD Talaash 3G Son of Sardaar Himmatwala Ek Tha Tiger Table 21 Matru Ki Bijlee Kai Po Che Raaz 3 Bittoo Boss Jolly LLB Race 2 Tezz Vicky Donor Ekk Deewana Tha Luv Shuv te Chicken Jannat 2 Oh My God Ferrari Ki Safari English Vinglish Ishaqzaade Special 26 Heroine Shanghai Student of the year Murder 3 FY12 Blood Money Bodyguard Agneepath Mere Brother Ki Dulhan Chillar Party Ready Don 2 Murder 2 Thank You Rockstar Desi Boyz The Dirty Picture Singham My Friend Pinto Aarakshan Zindagi Na Milegi Dobara BBuddah Hoga Terra Baap Ek Main Aur Ekk Tu Ra.One Agent Vinod Faltu Kahaani Players Ladies Vs Ricky Bahl Dil Toh Baccha Hai Ji Luv Ka The End Force Tere Naal Love Ho Gaya London Paris New York Dangerous Ishq Phas Gaye Re Obama Paan Singh Tomar Always Kabhi Kabhi Mujhse Fraaandship Karoge Dum Maro Dum FY11 Dabangg Housefull Double Dhamaal Badmaash Company Golmaal 3 I Hate Luv Storys Shaitan (Kalki) Band Baaja Baaraat Kites Once Upon A Time In Mumbai Pyaar Ka Panchnama Crook Tees Maar Khan Raajneeti Shagird [Nana Patekar] Hisss Guzaarish Anjaana Anjaani Chalo Dilli Pyaar Impossible 7 Khoon Maaf Action Replayy Masti Express Rakhtcharitra Khatta Meetha (Akshay) Atithi Tum Kab Jaoge Satrangee Parachute Rakhtcharitra-2 Lafangey Parindey Do Dooni Chaar Tanu Weds Manu Robot Lamhaa Guzaarish Break Ke Baad We Are Family Once Upon A Time In Mumbai Jhootha Hi Sahi No Problem Yamla Pagla Deewana Prince Milenge Milenge Peepli Live Raavan Veer Aisha Rann Udaan Patiala House FY10 Ajab Prem Ki Ghazab Kahani De Dana Dan All The Best 3 Idiots Chance Pe Dance My Name Is Khan Love Aaj Kal Newyork Life Partner Wanted Kaminey Dil Bole Hadippa Love Sex Aur Dhokha Blue Ishqiya Rocket Singh Right Yaaa Wrong Paa Kurbaan Striker Tum Mile Paathshaala Wake Up Sid Karthick Calling Karthick Source: TAM, Media articles, I-Sec research. Shaded movie names represent top movies in terms of gross collections

Media, September 10, 2013 ICICI Securities

Digitisation – from a content perspective

In this section, we argue that though gains from digitisation will help improve economics of the broadcasting space, a lot of the gains will need to be ploughed back into content. In the analogue mode, along with quality content, broadcasters needed a lot of financial muscle or control over distribution to reach out to consumers. Market shares in the analogue mode were decided not only by quality of content but, equally importantly, by distribution reach. Digitisation will help improve transparency and give way to primacy of content over distribution. While the initial gains will be driven by reduction of leakage (a norm in the analogue regime) and lower carriage fees, we believe the real opportunity lies in driving ARPU and that only players with strong market standing will stand to gain.

Subscription revenue from cable to triple by FY18

DTH industry currently pay ~Rs27bn as content costs to broadcasters, which is almost the same as what the entire cable industry pays despite the DTH subscriber base being less than half that of cable. The difference is starker if one were to adjust for the ~Rs15bn carriage fees made by the cable industry, which reduces the net payout of content fees to a mere Rs11bn. We believe that, with digitisation, content costs payout from cable will increase 2.8x and carriage fees will reduce to half by FY18E.

Chart 8: DTH industry pays Rs27bn as content fees to broadcasters

30 27

25 21 20 16 15 (Rs bn)(Rs 11 10 7

5 4 2

0 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Source: I-Sec estimates

Table 15: Broadcasters’ revenue from cable to double from removal of leakage HHs (mn) Content Cost (Rs mn) CPS* (Rs/month) DTH 40 26,784 55 Cable 86 25,253 24 Assuming cable CPS at par with DTH CPS Cable CPS @ DTH rates 86 57,139 Slippage from Cable 31,886 *CPS: Content cost per subscriber per month Source: Company data; I-Sec research

Media, September 10, 2013 ICICI Securities

Digitisation gains will be best driven by ARPU

The Indian media industry has been plagued by low ARPU mainly on account of slippages in analogue, archaic regulation w.r.t. channel pricing, and lack of an alternative distribution system like DTH. The last-mile cable owners had no incentive to raise prices and have only pushed prices down with the advent of DTH to stay competitive. As last-mile operators are forced to pay content costs and taxes, we expect the cost to consumer to rise. Also, consumers will want to select packages and channels as against everything being available in a single package, which will raise ARPUs.

Chart 9: Cost to consumer to rise up by ~70%

Government Digitisation

300 36 250 30 23 20 200 150 267 100

(Rs/month) 158 50 0 Ent. tax (under Additional Additional service tax service (Cost to digitisation) ARPU from channels Total payout consumer) Dual TV HHs Dual TV Current payout Current Subscription of non base pack

Source: I-Sec research

Channel packages Table 16: Digital cable announce packages at par with DTH announced by cable (Rs/month) Airtel Videocon companies indicate Packs Hathway DEN Siticable Dish TV Tata Sky Digital TV d2h likelihood of higher Basic 180+ taxes 160+ taxes 170+ taxes 220 220 220 220 Medium 225+ taxes 245+ taxes 222+ taxes 280 300 300 285 ARPU going forward Premium 270+ taxes 275+ taxes 267+ taxes 400 430 430 396 Note: Prices inclusive of taxes for DTH and exclusive of entertainment and service tax for cable Entertainment tax varies from state to state. Service tax @12.36% Source: Company data, I-Sec research

Chart 10: Customers to start paying for premium and niche content As tiering gains English prevalence, Entertainment customers will start paying for premium and niche content, which currently is Sports Base pack Lifestyle available under the analogue cable regime, as part of basic subscription package HD

Source: I-Sec research

Media, September 10, 2013 ICICI Securities

Consumers willing to pay high price for quality

The Indian consumer has displayed willingness to pay for quality in other forms of entertainment medium such as cinema. For instance, average ticket price (ATP) at multiplexes is almost 3-4x that at single-screen theatres, and data for PVR Cinemas indicates that ATP has grown at a CAGR of 8% over the past six years. We believe that ARPU levels can follow the same growth trajectory over a longer term as consumers start paying for quality content and premium service.

Table 17: Average ticket price: Multiplex vs single screen Single screen Multiplex Average Ticket Price (Rs) 25-30 125-130 Occupancy 15-20% 25-30% Seating capacity (per screen) 700-800 200-250 Source: PWC

Chart 11: Average collection per footfall has grown at a CAGR of 8%

Ticket rate / person (excl. entertainment tax) F&B / person 175 163 150 150 143 140

125 123 112

(Rs) 100 100

50 FY07 FY08 FY09 FY10 FY11 FY12 FY13

Data for PVR cinemas; Source: Company data; I-Sec research

Media, September 10, 2013 ICICI Securities

Subscription revenues to triple in next five years

We expect broadcasters’ subscription revenues to become 2.8x in the next five years, as we expect 75% addressability by FY18 and 100% by FY23E. We factor digitisation in 7-8 years and addressability (cash flows) in 10 years. Currently, while digitisation is in place in Delhi and Mumbai (just two out of the four metros) from Nov’12 onwards, addressability is still pending. Phase-2 markets have seen partial digitisation and addressability is quite some time away.

Table 18: Broadcasters’ subscription revenues to become 2.8x in next five years FY13E FY14EFY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E Households (mn) C & S HHs - Cable + DTH 127 135 144 152 161 171 181 192 204 218 DTH 40 45 50 54 58 63 70 77 84 92 Cable – Digital 1 4 13 31 50 65 83 97 110 124 Cable – Analogue 85 87 80 68 53 43 28 19 10 2

Broadcasters' revenues (Rs mn) Total revenue 52,038 60,991 71,982 87,670 109,859 134,320 163,106 196,587 233,574 277,101 DTH 26,784 33,624 40,569 47,577 55,055 64,444 76,467 91,217 108,243 127,936 Cable – Digital 145 1,089 5,246 16,152 34,585 53,398 74,072 96,787 119,998 146,978 Cable – Analogue 25,108 26,277 26,166 23,941 20,218 16,478 12,568 8,583 5,333 2,186

ARPU (Rs/month) Blended ARPU 167 176 186 199 216 236 259 284 312 342 DTH 173 187 202 218 235 254 274 296 320 345 Cable – Digital 173 187 202 218 235 254 274 296 320 345 Cable – Analogue 165 170 175 180 185 191 197 203 209 215

Carriage fee (Rs mn) 14,720 14,269 12,889 11,139 9,200 7,846 6,200 5,146 4,225 3,543

Net subscription revenue (Rs mn) 37,318 46,722 59,093 76,531 100,659 126,474 156,906 191,440 229,349 273,558

Digitisation penetration (%) Metro 10 25 75 100 100 100 100 100 100 100 Phase-2 0 10 25 75 100 100 100 100 100 100 Phase-3 0 0 10 25 60 75 90 100 100 100 Phase-4 0 0 0 5 13 30 50 60 75 90 Source: I-Sec research

Chart 12: Gross broadcasters’ revenues to increase at a CAGR of 20% in next 10 years

300

250

200 CAGR 20%

150 (Rs bn) (Rs

100

0 FY13E FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

Source: I-Sec research

Media, September 10, 2013 ICICI Securities

But, will the gains flow through to EBITDA?

Currently, the business model of broadcasters is heavily hinged upon network strength. Stronger the network better is the reach on distribution platforms, leading to higher advertisement and subscription revenues. However, post-digitisation, we believe ratings/market shares of channels will be the main driver of advertisement as well as subscription revenues, thereby making investments in content even more critical. Therefore, we believe substantial gains from higher subscription revenues will be invested back into content. A case in point is the Hindi film industry, in which improving theatrical collections owing to rise in multiplex revenues have resulted in substantial increase in remuneration for actors.

Chart 13: ZEEL’s domestic subscription revenues Chart 14: …but profitability has stagnated on have grown at a significant pace… account of investments in content

14,000 Domestic subscription EBITDA Margin % EBITDA Margin (excl domestic subscription revenue) 12,000 International subscription 32 10,000 24 8,000 16 6,000 (%)

(Rs mn) (Rs 10.5 4,000 8 4.3 2.2 1.3 2,000 0 0 (6.0) (5.7) -8

FY08 FY09 FY10 FY11 FY12 FY13 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company data, I-Sec research

Media, September 10, 2013 ICICI Securities

Index Tables and Charts

Tables Table 1: Star India and Sun Network boast of best quality content ...... 3 Table 2: Sport genre commands premium ARPU ...... 4 Table 3: Star India leading the pack by acquiring major cricket broadcast rights ...... 5 Table 4: Broadcasters signing longer-term deals ...... 8 Table 5: Most cricket broadcast rights locked till FY18 ...... 8 Table 6: Broadcast rights across networks ...... 9 Table 7: Network wise positioning ...... 11 Table 8: Tier-2 GECs picking up steam with increasing share of top programmes ...... 12 Table 9: Networks investing in big-budget international format shows ...... 13 Table 10: Investment in costume dramas by all players ...... 13 Table 11: Big-budget movie premieres garnering high ratings ...... 14 Table 12: Satellite rights prices going through the roof ...... 15 Table 13: ZEEL catching up to Sun Network’s investment intensity...... 15 Table 14: Sony Network and Star India most aggressive in satellite rights acquisition ... 16 Table 15: Broadcasters’ revenue from cable to double from removal of leakage ...... 17 Table 16: Digital cable announce packages at par with DTH ...... 18 Table 17: Average ticket price: Multiplex vs single screen ...... 19 Table 18: Broadcasters’ subscription revenues to increase 2.8x in next five years ...... 20

Charts

Chart 1: ZEEL underperforming Star India and Sun TV Network in terms of revenue growth ...... 3 Chart 2: Net surplus for BCCI from IPL ...... 7 Chart 3: Net surplus for BCCI from Champions League ...... 7 Chart 4: Sport segment has reported losses for both Nimbus and ZEEL over past few years ...... 7 Chart 5: Sony Network ratings improving significantly post IPL ...... 10 Chart 6: Cable and satellite rights prices witnessing strong growth ...... 14 Chart 7: ZEEL inventory of movies and programs have increased considerably over last 3 years . 15 Chart 8: DTH industry pays Rs27bn as content fees to broadcasters ...... 17 Chart 9: Cost to consumer to rise up by ~70% ...... 18 Chart 10: Customers to start paying for premium and niche content ...... 18 Chart 11: Average collection per footfall has grown at a CAGR of 8% ...... 19 Chart 12: Gross broadcasters’ revenues to increase at a CAGR of 20% in next 10 years ...... 20 Chart 13: ZEEL’s domestic subscription revenues have grown at a significant pace… ...... 21 Chart 14: …but profitability has stagnated on account of investments in content ...... 21

Equity Research INDIA September 10, 2013 BSE Sensex: 19270 Zee Entertainment Enterprises REDUCE Upgrade from SELL Not enough firepower to become numero uno Rs222 Media Reason for report: Company update and recommendation change

Zee Entertainment Enterprises’ (ZEEL) focus on profitability has made it a cautious investor in content, which has been at the expense of growth and ability

Target price Rs240 to hold on to its market share. We highlight that companies like Star India and Sun TV Network have fared far better than ZEEL in terms of revenue as well as market share stability over the past five years. In the event of digitisation, low

Shareholding pattern investments in content are likely to haunt ZEEL as even pay-TV revenues start Dec Mar Jun exhibiting a correlation with viewership share and ownership of key content. Also, ’12 ‘13 ‘13 ZEEL’s recent investments have been more focussed towards international Promoters 43.4 43.4 43.1 Institutional 48.9 50.4 50.4 presence – launch of Zee Alwan (Arabic channel) and investment in digital content investors – Ditto TV and the web portal india.com. We upgrade ZEEL to REDUCE (from MFs and UTI 9.0 6.5 6.0 Insurance Cos. 2.4 2.2 1.9 SELL) post the recent correction in its stock price maintaining our target price of FIIs 37.5 41.7 42.5 Others 7.7 6.2 6.5 Rs240. We do not see reason to downgrade numbers as advertisement revenues Source: NSE for ZEEL are driven by FMCG spends, which are likely to be strong. Key risks to our call a) faster than expected digitisation gains and b) higher ad growth led by Price chart strong FMCG spends. 280 260 f ZEEL’s investment intensity lacking vis-à-vis peers. ZEEL has failed to capitalise 240 on the growth by not investing enough in content and focusing more on profitability. 220 200 The company lags its peers in terms of a second GEC, new movie acquisition, and

(Rs) 180 limited India cricket ownership. While the company has entered a few niche channels 160 140 like Zee Khana Khazana (cookery channel), sports (golf channel) and ZeeQ 120 (edutainment channel), it is yet to build a rival to SAB TV, Life OK and Movies OK. 100 f Regional channels retrieving lost ground. ZEEL, after losing considerable ground in the Bengali and Marathi genres, has regained some of its lost market share. Also, Jun-13 Mar-13 Sep-12 Dec-12 Sep-13 the company has been faring better in Telugu and Tamil, though far away from the leader.

f ZEEL – sport investments weak. ZEEL has limited ownership of India cricket with South Africa and Sri Lanka boards being its key cricket rights. Interest in West Indies (time difference) and Zimbabwe (low ranking) has been limited. Also, ZEEL’s investments are dwarfed by Star India’s US$750mn bet on BCCI India rights, and Sony Network’s IPL rights. f Dividend payout (in the form of redeemable preference share) and digitisation hopes are likely to keep valuations rich, but high expectations have started to see correction, and we expect downgrades in consensus earnings to continue.

Market Cap Rs213bn/US$3.3bn Year to March FY12 FY13 FY14E FY15E Reuters/Bloomberg ZEE.BO/Z IN Revenue (Rs mn) 30,405 36,996 42,113 46,613 Shares Outstanding (mn) 959 Rec. Net Income (Rs mn) 5,891 7,196 8,002 9,601 Vikash Mantri 52-week Range (Rs) 259/169 EPS (Rs) 6.1 7.5 8.3 10.0 [email protected] Free Float (%) 56.9 % Chg YoY 5.9 24.1 10.6 20.0 +91 22 6637 7161 Satish Kothari FII (%) 42.5 P/E (x) 36.6 29.5 26.7 22.2 [email protected] Daily Volume (US$/'000) 10,833 CEPS (Rs) 6.4 8.0 8.8 10.5 +91 22 6637 7510 Absolute Return 3m (%) (4.0) EV/E (x) 27.1 21.0 18.6 15.5 Akhil Kalluri Absolute Return 12m (%) 30.3 Dividend Yield (%) 0.7 0.9 0.9 1.2 [email protected] +91 22 6637 7339 Sensex Return 3m (%) (0.8) RoCE (%) 18.3 19.9 19.4 20.3 Sensex Return 12m (%) 9.0 RoE (%) 18.0 19.6 19.1 20.0

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

ZEEL – Not enough firepower to become numero uno

The Essel group, promoters of Zee Entertainment Enterprises’ (ZEEL), has been the pioneer in the Indian media space with investments in cable, DTH, HITS, Indian cricket league (ICL) or building up Marathi and Bengali genres. ZEEL’s investment intensity over the past 5-7 years has however been overshadowed by Star India’s investments in sports, second GEC or regional broadcasting. We believe ZEEL needs to increase its content intensity to ensure itself a formidable positioning across genres and prevent new competition from chipping away its market share.

Hindi GEC – Lack of tier-2 GEC hurting the network ZEEL was the first network to launch a tier-2 GEC – Zee Smile (a comedy channel launched in 2004) and Zee Next (a youth-focused channel launched in 2007 and folded up in only nine months). The launch of these channels by ZEEL was followed by Star India’s launch of Star One in 2004 and Sony’s acquisition of SAB TV in 2005. While all four channels failed to make a significant impact initially, Sony Network and Star India have been able to rebrand and renew their content with Life OK (earlier, Star One) and SAB TV strong emerging as contenders in the Hindi GEC space. Currently, among Hindi GECs, Star Network and Sony Network lead ZEEL on the back of their tier-2 GECs

We believe ZEEL’s new initiative to launch a new Hindi GEC channel, Zee Anmol, is a half-hearted approach as it is slated to air re-runs of Zee TV’s popular old and current shows. The channel is similar to Star Utsav which airs re-runs of popular shows earlier telecast on Star Plus. With Star Utsav reporting weekly ratings of <50 GRPs (~4% market share among GECs), we fear that Zee Anmol too could find it challenging to grab significant additional market share for ZEEL.

Hindi movies – ZEEL not building on library ZEEL was also the pioneer in launching multiple Hindi movie channels, namely Zee Action, Zee Premier and Zee Classic in 2003, in addition to its existing flagship movie channel, Zee Cinema. While, ZEEL has among the best libraries of old movies (Amitabh Bachchan collection), it has failed to be aggressive in acquisition of new movie rights. Star India, with big budget satellite rights acquisition and the launch of new channel Movies OK, has surpassed ZEEL in the movie genre. In 2013, Movies OK garnered an average of ~55-60 weekly GRPs as against ~50 GRPs by all the three flanker movie channels of ZEEL. We see the recent launch of &pictures, after aggressive content acquisition in 2012, to help ZEEL in strengthening its presence in the Hindi movie space.

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Chart 1: Hindi GEC and movies launch timeline

Zee TV (1992) 9x (2010) Zee Anmol (2013) Hindi GEC Zee Smile (2004) (18% market share)

ZEEL 1992 1995 1998 2001 2004 2007 2010 2013

Hindi Movies (23% market share) Zee Cinema (1995) Zee Action (2003) &Picture (2013) Zee Premier (2003) Zee Classic (2003)

Star Utsav (2004) Hindi GEC Star Plus (1996) Star One (2004) Life OK (2011) (32% market share)

DBStar Corp TV 1992 1995 1998 2001 2004 2007 2010 2013

Hindi Movies (35% market share) Star Gold (2000) Movies OK (2012)

Sony Entertainment SAB TV (2005) Hindi GEC Network (1995) (28% market share)

DBSony Corp 1992 1995 1998 2001 2004 2007 2010 2013

Hindi Movies (27% market share) SET Max (2000)

Colors (2008) Hindi GEC (18% market share)

TV18DB Corp 1992 1995 1998 2001 2004 2007 2010 2013

Source: Company data, TAM, CS4+ HSM, I-Sec research

Regional markets – ZEEL caught napping by Star India ZEEL was the first national broadcaster to enter the regional markets of Marathi and Bengali, with launch of Zee Marathi and Zee Bangla in 1999 and it entered into the South Indian markets during the mid-2000s. However, ZEEL failed to create moats around its business through launch of channels across genres as was done by its competitor Sun Network. Sun Network, in its target markets, has channels across the entire gamut of genres namely GEC, movie, comedy, music, kids, etc., which has aided the network in maintaining its market share and created an entry barrier for new competition. Star India launched its Marathi and Bengali channels in 2008 and was able to gain leadership in Bengali and the no. 2 position in Marathi in a matter of 10 months. It was only in 2012 that ZEEL launched Zee Bangla Cinema, after entering the Bengali market in 1999.

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Table 1: Regional markets – Star India gaining market share across regions Launch Market share (%) Language Channel date 2007 2009 2011 2013* Zee Marathi 1999 47 45 31 36 Star Pravah 2008 - 16 28 41 Marathi ETV Marathi 2000 35 27 31 17 Zee Bangla 1999 38 28 36 34 Zee Bangla Cinema 2012 - - - 6 Star Jalsha 2008 - 36 43 42 Jalsha Movies 2012 - - - 9 Bengali ETV Bangla 1999 41 23 15 7 Gemini TV 1995 34 28 36 29 Zee Telugu 2005 7 15 16 17 Telugu ETV 1995 17 15 18 20 Udaya 1994 50 40 39 31 Zee Kannada 2006 6 14 16 15 Suvarna** 2008 3 15 19 25 Suvarna Plus 2013 - - - - Kannada ETV Kannada 2000 26 18 14 20 Sun Tv 1993 68 65 66 63 Zee Tamil 2001, 2008 - 1 3 6 Tamil Star Vijay 2001 9 7 9 12 *Note: Data for 2013 till Jul’13; **Acquired from Asianet in 2008 Source: TAM, Media articles, I-Sec research

Subscription revenue gains to be invested back into content

As discussed in the foregoing, we believe, digitisation will force networks to increase their investment intensity in content as post-digitisation revenues will be primarily driven by strength of content (ratings) as against strength of the network. ZEEL in the past has invested incremental gains from subscription revenues into content acquisition as reflected in its EBITDA gains being lower than overall gains in domestic subscription revenues. We expect the trend to continue post digitisation as networks will continue to invest in new channels/content. In our view, digitisation gains for ZEEL will be more back-ended and we fear that the street is currently over-optimistic on the company’s profitability in FY14-FY15E. We expect ZEEL to register 20% and 16% CAGRs in domestic subscription revenues and EBITDA respectively over FY13-18.

Chart 2: ZEEL’s domestic subscription revenues Chart 3: …but profitability has remained stagnant have grown at a significant pace… on account of investments in content

14,000 Domestic subscription EBITDA Margin % EBITDA Margin (excl domestic subscription revenue) 12,000 International subscription 32 10,000 24 8,000 16 6,000 (%)

(Rs mn) (Rs 10.5 4,000 8 4.3 2.2 1.3 2,000 0 0 (6.0) (5.7) -8

FY08 FY09 FY10 FY11 FY12 FY13 FY08 FY09 FY10 FY11 FY12 FY13

Source: Company data, I-Sec research

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

ZEEL lagging behind Star India

ZEEL has delivered 10% revenue CAGR over FY09-13; however, Star India has outperformed ZEEL with a 32% CAGR over the same period. Star India should have outperformed ZEEL even after adjusting for higher revenues in FY13 on account of inclusion of sports for 8 months as is evident from company’s revenue CAGR of 25% over FY09-12 as against 6% revenue CAGR for ZEEL over the same period. Even Sun TV Network (ex radio) has outperformed ZEEL with 15.9% and 16.4% total revenue and ad revenue CAGR over FY09-13 as against 10% and ~12% for ZEEL. Star India’s outperformance has been driven by strong performance across all genres, be it Hindi GEC, Hindi movie, R-GEC or sport. Star India’s market share has improved from 11% in FY09 to 22% in FY13 (#2 player being ZEEL with a 14% market share). Further, in FY13, Star India accounted for 28% and 35% of total advertisement and subscription revenues respectively, where stronger share of subscription revenues could have been driven by the strength of the network’s sport bouquet. We believe ZEEL’s lower investment intensity could significantly hurt, especially in the wake of big bets taken by Star India in the past few years.

Chart 4: ZEEL reporting 10% revenue CAGR over Chart 5: …however, Star India outperformed ZEEL FY09-13… with 32% CAGR over FY09-13

40 60

35 (CAGR 10%) 50 (CAGR 32%) 30 40

25 30

20 20 (Revenue Rs bn) Rs(Revenue (Revenue Rs bn) Rs(Revenue

15 10

10 0 FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12 FY13

Source: Company data, I-Sec research Note: FY13 revenues for Star include 8-month revenues from sport

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Chart 6: Star India clear leader in terms of GRP share

25% 22%

20%

15% 14% 11% 10% 6% 5% (Marketshare viewership %)

0% Star ZEEL Sony Viacom

Source: Company data, I-Sec research

Chart 7: ZEEL significantly lagging Star India in terms of market share

40% Star Z EEL 35% 35%

30% 28%

25% 23%

20% 17%

15%

10%

0% Ad revenue Subscription revenue

Source: Company data, I-Sec research

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Upgrade to REDUCE; Maintain TP of Rs240/share

We upgrade ZEEL to REDUCE from SELL maintaining our target price of Rs240/share based on 24x FY15 P/E. Key risks to our call are faster than expected digitisation gains and higher ad growth led by strong FMCG spends.

Chart 8: Recommendation history

320 H B H B H B H B H R A R S R

270

220

170 (Rs)

120

20 … … May- May- Jul-09 Jul-11 Apr-09 Oct-11 Jan-09 Jan-12 Jun-13 Feb-10 Mar-11 Mar-13 Nov-09 Sep-10 Dec-10 Aug-12 Nov-12 Sep-13 B: BUY; H: HOLD; S: SELL; A: ADD; R: REDUCE Note: The grey line indicates our target price Source: I-Sec research

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Table 2: Quarterly summary data (Rs mn, year ending March 31) FY12 FY13 FY14 Q1 Q2 Q3 Q4FY12 Q1 Q2 Q3 Q4FY13 Q1 Advertisement revenues 3787 15841 3955 15841 17010 4472 5281 5094 4792 19639 5301 Growth QoQ% (21.0) 0.1 7.8 18.1 (3.5) (5.9) 10.6 Growth YoY% 0.5 (6.9) (10.1) (6.9) 59.4 18.1 33.7 28.8 15.5 24.0 18.5 Subscription Revenues 3051 13244 3262 13244 11259 3641 3950 4098 4546 16235 4241 Growth QoQ% (1.8) 12.1 (9.5) 8.5 3.7 10.9 (6.7) Growth YoY% 16.7 17.6 15.7 17.6 14.1 19.3 35.7 25.6 13.0 22.6 16.5 Domestic subscription 2075 9222 2223 9222 7182 2505 2808 2961 3374 11649 3168 Growth QoQ% 0.0 0.1 0.0 0.1 0.1 0.1 (0.1) Growth YoY% 0.3 28.4 0.2 28.4 27.1 0.2 0.4 0.3 0.4 26.3 0.3 Intl. subscription 976 4,022 1038 4,022 4,094 1137 1141 1136 1172 4,586 1073 Growth QoQ% (0.1) 0.1 0.1 0.0 (0.0) 0.0 (0.1) Growth YoY% (0.0) (1.8) 0.0 (1.8) (1.9) 0.2 0.2 0.1 0.1 14.0 (0.1) Others Sales & service 145 1320 332 1320 1166 317 305 197 305 1122 191 Growth YoY% (62.5) (0.3) 118.7 (6.0) (40.7) (41.2) (39.6) Total Income 6983 30,405 7548 30,405 29,436 8430 9535 9389 9643 36,996 9733 Growth QoQ% (12.5) 5.1 (3.0) 13.1 (1.5) 2.7 0.9 Growth YoY% 3.2 3.3 (0.0) 3.3 33.8 20.7 32.7 24.4 11.0 21.7 15.5

Programming & operating costs 3423 14311 3422 14311 14369 3757 4791 4185 4669 17401 4108 % of sales 49.0 47.1 45.3 47.1 48.8 44.6 50.2 44.6 48.4 47.0 42.2 Staff costs 747 2925 731 2925 2738 888 873 895 835 3491 956 % of sales 10.7 9.6 9.7 9.6 9.3 10.5 9.2 9.5 8.7 9.4 9.8 Admin & selling expenses 1253 5774 1236 5774 4762 1453 1695 1697 1716 6561 1754 % of sales 17.9 19.0 16.4 19.0 17.7 17.2 17.8 18.1 17.8 17.7 18.0 Total expenses 5422 23010 5389 23010 21870 6097 7359 6777 7220 27453 6818 % of sales 77.7 75.7 71.4 75.7 74.3 72.3 77.2 72.2 74.9 74.2 70.0

EBITDA 1561 7395 2160 7395 7566 2333 2177 2612 2423 9543 2915 EBITDA Margin % 22.3 24.3 28.6 24.3 25.7 27.7 22.8 27.8 25.1 25.8 30.0

Depreciation 89 323 74323 288 99 96 90 115 399 87 Interest & financial charges 30 50 182 50 104 18 23 16 29 86 22 Other Income 255 1384 340 1384 851 301 260 360 538 1461 722 PBT 1696 8406 22438406 8025 2517 2318 2866 2817 10519 3528 Tax 394 2500 8672500 2813 947 444 933 1014 3337 1289 Adjusted PAT 1337 5891 1393 5891 5614 1582 1876 1941 1795 7196 2246 Growth QoQ% (35.3) (10.7) (4.0) 18.6 3.5 (7.5) 25.2 NPM % 19.1 19.4 18.5 19.4 19.1 18.8 19.7 20.7 18.6 19.5 23.1

Sports Business Revenues 873 3934 9013934 4411 992 1818 1078 1072 4960 1159 Growth QoQ% (38.7) 2.3 (22.4) 83.3 (40.7) (0.6) 8.1 Growth YoY% 4.9 (10.8) (6.6) (10.8) 40.0 13.6 106.4 19.6 (16.2) 26.1 16.8 Costs 1439 5414 10015414 6489 1202 1987 1164 1477 5830 1254 Growth QoQ% (8.7) (9.6) (35.6) 65.3 (41.4) 26.9 (15.1) EBITDA (566) (1,480) (100)(1,480) (2,078) (210) (169) (86) (405) (870) (95) EBITDA Margin % (64.8) (37.6) (11.1) (37.6) (47.1) (21.2) (9.3) (8.0) (37.8) (17.5) (8.2)

Ex sports business Revenues 6110 26471 664726471 25025 7438 7717 8311 8571 32036 8574 Growth QoQ% (6.8) 5.5 0.4 3.8 7.7 3.1 0.0 Growth YoY% 2.9 5.8 1.0 5.8 32.8 21.7 22.4 25.0 15.6 21.0 15.3 Costs 3983 17596 438817596 15381 4895 5372 5613 5743 21623 5564 Growth QoQ% (3.7) 9.7 (6.3) 9.7 4.5 2.3 (3.1) Growth YoY% 7.3 9.4 22.9 34.2 27.9 9.9 13.7 EBITDA 2127 8875 22608875 9644 2543 2346 2698 2828 10413 3010 EBITDA Margin % 34.8 33.5 34.0 33.5 38.5 34.2 30.4 32.5 33.0 32.5 35.1 Source: Company data, I-Sec research

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Table 3: Annual summary data (Rs mn, year ending March 31) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Advertisement revenues 9,307 10,593 10,670 17,010 15,841 19639 22538 24295 Growth % 32.3 13.8 0.7 59.4 (6.9) 24.0 14.8 7.8 Subscription revenues 7,436 9,038 9,869 11,259 13,244 16235 18396 21080 Growth % 11.9 21.5 9.2 14.1 17.6 22.6 13.3 14.6 Domestic subscription 4,043 4,546 5,652 7,182 9,222 11649 13885 16465 Growth% (39.2) 12.4 24.3 27.1 28.4 26.3 19.2 18.6 International subscription 3,393 4,492 4,173 4,094 4,022 4,586 4,511 4,615 Growth YoY% - 32.4 (7.1) (1.9) (1.8) 14.0 (1.6) 2.3 Others Sales & service 1,611 2,143 1,459 1,166 1,320 1122 1180 1239

Total Revenues 18,354 21,773 21,998 29,436 30,405 36,996 42,113 46,613 Growth % 21.1 18.6 1.0 33.8 3.3 21.7 13.8 12.0

Operational costs / COGS 7,818 9,810 9,452 14,369 14,311 17401 20160 21327 % of sales 42.6 45.1 43.0 48.8 47.1 47.0 47.9 45.8 Personnel costs 1,438 2,031 1,963 2,738 2,925 3491 4016 4445 % of sales 7.8 9.3 8.9 9.3 9.6 9.4 9.5 9.5 Admin and other exp 2,132 1,860 2,113 1,896 5,774 2514 2690 2977 % of sales 11.6 8.5 9.6 8.0 19.0 6.8 6.4 6.4 Selling and distribution exp 1,543 2,592 2,335 2,866 3,445 4047 4469 4946 % of sales 8.4 11.9 10.6 9.7 11.3 10.9 10.6 10.6 Total expenses 12,931 16,293 15,863 21,870 23,010 27453 31334 33695 Cost of Sales % 70.5 74.8 72.1 74.3 75.7 74.2 74.4 72.3

Total EBITDA 5,423 5,480 6,135 7,566 7,395 9543 10779 12918 EBITDA Margin % 29.5 25.2 27.9 25.7 24.3 25.8 25.6 27.7

Depreciation & amortisation 232 310 285 288 323 399 459 486 Interest & financial charges 516 1,339 331 104 50 86 90 94 Other Income 1,138 1,572 1,220 851 1,384 1461 1870 1963 PBT 5,813 5,403 6,738 8,025 8,406 10519 12100 14301 Tax 1,627 1,633 1,145 2,813 2,500 3337 4114 4719 Adjusted PAT 3,851 3,673 5,772 5,614 5,891 7196 8002 9601 Growth % 62.1 (4.6) 57.2 (2.7) 4.9 22.2 11.2 20.0 NPM % 21.0 16.9 26.2 19.1 19.4 19.5 19.0 20.6

Sports Revenues 2,140 3,876 3,151 4,411 3,934 4960 6238 6181 Growth % 0.0 81.1 -18.7 40.0 (10.8) 26.1 25.8 (0.9) Costs 2,083 3,563 3,727 6,489 5,414 5830 7579 6821 EBITDA 57 313 (576) (2,078) (1,480) (870) (1,341) (640) EBITDA margin % 2.7 8.1 (18.3) (47.1) (37.6) (17.5) (21.5) (10.4)

Ex-Sports Revenues 16,213 17,897 18,847 25,025 26,471 32036 35875 40432 Growth % - 10.4 5.3 32.8 5.8 21.0 12.0 12.7 Costs 10,847 12,730 12,136 15,381 17,596 21623 23755 26874 EBITDA 5,366 5,167 6,711 9,644 8,875 10413 12120 13558 EBITDA margin % 33.1 28.9 35.6 38.5 33.5 32.5 33.8 33.5 Source: Company data, I-Sec research

Zee Entertainment Enterprises, September 10, 2013 ICICI Securities

Financial summary

Table 4: Profit and Loss statement Table 6: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E Operating Income (Sales) 30,405 36,996 42,113 46,613 Operating Cashflow 4,105 6,817 6,879 8,313 of which advertising 15,841 19,639 22,538 24,295 Working Capital Changes (3,592) (2,961) (5,125) (1,785) of which subscription 13,244 16,235 18,396 21,080 Capital Commitments (1,017) (712) (1,164) (947) of which others - - - - Free Cashflow (504) 3,144 591 5,581 Operating Expenses 1,320 1,122 1,180 1,239 Cashflow from Investing EBITDA 23,010 27,453 31,33433,695 Activities 3,122 1,4571,038 2,527 % margins 7,395 9,543 10,779 12,918 Issue of Share Capital - - 5 - Depreciation & Amortisation 24.3 25.8 25.6 27.7 Buyback of shares (19) (5) - - Gross Interest 323 399 459 486 Inc (Dec) in Borrowings (5) 5 - - Other Income 50 86 90 94 Dividend paid (1,690) (2,218) (2,325) (3,068) Recurring PBT 1,384 1,461 1,870 1,963 Extraordinary Items - - - - Add: Extraordinaries 8,406 10,519 12,100 14,301 Chg. in Cash & Bank balances (575) 2,033 (874) 5,002 Less: Taxes 2,550 3,370 4,114 4,719 Source: Company data, I-Sec research - Current tax 2,685 3,318 4,114 4,719 - Deferred tax (135) 52 - - Less: Minority Interest (32) 33 (133) (152) Table 7: Key ratios Net Income (Reported) 5,841 7,163 8,002 9,601 (Year ending March 31) Recurring Net Income 5,891 7,196 8,002 9,601 FY12 FY13 FY14E FY15E Source: Company data, I-Sec research Per Share Data (in Rs) Diluted Recurring EPS 6.1 7.5 8.3 10.0 Table 5: Balance sheet Reported EPS 6.0 7.5 8.3 10.0 Recurring Cash EPS 6.4 8.0 8.8 10.5 (Rs mn, year ending March 31) Dividend per share (DPS) 1.5 2.0 2.1 2.8 FY12 FY13 FY14EFY15E Book Value per share (BV) 35.4 41.0 46.6 53.4 Assets Total Current Assets 25,418 32,380 36,042 42,787 Growth Ratios (%) of which cash & cash eqv. 3,283 5,316 4,442 9,445 Operating Income 3.3 21.7 13.8 10.7 Total Current Liabilities & EBITDA (2.3) 29.013.0 19.8 Provisions 8,820 11,393 10,319 11,049 Recurring Net Income 4.9 22.2 11.2 20.0 Net Current Assets 16,598 20,987 25,723 31,738 Diluted Recurring EPS 5.9 24.1 10.6 20.0 Investments 7,999 7,916 7,916 7,916 Diluted Recurring CEPS 6.2 24.2 10.8 19.2 Net Fixed Assets 2,506 2,848 3,612 4,091 Goodwill 6,894 7,127 7,127 7,127 Valuation Ratios (x) Total Assets 33,997 38,878 44,378 50,872 P/E 36.6 29.526.7 22.2 P/CEPS 34.7 27.925.2 21.1 Liabilities P/BV 6.3 5.44.8 4.2 Borrowings 12 17 17 17 EV / EBITDA 27.1 21.0 18.6 15.5 Deferred Tax Liability (337) (288) (288) (288) EV / Operating Income 6.6 5.4 4.8 4.3 Minority Interest (32) 33 (133) (152) EV / Operating FCF 391.1 52.1 114.4 30.7 Equity Share Capital 959 954 959 959 Face Value per share (Rs) 1.0 1.0 1.0 1.0 Operating Ratios (%) Reserves & Surplus* 33,349 38,161 43,822 50,335 Production cost/Sales 7.7 6.8 6.4 6.4 Net Worth 34,354 39,115 44,782 51,295 Other Income / PBT 16.5 13.9 15.5 13.7 Total Liabilities 33,997 38,878 44,378 50,872 Effective Tax Rate 30.3 32.0 34.0 33.0 Source: Company data, I-Sec research NWC / Total Assets 39.2 40.3 48.0 43.8 Inventory Turnover (days) NA NA NA NA Table 15: Quarterly trend Receivables (days) 105.7 91.5 89.2 86.8 Payables (days) 75.5 68.9 73.9 76.2 (Rs mn, year ending March 31) D/E Ratio (x) (0.01) (0.01) (0.01) (0.01) Sep-12 Dec-12 Mar-13 Jun-13 Net sales 9,535 9,389 9,643 9,733 Return/Profitability Ratios (%) % growth (YoY) 32.7 24.4 11.0 15.5 Recurring Net Income Margins 18.5 18.7 18.2 19.8 EBITDA 2,177 2,612 2,423 2,915 RoCE 18.3 19.919.4 20.3 Margin (%) 22.8 27.8 25.1 30.0 RoNW 18.0 19.619.1 20.0 Other income 260 360 538 722 Dividend Payout 24.7 26.5 25.0 27.5 Add: Extraordinaries 0 - - - Dividend Yield 0.7 0.9 0.9 1.2 Net profit 1,875 1,941 1,795 2,246 EBITDA Margins 24.3 25.8 25.6 27.7 Source: Company data Source: Company data, I-Sec research

Equity Research INDIA September 10, 2013 BSE Sensex: 19270 Sun TV Network BUY Maintained Building moats Rs389 Media Reason for report: Company update

Sun TV Network (Sun TV) is among the strongest broadcasting players in terms of content, as the company has been very aggressive in cordoning off content from Target Price Rs500 competition. With a bouquet of 32 channels across genres and a huge library of

movies (70%+ of market), the company’s market share stands least threatened. Shareholding pattern We have a BUY rating on the stock with a target price of Rs500/share based on Dec Mar Jun 21x FY15 P/E. Sun TV remains our preferred pick among the Indian broadcasting ’12 ’13 ’13 Promoters 77.0 77.0 75.0 space. Political risk and negative news flow on telecom scam are the key risks to Institutional the stock. investors 15.8 16.0 17.2 MFs and UTI 2.2 1.8 2.8 Insurance Cos. 0.0 0.1 0.1 f Strong entry barrier of content: Over the past two decades, Sun TV has made FIIs 13.5 14.0 14.3 huge investments in content owing satellite rights of 70%+ movies. It has also been Others 7.2 7.1 7.8 Source: NSE actively investing in channels across genres and languages, allowing little scope for new players to break in the market. Sun TV enjoys a market share of 40%+ in its target markets and owns ~25% of major channels in its markets.

Price chart f Unfazed by new competition: Sun TV offers the strongest franchise in South India, with leadership in key markets of Tamil Nadu, Andhra Pradesh and Karnataka and 550 500 at No. 2 slot in Kerala. The company has been able to successfully maintain its 450 leadership by launching multiple channels across languages and acquiring critical 400 movies for its library. Sun TV’s ratings have remained steady over the years with 350 (Rs) 300 dominant (60%+) market share in the key state of Tamil Nadu. While Star India and 250 Zee Entertainment Enterprises (ZEEL) are trying to make inroads in these markets 200 for years, they are largely vying for No.2 slot. 150 f No South pack without Sun TV: Given the strength of Sun TV’ bouquet, no TV channel package can avoid having Sun TV channels in its base pack. This makes Jul-13 Jan-13 Mar-13 Sep-12 Sep-13 Nov-12 May-13 Sun TV a huge beneficiary of ongoing digitization drive, given its dominant position in key regional markets of South India. We expect Sun TV’s subscription revenues to grow at a CAGR of 20% over FY13-FY15E driven by digitization in phase II cities, where Sun TV has a strong franchisee in five cities. Further, any improvement in collection from Chennai market will lead to a higher growth in subscription revenues. f Trading at a huge 25%+ discount to ZEEL: We feel such a high valuation discount is unreasonable given Sun TV historically has traded at a premium to ZEEL and is the market leader with one of the strongest channel bouquet in its target markets.

Sun TV is currently trading at FY14 P/E of 19.0x and FY15 P/E of 16.2x.

Market Cap Rs153bn/US$2.3bn Year to Mar 2012 2013 2014E 2015E Reuters/Bloomberg SUTV.BO/SUN IN Revenue (Rs mn) 18,472 19,230 22,997 26,021 Shares Outstanding (mn) 394.3 Rec. Net Income (Rs mn) 6,929 7,096 8,046 9,457 Vikash Mantri 52-week Range (Rs) 492/271 EPS (Rs) 17.6 18.0 20.4 24.0 [email protected] Free Float (%) 25.0 % Chg YoY (10.0) 2.4 13.4 17.5 +91 22 6637 7161 FII (%) 14.3 P/E (x) 22.1 21.6 19.0 16.2 Satish Kothari [email protected] Daily Volume (US$/'000) 7,303 CEPS (Rs) 29.6 29.2 32.4 37.3 +91 22 6637 7510 Absolute Return 3m (%) (8.9) EV/E (x) 10.6 10.6 9.4 8.2 Akhil Kalluri Absolute Return 12m (%) 28.2 Dividend Yield (%) 2.4 2.4 2.8 3.3 [email protected] Sensex Return 3m (%) (0.8) RoCE (%) 27.0 25.2 26.0 27.8 +91 22 6637 7339 Sensex Return 12m (%) 9.0 RoE (%) 28.7 26.6 27.2 28.9

Sun TV Network, September 10, 2013 ICICI Securities

Strong regional franchise

Table 1: Sun TV Network – Market leader by a long shot in South India Tamil Telugu Kannada Malayalam #1 player market share Sun Tv 40 Gemini 24 Udaya 26 Asianet 32 #2 player market share KTV 12 Maa 16 Suvarna 16 Surya 18 #3 player market share Vijay 10 ETV 13 Zee Kannada 12 Mazhavil Manorama 10 Size of market (Rs bn) 13.5 9.0 6.2 6.6 No of major channels 45 30 19 24 Sun - No of channels 12 9 7 4 Share of Sun TV's channels 61 38 41 29 Source: TAM CS 4+ respective markets; FICCI; I-Sec research

Table 2: Sun TV Network boasts of a strong bouquet of channels in its target markets Tamil Telugu Malayalam Kannada GEC Sun Tv Gemini Tv Surya Tv Udaya TV Movies KTV Gemini Movies Udaya Movies Music Sun Music Gemini Music Kiran Tv Udaya Music News Sun News Gemini News Udaya News Comedy Adithya Tv Gemini Comedy Udaya Comedy Kids Chutti Tv Kushi Tv Kochu Tv Chintu TV LifeStyle Sun Life Gemini Life Others Sun Tv Ri Action Movie Sun Action Gemini Action Surya Action Suriyan Action HD Bouquet Sun TV HD,KTV HD, Sun Music HD Gemini HD No of channels 12 9 4 7 Source: Company data; I-Sec research

Table 3: Sun TV Network acquiring higher film and programming broadcast rights in past two years (Rs mn) Sun TV FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Acquisitions 402 807 1,051 1,073 1,749 1,992 2,925 4,288 Amortisation 434 835 714 1,065 1,401 1,803 2,519 3,132 Source: Company data; I-Sec research

Chart 1: Subscription revenues to ramp up in FY14-15E led by digitization

2,400 Analogue cable DTH (RHS) 6,000

2,200 5,000

2,000 4,000 1,800 3,000 (Rs mn) (Rs 1,600 mn) (Rs 2,000 1,400

1,200 Impact of ARASU 1,000

1,000 0 FY09 FY10 FY11 FY12 FY13 FY14E FY15E

Source: Company data, I-Sec research

Sun TV Network, September 10, 2013 ICICI Securities

Sun TV Network trading at significant discount to ZEEL Chart 2: Sun TV Network trading at a discount to Chart 3: Sun TV Network currently trading at its historical valuations ~25% discount to ZEEL

40 70.0 ZEE TV Sun TV

35 60.0 50.0 30 40.0 25 30.0

20 20.0 1-year fwd (x) P/E 1 yr forward P/E (x)15 10.0

0.0 10 Jul-10 Jul-11 Apr-06 Jun-09 Aug-12 Aug-13 May-07 May-08 Oct-09 Apr-08 Apr-13 Jan-09 Jun-09 Jun-12 Mar-10 Feb-12 Aug-10 Dec-10 Sep-11 Sep-08 Nov-12 Aug-13 May-11

Source: Company data, Bloomberg, I-Sec research Chart 4: ZEEL has outperformed Sun TV Network in past 2 years

80 Sun TV ZEEL 70 Sun TV ZEEL 60 60 50 40 40

20 30

0 20 10 -20

Ad revenue growth (%) 0 -40 Subscription revenue growth (%) -10

-60 -20 FY08 FY09 FY10 FY11 FY12 FY13 FY08 FY09 FY10 FY11 FY12 FY13 Source: Company data; I-Sec research Chart 5: Sun TV Network margins and return profile much stronger than ZEEL

Sun TV* ZEEL Sun TV ZEEL 60 54.5 40 36.8 54.4 53.0 55 49.7 50.9 50.3 35 50 45 30 27.9 28.7 40 26.2 35 25 23.6 21.6 29.5 30 27.9 25.8 19.6 25.2 RoE (%) EBITDA margin (%) EBITDA 25.7 24.3 20 18.0 25 16.0 16.2 20 15 14.1 15 11.7 10 10 FY08 FY09 FY10 FY11 FY12 FY13 FY08 FY09 FY10 FY11 FY12 FY13 Source: Company data; I-Sec research *EBIT margin for Sun TV Source: Company data, I-Sec research

Sun TV Network, September 10, 2013 ICICI Securities

Chart 6: Sun TV continues to dominate Tamil Chart 7: Kannada ratings improve market

Tamil GRPs GRP share (RHS) Kannada GRPs GRP share (RHS) 1,500 70 700 42 68 1,400 40 600 66 1,300 64 38 (%) 500 (%) 62 1,200 (GRPs) 36 (GRPs) 60 1,100 400 58 34 1,433 1,372 1,249 1,157 1,219 1,148 1,115 1,146 1,253

1,000 56 609 576 530 478 507 445 416 383 477 300 32 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14* Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14* *Q2FY14 data till July’13 Source: TAM CS4+ Market Tamil Nadu, I-Sec research Source: TAM CS4+ Market Karnataka, I-Sec research

Chart 8: Leader in Telugu but market share on a Chart 9: Malayalam ratings stabilizing after decline slipping in Q3FY13

Telugu GRPs GRP share (RHS) Malayalam GRPs GRP share (RHS) 800 48 600 36 44 34 700 40 32 500 30 36 600 28

32 (%) (%)

(GRPs) (GRPs) 26 400 500 28 24 24 22 743 640 685 595 591 586 569 524 528 480 509 489 477 443 313 334 363 371 400 20 300 20 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14* Q2FY14*

*Q2FY14 data till July’13 Source: TAM CS4+ Market Andhra Pradesh, I-Sec research Source: TAM CS4+ Market: Kerala, I-Sec research

Sun TV Network, September 10, 2013 ICICI Securities

Maintain BUY with a TP of Rs500/share

We reiterate BUY on Sun TV Network with a target price of Rs500/share based on 21x FY15 P/E. Sun TV remains our preferred pick among the Indian broadcasting space. Political risk and negative news flow on telecom scam are the key risks to the stock.

Chart 10: Recommendation history

700 B H B H B H B A B

600

500

400

(Rs) 300

200

100

0 Jul-10 Jul-11 Apr-09 Apr-10 Oct-11 Jan-09 Jun-12 Jan-13 Mar-11 Feb-12 Aug-09 Dec-09 Sep-12 Sep-13 Nov-10 May-13

B: BUY; H: HOLD; S: SELL; A: ADD; R: REDUCE Note: The grey line indicates our target price Source: I-Sec research

Sun TV Network, September 10, 2013 ICICI Securities

Table 4: Summary of quarterly data (Rs mn) FY12 FY13 FY14 Q1 Q2 Q3 Q4FY12 Q1 Q2 Q3 Q4 FY13 Q1 Income Ad income 2,310 2,350 2,440 2,350 9,450 2,428 2,445 2,930 2,694 10,497 2,792 Growth YoY 4.1 2.2 (6.5) (8.9) (2.7) 5.1 4.0 20.1 14.6 11.1 15.0 Broadcast Fee 390 390 410 450 1,640 370 370 340 360 1,440 350 Growth YoY 11.4 (2.5) (2.4) 21.6 6.5 (5.1) (5.1) (17.1) (20.0) (12.2) (5.4) Programme Licensing income 200 180 238222 840 260 260 260 260 1,040 290 Growth YoY 25.0 12.5 19.0 30.6 21.7 30.0 44.4 9.2 17.1 23.8 11.5 Income from pay channels 1,400 1,260 1,130 1,170 4,960 1,190 1,240 1,315 1,380 5,125 1,480 of which analogue 560 470 290 310 1,630 300 340 370 380 1,390 420 of which DTH 840 790 840 860 3,330 890 900 945 1,000 3,735 1,060 Growth QoQ 1.4 (10.0) (10.3) 3.5 1.7 4.2 6.0 4.9 7.2 Growth YoY 17.6 1.6 (8.6) (15.2) (1.7) (15.0) (1.6) 16.4 17.9 3.3 24.4 Others 240 310 30100 680 20 25 14 33 91 1,106 Growth YoY (50.0) 121.4 (98.0) (16.7) (69.8) (91.7) (91.9) (54.7) (67.3) (86.6) 5,431.5 Total revenue 4,540 4,513 4,251 4,270 17,574 4,258 4,333 4,859 4,727 18,176 6,019 Growth YoY 3.1 6.2 (28.9) (7.3) (8.6) (6.2) (4.0) 14.3 10.7 3.4 41.4 Cost of revenues 242 225 251 288 1,007 401 338 338 475 1,552 450 % of sales 5.3 5.0 5.9 6.8 5.7 9.4 7.8 7.0 10.0 8.5 7.5 Employee costs 440 414 403 384 1,641 422 429 476 445 1,771 442 % of sales 9.7 9.2 9.5 9.0 9.3 9.9 9.9 9.8 9.4 9.7 7.3 Other expenditure 199 219 186 316 920 205 277 281 322 1,085 1,590 % of sales 4.4 4.9 4.4 7.4 5.2 4.8 6.4 5.8 6.8 6.0 26.4 Total expenses 881 858 840 988 3,567 1,028 1,043 1,095 1,241 4,407 2,482 % of sales 19.4 19.0 19.8 23.1 20.3 24.1 24.1 22.5 26.3 24.2 41.2 EBITDA 3,659 3,654 3,411 3,282 14,007 3,230 3,290 3,763 3,486 13,769 3,537 EBITDA Margin 80.6 81.0 80.2 76.9 79.7 75.9 75.9 77.5 73.7 75.8 58.8 Depreciation & amortisation 1,061 1,176 1,124 1,068 4,430 933 1,138 1,044 1,017 4,132 1,174 Interest 2 8 369 56 2 5 17 24 48 7 Other income 173 186 232 151 742 132 96 106 216 550 134 PBT 2,769 2,657 2,4832,355 10,263 2,427 2,243 2,808 2,661 10,139 2,489 Tax 892 856 804765 3,317 784 726 910 886 3,306 845 Reported PAT 1,876 1,801 1,679 1,590 6,947 1,643 1,517 1,899 1,775 6,833 1,644 EPS (Rs) 4.8 4.6 4.3 4.0 17.6 4.2 3.9 4.8 4.5 17.3 4.2 Source: Company data, I-Sec research

Sun TV Network, September 10, 2013 ICICI Securities

Table 5: Summary of annual financials (Rs mn) FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E Income Ad income 4,755 6,057 8,450 10,532 10,294 11,567 12,961 14,516 Growth YoY % 30.6 27.4 39.5 24.6 (2.3) 12.4 12.2 12.0 Broadcast Fee 1,256 1,304 1,343 1,537 1,640 1,440 1,450 1,450 Growth YoY % 15.7 3.8 3.0 14.5 6.6 (12.2) 1.0 0.0 Programme Licensing income 383 540 544 623 826 1,040 1,165 1,294 Growth YoY % 12.4 41.2 0.7 14.5 32.6 26.0 13.0 11.1 Income from pay channels 2,293 2,151 3,431 5,157 5,046 5,125 6,171 7,323 of which DTH 110 813 1,835 2,891 3,312 3,720 4,505 0 Others 2,183 1,338 1,596 2,266 1,734 1,405 1,665 0 Growth YoY % 37.2 (6.2) 59.5 50.3 (2.2) 1.6 20.5 18.7 Others 12 341 761 2,285 666 91 1,250 1,438 Growth YoY % (36.7) 2,648.4 123.2 200.5 (70.9) (86.3) 1,315.6 15.0 Total Revenue 8,699 10,394 14,528 20,135 18,472 19,230 22,997 26,021 Growth YoY % 28.3 19.5 39.8 38.6 (8.3) 4.1 19.6 13.1 Cost of revenues 766 1,114 1,227 1,373 1,333 1,844 1,951 2,147 % of sales 8.8 10.7 8.4 6.8 7.2 9.6 8.5 8.3 Employee costs 958 1,155 1,340 1,919 1,859 1,994 2,140 2,380 % of sales 11.0 11.1 9.2 9.5 10.1 10.4 9.3 9.1 General and admn expenses 954 684 928 1,004 1,061 1,179 1,481 1,605 % of sales 11.0 6.6 6.4 5.0 5.7 6.1 6.4 6.2 Selling expenses 47 73 125 59 74 122 1,460 1,527 % of sales 0.5 0.7 0.9 0.3 0.4 0.6 6.3 5.9 Total expenses 2,724 3,026 3,620 4,356 4,328 5,139 7,032 7,659 % of sales 31.3 29.1 24.9 21.6 23.4 26.7 30.6 29.4 EBITDA 5,975 7,368 10,909 15,779 14,144 14,091 15,965 18,362 EBITDA margin (%) 68.7 70.9 75.1 78.4 76.6 73.3 69.4 70.6 Depreciation & amortisation 1,239 2,205 3,209 4,805 4,736 4,417 4,714 5,225 Interest 159 138 49 23 58 49 53 57 Other income 556 668 350 487 796 722 833 960 PBT 5,133 5,693 8,000 11,439 10,145 10,347 12,032 14,040 Tax 2,015 2,293 2,991 3,831 3,317 3,306 4,047 4,633 Share in profits from associates 11 2 8 35 79 79 83 87 PAT before minority interest 3,130 3,402 5,017 7,642 6,907 7,120 8,068 9,493 Minority Interest (137) (281) (182) (55) (22) 25 22 36 Reported PAT after minority interest 3,267 3,683 5,199 7,698 6,929 7,096 8,046 9,457 Reported EPS (Rs) 8.3 9.3 13.2 19.5 17.6 18.0 20.4 24.0 DPS (Rs) 2.5 2.5 7.5 8.8 9.5 9.5 10.8 12.6 Source: Company data, I-Sec research

Sun TV Network, September 10, 2013 ICICI Securities

Financial summary

Table 6: Profit and Loss statement Table 8: Cash flow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E Operating Income (Sales) 18,472 19,230 22,997 26,021 Operating Cashflow 9,329 10,006 12,285 14,057 of which Advertising Income 10,294 11,555 12,961 14,516 Working Capital Changes (1,357) (2,399) (4,132) (1,760) of which Pay Channels Income 5,046 5,120 6,171 7,323 Capital Commitments (7,904) (2,791) (2,855) (6,046) of which Broadcast fee 1,640 1,436 1,450 1,450 Free Cashflow 68 4,815 5,298 6,251 Operating Expenses 4,328 5,139 7,032 7,659 Cashflow from Investing EBITDA 14,144 14,091 15,96518,362 Activities 1,347 608833 960 % margins 76.6 73.3 69.4 70.6 Issue of Share Capital - - - - Depreciation & Amortisation 4,736 4,417 4,714 5,225 Buyback of shares - - - - Gross Interest 58 49 53 57 Inc (Dec) in Borrowings (1) - - - Other Income 796 722 833 960 Dividend paid (4,493) (4,493) (5,098) (5,978) Recurring PBT 10,145 10,347 12,032 14,040 Extraordinary Items - - - - Add: Extraordinaries - - - - Chg. in Cash & Bank balances (2,955) 1,087 614 848 Less: Taxes 3,317 3,306 4,047 4,633 Source: Company data, I-Sec Research - Current tax 3,389 3,359 3,688 4,299 - Deferred tax (72) (53) 358 334 - Others - - - - Table 9: Key ratios Less: Minority Interest (101) (54) (61) (51) (Year ending March 31) Net Income (Reported) 6,929 7,096 8,046 9,457 FY12 FY13 FY14E FY15E Recurring Net Income 6,929 7,096 8,046 9,457 Per Share Data (Rs) Source: Company data, I-Sec Research Recurring EPS 17.6 18.0 20.4 24.0 Reported EPS 17.6 18.0 20.4 24.0 Table 7: Balance sheet Recurring Cash EPS 29.6 29.2 32.4 37.3 Dividend per share (DPS) 9.5 9.5 10.8 12.6 (Rs mn, year ending March 31) Book Value per share (BV) 63.7 70.7 78.2 87.0 FY12 FY13 FY14EFY15E Assets Growth Ratios (%) Total Current Assets 10,561 14,081 20,264 23,149 Operating Income (8.3) 4.1 19.6 13.1 of which cash & cash eqv. 3,075 4,162 4,775 5,623 EBITDA (10.4) (0.4) 13.3 15.0 Total Current Liabilities & Recurring Net Income (10.2) 3.1 13.4 17.8 Provisions 2,380 3,006 4,4434,719 Diluted Recurring EPS (10.0) 2.4 13.4 17.5 Net Current Assets 8,181 11,076 15,822 18,430 Diluted Recurring CEPS (6.7) (1.3) 10.8 15.1 Investments of which 2,244 2,437 2,437 2,437 Valuation Ratios (x) Strategic/Group 1,926 2,005 2,0052,005 P/E 22.1 21.619.0 16.2 Other Marketable 318 432 432 432 P/CEPS 13.1 13.312.0 10.4 Net Fixed Assets 16,259 15,878 14,019 14,840 P/BV 6.1 5.55.0 4.5 of which EV / EBITDA 10.6 10.6 9.4 8.2 Capital Work-in-Progress 3,801 2,109 972 1,136 EV / Operating Income 15.9 15.5 13.3 11.4 Total Assets 26,685 29,391 32,278 35,707 EV / Operating FCF 18.8 19.7 18.4 12.2

Liabilities Operating Ratios Borrowings - - -- Cost of revenues / Revenues (%) 7.2 9.6 8.5 8.3 Deferred Tax Liability 338 284 284 284 Selling Expenses/ Sales (%) 5.7 6.4 6.4 6.2 Minority Interest 1,227 1,252 1,191 1,140 Other Income / PBT (%) 7.8 7.0 6.9 6.8 Equity Share Capital 1,970 1,970 1,970 1,970 Effective Tax Rate (%) 32.7 31.9 33.6 33.0 Face Value per share (Rs) 5 5 5 5 NWC / Total Assets (%) 19.1 23.5 34.2 35.9 Reserves & Surplus* 23,149 25,884 28,832 32,312 Receivables (days) 93 104 102 104 Net Worth 25,120 27,854 30,803 34,282 Payables (days) 43 29 32 43 Total Liabilities 26,685 29,391 32,278 35,707 D/E Ratio (x) 0.0 0.0 0.0 0.0 Source: Company data, I-Sec Research Return/Profitability Ratios (%) Table 10: Quarterly trend Recurring Net Income Margins 35.4 35.3 33.5 34.9 RoCE 27.0 25.2 26.0 27.8 (Rs mn, year ending March 31) RoNW 28.7 26.6 27.2 28.9 Sep-12 Dec-12 Mar-13 Jun-13 Dividend Payout Ratio 54.0 52.8 52.8 52.7 Net sales 4,333 4,859 4,727 6,019 Dividend Yield 2.4 2.4 2.8 3.3 % growth (YoY) (4) 14 11 41 EBITDA Margins 76.6 73.3 69.4 70.6 EBITDA 3,290 3,763 3,486 3,537 Source: Company data, I-Sec Research Margin (%) 76 77 74 59 Other income 96 106 2,661 2,489 Add: Extraordinaries - - - - Net profit 1,517 1,899 1,775 1,644 Source: Company data

Equity Research INDIA September 10, 2013 BSE Sensex: 19270 Dish TV BUY Maintained Rupee stings Rs43 Media Reason for report: Company update and earnings revision

Dish TV, the leading DTH player in India, is the best play among listed distribution companies. We prefer DTH over cable owing to ownership of the last mile and Target price Rs60 lack of transparency in reporting subscription by cable companies. DTH stands to gain from digitization, as it will lead to fair playing field between cable and DTH. Target Price revision Rs60 from Rs72 Currently in the digitised 38 cities, DTH cannot compete with digital cable as the latter is being offered at analogue prices with improved content quality. (cable Earnings revision continues to avoid taxes and content costs). We believe DTH economics will (%) FY14E FY15E significantly improve once this anomaly is corrected. Notwithstanding the Sales ↓ 0.5 ↓ 0.0 negative impact of depreciation in the rupee, which will eventually be passed on EBITDA ↓ 5.7 ↓ 2.8 as higher Set Top Box (STB) prices, we remain positive on the space. The key PAT NM NM challenge for DTH in digitization is to manage content costs and drive higher

Average Revenue per User (ARPU) growth. Shareholding pattern Dec Mar Jun f Drastic improvement in industry structure in past 18 months: We believe DTH ’12 ’13 ’13 industry has undergone a sea change in the past 18 months with lower level of Promoters 63.6 63.6 63.6 Institutional subsidy and higher package prices. Industry has moved from Rs1,600 for STB with investors 25.9 25.7 25.4 MFs and UTI 4.5 21.3 4.4 one month free viewing to Rs2,250 for STB without any free viewing. Further, Insurance Cos. 0.0 4.4 0.0 package prices have also risen sharply from Rs180/month to Rs220/month in the FIIs 21.3 10.8 21.0 Others 10.6 63.6 11.1 past 18 months. Churn level for the industry has fallen from ~1.2% to 0.6% in June

2013, with cable digitization increasing the switchover cost. f Well-placed to refinance debt. Dish TV has a repayment of US$140mn due in Price chart FY14. The sharp fall in the rupee has significantly pushed up this liability. We believe 90 Dish TV is well placed to refinance its debt, as it will generate Rs5.6bn of operating 80 FCF in FY14-15E. Further, capex in FY14 will be much lower, as Dish TV has an 70 inventory (including trade) of 1.9mn STBs currently vs. the acceptable inventory of 60 1mn STBs. (Rs) 50 f Slowdown in subscriber addition as company focuses on quality. Dish TV’s 40 subscriber addition has come down in recent months due to hike in STB prices and 30 due to weak consumer sentiment. We expect Dish TV’s endeavor to focus on quality subscribers, as reflected in lower churn levels, bodes well for the company over the Jul-13 Jan-13 Mar-13 Sep-12 Sep-13 Nov-12 May-13 longer run. f Lower target price to Rs60/share (from Rs72/share), as we factor in a lower subscriber addition and raise our exchange rate assumption to Rs65/USD from Rs59/USD. We have revised our EBITDA estimate for FY14 and FY15 by 5.7% and 2.8% respectively factoring in aforementioned changes. Dish TV currently trades at an attractive valuation of 9.4x and 7.7x FY14 and FY15 EV/EBITDA. Maintain BUY. Dish TV remains our top pick in the media distribution space.

Market Cap Rs45.7bn/US$701mn Year to March FY12 FY13 FY14E FY15E Reuters/Bloomberg DSTV.BO/DITV IN Revenue (Rs mn) 19,579 21,668 24,252 27,500 Shares Outstanding (mn) 1,063 Net Income (Rs mn) (1,331) (1,254) (1,176) (936) Vikash Mantri 52-week Range (Rs) 83/40 EPS (Rs) (1.3) (1.2) (1.1) (0.9) [email protected] Free Float (%) % Chg YoY +91 22 6637 7161 36.4 (30.7) (5.8) (6.3) (20.4) Satish Kothari FII (%) 21.0 P/E (x) NM NM NM NM [email protected] Daily Volume (US$'000) 3,442 CEPS (Rs) 3.7 4.7 4.5 5.8 +91 22 6637 7510 Absolute Return 3m (%) (30.3) EV/E (x) 10.9 10.0 9.4 7.7 Akhil Kalluri Absolute Return 12m (%) (41.4) Dividend Yield (%) - - - - [email protected] +91 22 6637 7339 Sensex Return 3m (%) (0.8) RoCE (%) 5.6 0.2 4.5 7.7 Sensex Return 12m (%) 9.0 RoE (%) NM NM NM NM

Dish TV, September 10, 2013 ICICI Securities

Chart 1: Dish TV trading at attractive valuation of 7.7x FY15 EV/E

140 16x 120

100 12x 80

(Rs bn) (Rs 60 8x 40

20 Jul-10 Apr-10 Oct-11 Jun-11 Jan-13 Feb-12 Mar-11 Sep-12 Nov-10 Aug-13 May-12 May-13

Source: Bloomberg, I-Sec research

Sensitivity to rupee fluctuations Table 1: Dish TV highly sensitive to exchange rate fluctuations (Rs mn) Exchange rate 55 60 65 70 75 EBITDA - FY14E 6,345 6,237 6,128 6,020 5,912 EBITDA - FY15E 7,669 7,559 7,450 7,340 7,231 Target Price (Rs) 70 65 60 55 50 Source: I-Sec research

Improving industry economics Table 2: Package price in last 18 months to lead APRU growth (Rs) Monthly tariff Company Package Nov’11 Dec ‘11 Apr ‘12 July ‘12 Apr’13 Dish TV Family Pack 165 175 180 200 220 Tata Sky Dhamaal Mix 165 175 180 200 220 Videocon d2h SuperGold Pack 165 174 180 200 220 Airtel – Digital TV Value Sports 158+taxes 158+taxes 158+taxes 200 220 Reliance – Big TV Bronze Pack 171 171 174 200 220 Sun Direct Value Plus pack 165+taxes 165+taxes 165+taxes 165+taxes 199 Source: Company, I-Sec research

Table 3: DTH operators have consistently taken price hike to reduce subsidy burden (Rs) Earlier Revised prices Cost of STB Offer Cost of STB Offer Tata Sky 1,690 1 month free subscription 2,250 No free subscription Dish TV 1,640 1 month free subscription 2,249 No free subscription Videocon d2h 1,690 1 month free subscription 2,249 No free subscription Airtel digital TV 1,690 1 month free subscription 2,249 No free subscription Source: Company, I-Sec research

Dish TV, September 10, 2013 ICICI Securities

Chart 2: Churn level for Dish down considerably Chart 3: ARPU on the uptrend

1.8% 170 1.6% 165 1.4% 160 1.2% 155 1.0% 150 0.8% 0.6% 145 Monthly churn 0.4% ARPU (Rs/month) 140 0.2% 135 0.0% 130 Jun-11 Jun-12 Jun-13 Mar-11 Mar-12 Mar-13 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12 Jun-11 Jun-12 Jun-13 Mar-11 Mar-12 Mar-13 Dec-10 Sep-11 Dec-11 Sep-12 Dec-12

Source: Company data, I-Sec research Earnings revision

We revise our earnings estimates factoring in a lower subscriber addition and raising our exchange rate assumption to Rs65/USD from Rs59/USD. Our revised EBITDA estimates are cut by 3%-6%.

Table 4: EBITDA estimates cut by 3-6% (Rs mn, year ending March 31) FY14E FY15E Revised Earlier % chg Revised Earlier % chg Revenues 24,252 24,365 (0.5) 27,500 27,488 0.0 EBITDA 6,128 6,499 (5.7) 7,450 7,668 (2.8) PAT (1,176) (475) NM (936) (40) NM Net subscribers 11.5 11.5 - 12.2 12.2 - ARPU (Rs/month) 166 166 0.0 177 176 0.3 Source: I-Sec research

Table 5: SAC as well as gross subscriber addition estimates lowered FY14E FY15E Gross subscribers (mn) Earlier 17.7 20.0 New 17.3 19.3 Change (0.4) (0.7) Net subscribers (mn) Earlier 11.7 12.4 New 11.5 12.2 Change (0.2) (0.2) ARPU (Rs/month) Earlier 169 180 New 165 175 Change (4.5) (4.9) SAC (Rs) Earlier 2,052 2,003 New 1,879 1,835 Change (173) (168) Source: I-Sec research

Dish TV, September 10, 2013 ICICI Securities

Table 6: Quarterly summary data (Rs mn, year ending March 31) FY12 FY13 FY14 Q1 Q2 Q3 Q4FY12 Q1 Q2 Q3 Q4FY13 Q1 Profit & Loss statement DTH 4,472 4,680 4,7034,988 19,169 5,016 5,157 5,323 5,315 21,179 5,580 Growth % QoQ 6.5 4.7 0.5 6.1 0.6 2.8 3.2 (0.2) 11.4 5.0

Subscription revenue 3,922 4,130 4,254 4,338 16,639 4,556 4,727 4,943 4,995 19,225 5,280 Growth % QoQ 7.5 5.3 3.0 2.0 5.0 3.8 4.6 1.1 15.5 5.7 ARPU (Rs) 150 152 152 151 153 156 159 160 157 158 165 Growth % QoQ 0.0 1.3 0.0 (0.7) 3.3 5.0 2.6 (1.3) 5.1% Net subscribers (mn) 8.9 9.2 9.5 9.6 9.6 9.8 10.0 10.5 10.7 10.7 10.8 Net sub adds (000s) 426 265 305 100 1,096 200 200 500 146 1,046 155

Rental revenue 550 550 449 650 2,206 460 430 380 320 1,650 300 Growth % QoQ - - (18.4) 44.8 (29.2) (6.5) (11.6) (15.8) (25.2) (6.3)

Teleport services 30 30 49 40 140 50 50 50 50 196 50 Growth % QoQ (53.8) - 63.3 (18.4) 25.0 - - - 40.0 -

Total income 4,604 4,822 4,905 5,247 19,578 5,200 5,336 5,578 5,554 21,668 5,784 Growth % QoQ 6.3 4.7 1.7 7.0 (0.9) 2.6 4.5 (0.4) 10.7 4.1

Operating expenses 2,472 2,380 2,540 2,632 9,972 2,578 2,548 2,846 3,183 10,977 3,175 % of sales 53.7 49.4 51.8 50.2 50.9 49.6 47.8 51.0 57.3 50.7 54.9 Programming costs 1,572 1,472 1,576 1,468 6,066 1,510 1,420 1,627 1,967 6,525 1,916 % of DTH revenues 35.1 31.5 33.5 29.4 31.6 30.1 27.5 30.6 37.0 30.8 34.3 Personnel costs 174 171 173 191 748 202 203 207 209 822 242 % of sales 3.8 3.5 3.5 3.6 3.8 3.9 3.8 3.7 3.8 3.8 4.2 Admin and other exp 231 235 232 253 2,845 212 284 249 218 3,036 249 % of sales 5.0 4.9 4.7 4.8 5.1 4.1 5.3 4.5 3.9 4.4 4.3 S&D expenses 605 818 758 729 797 651 744 898 743 823 900 % of sales 13.1 17.0 15.5 13.9 14.5 12.5 13.9 16.1 13.4 14.0 15.6 Total expenses 3,482 3,604 3,703 3,805 14,619 3,643 3,779 4,200 4,353 15,873 4,566 % of sales 75.6 74.7 75.5 72.5 74.7 70.1 70.8 75.3 78.4 73.3 78.9

EBITDA 1,122 1,218 1,2021,442 4,959 1,556 1,557 1,378 1,201 5,795 1,218 EBITDA margin % 24.4 25.3 24.5 27.5 25.3 29.9 29.2 24.7 21.6 26.7 21.1

Depreciation 1,107 1,162 1,2321,678 5,219 1,512 1,533 1,713 1,450 6,276 1,444 Interest charges 334 634 477 348 1,780 572 317 288 344 1,284 354 Other income 137 92 78 94 707 205 80 175 157 512 277 PBT (183) (486) (430)(490) (1,332) (323) (213) (448) (436) (1,252) (303)

Tax ------Adjusted PAT (183) (486) (430) (490) (1,332) (323) (213) (448) (436) (1,252) (303) Growth % QoQ (50.6) 165.3 (11.6) 14.1 (34.2) (34.0) 110.3 (2.7) (6.0) (30.5) NPM % (4.0) (10.1) (8.8) (9.3) (6.8) (6.2) (4.0) (8.0) (7.9) (5.8) (5.2)

Operating metrics Gross subscribers (mn) 11.2 11.7 12.5 12.9 12.9 13.4 13.9 14.7 15.1 15.1 15.5 Gross sub adds (000s) 725 575 740 415 2,459 504 477 829 400 2,210 348

Net subscribers (mn) 8.9 9.2 9.5 9.6 9.6 9.8 10.0 10.5 10.7 10.7 10.8 Net sub adds (000s) 426 265 305 100 1,096 200 200 500 146 1,046 155

Disconnects (000s) 299 310 435 315 1,363 304 277 329 254 1,164 193 Monthly Churn (%) 1.1 1.1 1.6 1.1 1.0 1.0 0.9 1.1 0.8 1.0 0.6

ARPU (Rs) 150 152 152 151 153 156 159 160 157 158 165 Growth % QoQ 0.0 1.3 0.0 (0.7) 3.3 5.0 2.6 (1.3) 5.1

SAC (Rs) 2,058 2,232 2,124 2,127 2,145 2,273 2,201 1,996 1,828 Growth % QoQ (7.5) 8.5 (4.8) 0.1 0.8 6.0 (3.2) (9.3) (8.4) Source: Company data, I-Sec research

Dish TV, September 10, 2013 ICICI Securities

Table 7: Annual summary data (Rs mn, year ending March 31) FY09 FY10 FY11 FY12 FY13 FY14E FY15E Profit & Loss statement DTH 6,905 9,854 13,949 19,004 21,077 23,71626,932 Growth % 77.4 42.7 41.6 36.2 10.9 12.5 13.6

Subscription revenue 5,897 8,353 11,927 16,639 19,228 22,108 25,251 Growth % 79.3 41.6 42.8 39.5 15.6 15.0 14.2 ARPU (Rs) 130 140 141 151 158 166 177 Growth % (10.7) 7.2 0.7 7.8 3.5% 4.9% 6.5% Net subscribers (mn) 4.3 5.7 8.5 9.6 10.6 11.5 12.2 Net sub adds (000s) 1,793 1,383 2,849 1,096 1,047 890 712

Rental revenue 1,007 1,501 1,985 2,206 1,597 1,275 1,252 Growth % 66.9 49.0 32.3 11.1 (27.6) (20.1) (1.8)

Teleport services 133 168 107 140 198 201 218 Growth % 18.6 26.3 (36.2) 30.3 41.4 2.0 8.0

Total Income 7,381 10,850 14,367 19,578 21,668 24,252 27,500 Growth % 78.8 47.0 32.4 36.3 10.7 11.9 13.4

Operating expenses 5,293 6,902 7,838 9,972 11,081 13,032 14,594 % of sales 71.7 63.6 54.6 50.9 51.1 53.7 53.1 Programming costs 3,479 4,373 5,036 6,066 6,525 7,583 8,461 % of DTH revenues 50.4 44.4 36.1 31.9 31.0 32.0 31.4 Personnel costs 543 514 761 748 822 901 1,002 % of sales 7.4 4.7 5.3 3.8 3.8 3.7 3.6 Admin and other expense 2,162 1,771 2,572 2,845 3,036 3,196 3,384 % of sales 6.4 4.8 5.5 5.1 4.0 3.8 3.6 Selling and distribution expenses 898 752 782 797 761 852 917 % of sales 29.3 16.3 17.9 14.5 14.0 13.2 12.3 Total expenses 8,614 9,733 11,986 14,619 15,874 18,123 20,050 % of sales 116.7 89.7 83.4 74.7 73.3 74.7 72.9

EBITDA (1,233) 1,117 2,380 4,959 5,794 6,128 7,450 EBITDA margin % (16.7) 10.3 16.6 25.3 26.7 25.3 27.1

Depreciation 2,289 3,227 3,996 5,219 6,276 5,9957,115 Interest & financial charges 1,293 971 1,534 1,780 1,284 1,784 1,809 Other Income 13 453 1,226 707 511 474 539 PBT (4,801) (2,628) (1,923) (1,332) (1,254) (1,176)(936)

Tax 6 (6) (3) - 1 -- Adjusted PAT (4,807) (2,622) (1,920) (1,332) (1,255) (1,176) (936) Growth % 18.4 (45.5) (26.8) (30.6) (5.7) (6.3) (20.4) NPM % (65.1) (24.2) (13.4) (6.8) (5.8) (4.8) (3.4)

Operating metrics Gross subscribers (mn) 5.1 6.9 10.4 12.9 15.1 17.3 19.2 Gross sub adds (000s) 2,063 1,828 3,536 2,459 2,205 2,165 1,901

Net subscribers (mn) 4.3 5.7 8.5 9.6 10.6 11.5 12.2 Net sub adds (000s) 1,793 1,383 2,849 1,096 1,047 890 712

Disconnects (000s) 270 445 687 1,363 1,158 1,276 1,189 Monthly Churn (%) 0.6 0.6 0.7 1.0 1.0 1.0 0.8

ARPU (Rs) 130 140 141 151 158 166 177 Growth % (10.7) 7.2 0.7 7.8 3.5 4.9 6.5 Source: Company data, I-Sec research

Dish TV, September 10, 2013 ICICI Securities

Valuation methodology and key risks

We maintain BUY rating on Dish TV with a revised DCF based target price of Rs60/share (earlier: Rs72/share). The stock is currently trading at FY14E and FY15E EV/EBITDA of 9.4x and 7.7x.

The key risks to our call are muted growth in ARPU, substantial increase in competitive intensity and significant depreciation in the rupee.

Chart 4: Recommendation history

100 B H A B A A R B

(Rs) 60

30 Jul-13 Apr-11 Oct-11 Apr-12 Oct-12 Apr-13 Jun-11 Jun-12 Feb-11 Feb-12 Feb-13 Dec-11 Dec-12 Aug-11 Aug-12 Sep-13 Note: The grey line indicates our target price B: BUY; H: HOLD; S: SELL; A: ADD; R: REDUCE Source: I-Sec research

Dish TV, September 10, 2013 ICICI Securities

Financial summary Table 8: Profit and Loss statement Table 10: Cashflow statement (Rs mn, year ending March 31) (Rs mn, year ending March 31) FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E Operating Income (Sales) 19,579 21,668 24,252 27,500 Operating Cashflow 3,851 6,297 4,345 5,640 of which DTH 19,004 21,077 23,716 26,932 Working Capital Changes (5,664) 341 (1,015) 317 of which Teleport 140 198 201 218 Capital Commitments of which Others 436 393 334 351 Free Cashflow (3,599) (9,174) (4,908) (4,758) Operating Expenses 14,619 15,874 18,123 20,050 Cashflow from Investing EBITDA 4,960 5,794 6,128 7,450 Activities (5,412) (2,537) (1,578) 1,200 % margins 25.3 26.7 25.3 27.1 Issue of Share Capital 1,400 (770) 474 539 Depreciation & Amortisation 5,219 6,276 5,995 7,115 Buyback of shares 23 43 - - Net Interest 1,973 1,284 1,784 1,809 Inc (Dec) in Borrowings 4,593 2,327 (1,116) (1,216) Other Income 900 511 474 539 Dividend paid - - - - Recurring PBT (1,331) (1,254) (1,176) (936) Extraordinary Items - 594 - - Add: Extraordinaries - (594) - - Chg. in Cash & Bank balances 603 (343) (2,220) 522 Less: Taxes - - - - Source: Company data, I-Sec research - Current tax - - - - - Deferred tax - - - - Net Income (Reported) (1,331) (660) (1,176) (936) Table 11: Key ratios Recurring Net Income (1,331) (1,254) (1,176) (936) (Year ending March 31) Source: Company data, I-Sec research FY12 FY13 FY14E FY15E Per Share Data (Rs) Table 9: Balance sheet Diluted Recurring EPS (1.3) (1.2) (1.1) (0.9) Diluted Reported EPS (1.3) (0.6) (1.1) (0.9) (Rs mn, year ending March 31) Recurring Cash EPS 3.7 4.7 4.5 5.8 FY12 FY13 FY14EFY15E Dividend per share (DPS) - - - - Assets Book Value per share (BV) (0.9) (1.5) (2.6) (3.5) Total Current Assets 6,752 7,891 6,530 7,151 of which cash & cash eqv. 3,988 3,645 2,199 2,566 Growth Ratios (% YoY) Total Current Liabilities & Operating Income 36.3 10.7 11.9 13.4 Provisions 13,276 16,774 15,844 16,415 EBITDA 108.4 16.8 5.8 21.6 Net Current Assets (6,523) (8,883) (9,315) (9,264) Recurring Net Income (30.7) (5.8) (6.3) (20.4) Investments - - - - Diluted Recurring EPS (30.7) (5.8) (6.3) (20.4) Net Fixed Assets 18,088 20,875 19,014 16,811 Diluted Recurring CEPS 87.3 29.2 (4.0) 28.2 of which intangibles 791 841 896 936 Valuation Ratios (x) Capital Work-in-Progress 3,884 6,535 3,544 2,899 P/E NM NMNM NM Goodwill - - - - P/CEPS 11.8 9.19.5 7.4 Total Assets 13,065 14,774 12,481 10,329 P/BV NM NMNM NM EV / EBITDA 10.9 10.0 9.4 7.7 Liabilities EV / Operating Income 2.8 2.7 2.4 2.1 Borrowings 14,003 16,330 17,915 16,699 EV / Operating FCF NM 8.7 17.3 9.7 Deferred Tax Liability - - - - Equity Share Capital 1,064 1,065 1,063 1,063 Operating Ratios Face Value per share (Rs) 1.0 1.0 1.0 1.0 Raw Material/Sales (%) 0.3 0.4 0.3 0.3 Reserves & Surplus (2,002) (2,621) (6,497) (7,434) SG&A/Sales (%) 15.0 14.4 13.5 12.6 Net Worth (939) (1,556) (5,434) (6,370) Other Income / PBT (%) (67.6) (40.8) (40.3) (57.5) Total Liabilities 13,064 14,774 12,481 10,329 Effective Tax Rate (%) - - - - Source: Company data, I-Sec research NWC / Total Assets (%) (80) (85) (92) (115) Inventory Turnover (days) 282 236 234 251 Table 12: Quarterly trend Receivables (days) 35 18 25 18 Payables (days) 47 39 38 31 (Rs mn, year ending March 31) Net D/E Ratio (x) (9.1) (6.4) (2.2) (1.8) Sep-12 Dec-12 Mar-13 Jun-13 Net sales 5,336 5,578 5,554 5,784 Profitability Ratios (%) % growth (YoY) 10.7 13.7 5.8 11.2 Recurring Net Income Margins (6.5) (5.7) (4.8) (3.3) EBITDA 1,557 1,378 1,2011,218 RoCE 5.6 0.2 4.5 7.7 Margin (%) 29.2 24.7 21.6 21.1 RoNW NM NM NM NM Other income 80 175 157 277 Dividend Payout Ratio - - - - Add: Extraordinaries 764 - - - Dividend Yield - - - - Net profit (213) (448) (436) (303) EBITDA Margins 25.3 26.7 25.3 27.1 Source: Company data, I-Sec research Source: Company data, I-Sec research

Media, September 10, 2013 ICICI Securities

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New I-Sec investment ratings (all ratings based on absolute return) BUY: >15% return; ADD: 5% to 15% return; REDUCE: Negative 5% to positive 5% return; SELL: < negative 5% return

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