COMPANY UPDATE
ZEE ENTERTAINMENT Likely to recapture eyeballs
India Equity Research| Media
EDELWEISS 4D RATINGS Zee Entertainment Enterprises’ (ZEE) flagship channel Zee TV’s ratings are Absolute Rating BUY likely to rise from the doldrums with Sony’s mega show Kaun Banega Crorepati (KBC) going off air this week. Also, on the anvil are two more Rating Relative to Sector Outperformer shows (including Dance India Dance) in H2FY12 and increase in the Risk Rating Relative to Sector Medium Sector Relative to Market Overweight number of original programming hours from 28 to ~32 by FY12 end. The company has already soft launched four HD channels, a positive from the
ARPU perspective. Overall, we remain positive on ZEE’s subscription MARKET DATA (R: ZEE.BO, B: Z IN) revenue from a long‐term perspective. Maintain ‘BUY’. CMP : INR 114 Target Price : INR 150 KBC ending a positive; ratings likely to rise from hereon 52‐week range (INR) : 153 / 106 Share in issue (mn) : 978.1 After garnering 228 GRPs and becoming a close No. 3 player in June 2011, viewership M cap (INR bn/USD mn) : 111 / 2,191 of ZEE’s flagship channel Zee TV has nosedived, languishing at a poor No.4 spot. This Avg. Daily Vol.BSE/NSE(‘000) : 2,166.0 has been primarily due to tremendous success of Sony’s KBC, which has consistently
garnered GRPs of ~40‐45. However, with the current week (Week 47) being KBC’s last SHARE HOLDING PATTERN (%) on air, ZEE’s ratings are likely to have bottomed out in our view. Others 8.5%
Two more shows on cards; sports losses to be sharply lower
ZEE has already launched two new shows Star Ya Rockstar and Hitler Didi and will FIIs Promoters* launch Afsar Bitiya and Dance India Dance (DID) in H2FY12. DID will be critical for Zee 35.0% 43.3% TV as it had garnered excellent GRPs (~25‐30) in the past. In our view, ZEE will have to
change its cost‐focused strategy and maintain a healthy balance of movies and fiction
shows. Sports EBITDA loss in H2FY12 is likely to be ~INR220mn versus a loss of
INR792mn in H1FY12, which will cushion margin pressure. MFs, FIs & Banks 13.2% * Promoters pledged shares : 10.3 Outlook and valuations: Improving; maintain ‘BUY’ (% of share in issue)
We remain positive on ZEE from a long term perspective as we expect subscription PRICE PERFORMANCE (%) revenue to get a boost from the digitization mandate and the distribution JV with Star. EW Media Stock Nifty At CMP of INR114, the stock is trading at P/E of 17.8x and 14.9x on FY12E and FY13E, Index respectively. We maintain ‘BUY’ recommendation and ‘Sector Outperformer’ rating. 1 month 9.7 10.7 5.3
Financials (INR mn) 3 months (1.2) (0.9) (21.0)
FY10 FY11 FY12E FY13E 12 months (14.3) (15.9) (35.7) Year to March Net revenue 21,998 30,136 31,628 35,929
Rev. growth (%) 1.0 37.0 5.0 13.6
EBITDA 6,135 8,266 8,144 9,773
Net profit 5,881 5,913 6,197 7,391
Shares outstanding (mn) 978 978 966 966 Diluted EPS (INR) 6.2 6.2 6.4 7.6 Abneesh Roy +91 22 6620 3141 EPS growth (%) 46.7 (0.5) 3.7 19.3 [email protected] Diluted PE (x) 18.3 18.4 17.8 14.9
EV/EBITDA (x) 16.8 12.1 11.6 9.3
ROACE (%) 15.5 26.7 30.8 32.0 November 16, 2011
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Curtains down on KBC may trigger uptick in Zee TV GRPs After garnering healthy 228 GRPs and closing the gap with Colors to just two points towards the end of June 2011, Zee TV’s GRPs have nosedived. From being a consistent player amongst the top 3 in the GEC genre, the channel has been pushed to the fourth spot in terms of TV ratings. The launch of Sony’s KBC on August 15, 2011, added salt to Zee TV’s injury and its ratings failed to recover. Having consistently garnered an average TRP of 4 and being amongst the top 3 shows in the GEC genre, KBC has had a successul run this year.
Fig. 1: KBC has enjoyed enormous success yet again
Source: Edelweiss research
However, with the ongoing week (Week 47) being the show’s last on air, ZEE can expect some recovery in Zee TV’s ratings from the following week. To give some hope of a revival, Zee TV’s ratings have improves slightly in the past two weeks, which includes a 32 point surge in the last week (Week 46).
Chart 1: Zee TV’s GRPs have nosedived since launch of KBC 400 Year 2011
320
240
(GRPs) 160
80
0 34 35 36 37 38 39 40 41 42 43 44 45 46
Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Wk Star Plus Colors Zee TV Sony
Source: Company, Edelweiss research
2 Edelweiss Securities Limited Zee Entertainment Enterprise
Before the launch of KBC, Sony was a no. 4 player in the GEC space. However, with a slew of hit serials apart from KBC like CID, Crime Patrol and Bade Acche Lagte Hai, Sony has jumped to the no.2 slot, overtaking Colors and Zee TV. Post KBC, Sony is launching two new fiction shows – Parvarish and Dekha Ek Khwab to replace KBC’s time slot. Even though these two serials are unlikely to replicate the immense success of KBC, we need to keep a close tab on their performance.
Fig. 2: Parvarish Fig. 3: Dekha Ek Khwab
Source:Edelweiss research
Chart 2: The race between Colors, Sony and Zee has spiced up in H2CY11 350 Year 2011
280
210
(GRPs) 140 Sony's huge leap in 70 rankings has been largely aided by KBC 0 Wk 1Wk 6Wk 11 Wk 16 Wk 21 Wk 26 Wk 31 Wk 36 Wk 41 Wk 46 Colors Zee TV Sony
Source: Company, Edelweiss research
Focus on extending original programming hours ZEE has already launched two new shows Star Ya Rockstar and Hitler Didi on Zee TV. The company has still not frozen the launch dates of its upcoming show Afsar Bitiya. Dance India Dance will be launched either near Q3FY12 end or the beginning of Q4FY12. Currently, Zee TV showcases 28 hours of original programming and is trying to increase it to ~32‐33 hours/week by FY12 end. However, ZEE will invest in high cost reality shows only after careful evaluation. Management admitted in the Q2FY12 conference call that the company will continue to invest agressively in movies. Recently, media articles suggested that the
3 Edelweiss Securities Limited Media
company had bought the movie rights of the Hrithik Roshan starrer under production Agneepath for a whopping ~INR410mn.
Fig. 4: Star Ya Rockstar Fig. 5: Hitler Didi
Source:Edelweiss research
Fig. 6: Dance India Dance Fig. 7: Afsar Bitiya
Source:Edelweiss research
HD channels to be officially launched soon Currently, ZEE is producing its entire content in HD. It has already announced the launch of four of its mainstream channels in HD viz., Zee TV, Zee Cinema, Ten Sports and Zee Studio. Currently, ZEE is in talks with cable operators and DTH companies for launch of the HD channels. In the past few months, STAR and Colors have launched channels in HD. Sony has also announced that it will be launching its HD channel soon. With rates of HD compatible television sets dipping considerably, we expect HD penetration to surge further. DTH companies like Dish TV are planning to raise funds to gear up for the compulsory digitization mandate and the increasing HD penetration. Thus, there lies a good opportunity to inrease subscription revenues through higher HD channels.
Sports business losses likely to be sharply lower in H2FY12 Although H1FY12 loss from sports stands at INR792mn (loss of INR226mn in Q2FY12 and INR566mn in Q1FY12), ZEE remains confident of meeting its FY12 guidance (loss of
4 Edelweiss Securities Limited Zee Entertainment Enterprise
INR1,000mn) . We consider this to be a daunting task and expect a loss of ~INR1.1bn for FY12, especially in the context of a slowdown in ad spends.
Chart 3: Ex‐sports EBITDA (approx) 3,000 36.5
2,400 34.0
1,800 31.5 mn)
(%)
(INR 1,200 29.0
600 26.5
0 24.0 FY12
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q2FY12 Q1 Source: Company, Edelweiss research
Table 1: ZEE – Sports performance Sports Q1FY10 Q2FY10 Q3FY10 Q4FY10 FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 FY11 Q1FY12 Q2FY12 Sales 870 1,060 604 617 1,474 832 1,190 1,665 1,424 5,111 873 881 Cost 1,142 1,108 880 597 2,022 1,186 1,732 1,995 1,576 6,489 1,439 1,107 EBITDA (272) (48) (276) 20 (548) (354) (542) (330) (152) (2,078) (566) (226) EBITDA (%) (31.3) (4.5) (45.7) 3.2 (37.2) (42.5) (45.5) (19.8) (10.7) (41.0) (64.8) (26.0) Source: Company, Edelweiss research
Chart 4: ZEE – Sports performance 1,800
1,200
600 mn)
0 (INR
(600)
(1,200) FY12
Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q2FY12 Q1
Sports Revenues Sports EBITDA Source: Company, Edelweiss research
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Rejig in Zee’s management After joining ZEE in March 2005, Joy Chakraborty, Executive Director, Revenue and Niche channels, ZEE resigned from the company in October 2011. Meanwhile, ZEE has announced that Rajesh Jejurikar, CEO of Mahindra & Mahindra’s Automotive division, will be joining the company as President. Zee can benefit from Mr. Jejurikar’s immense experience in marketing and brand building.
Outlook and valuations: Improving; maintain ‘BUY’ We remain positive on ZEE from a long term perspective as we expect subscription revenue to get a boost from the digitization mandate and the distribution JV with Star. In the past few months, the stock has de‐rated because of sharp fall in Zee TV’s viewership and slowdown in ad revenue. At CMP of INR114, the stock is trading at P/E of 17.8x and 14.9x on FY12E and FY13E, respectively. We maintain ‘BUY’ recommendation and ‘Sector Outperformer’ rating on the stock.
Chart 5: Zee’s PE band chart – Valuations near lower end 275.0
220.0 30x
25x 165.0 20x
(INR) 110.0 15x
10x 55.0 5x
0.0 Oct-04 Oct-05 Oct-06 Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-05 Apr-06 Apr-07 Apr-08 Apr-09 Apr-10 Apr-11 Source: Edelweiss research
6 Edelweiss Securities Limited Zee Entertainment Enterprise
Company Description ZEE is one of the largest media companies in India. It owns and operates Zee TV and Zee Cinema, both leading channels in the Hindi GEC and movies segment respectively. Besides these two, the company has an attractive bouquet of several other channels including Ten Sports, Ten Cricket, Ten Action +, Zing, Zee Jagran, Zee Premier, Zee Classic, Zee Action, Zee Cafe, Zee Studios, and Zee Trendz.
Investment Theme With the nominal GDP growth expected to improve, the outlook on ad spends is expected to improve in H2FY12. Also, higher penetration of DTH and sunset clause augur well for faster growth in subscription revenues. With the ordinance of digitization and the Star‐Zee deal, subscription revenues could see a positive surprise. We believe ZEE is poised to benefit from this favorable environment over the longer term.
Key Risks • Increase in competition from Colors & Sony
• Sports losses could be volatile • Slowdown in ad spends
• Subscription revenue deal may take time to materialize
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Financial Statements
Income statement (INR mn) Year to March FY09 FY10 FY11 FY12E FY13E Net revenue 21,773 21,998 30,136 31,628 35,929 Direct costs 9,810 9,452 14,369 15,229 17,210 Employee costs 2,031 1,963 2,738 2,878 3,018 Total SG&A expenses 4,452 4,448 4,762 5,377 5,928 Total operating expenses 16,293 15,863 21,870 23,484 26,157 EBITDA 5,480 6,135 8,266 8,144 9,773 Depreciation & Amortization 310 285 288 265 317 EBIT 5,170 5,849 7,977 7,879 9,456 Other income 1,572 1,220 851 1,063 1,144 Interest expenses 1,339 331 104 90 40 Profit before tax 5,403 6,738 8,725 8,852 10,559 Provision for tax 1,633 857 2,813 2,656 3,168 Core profit 3,770 5,881 5,913 6,197 7,391 Extraordinary income/ (loss) 1,451 284 339 ‐ ‐ Profit After Tax 5,221 6,165 6,251 6,197 7,391 Minority interest 99 (195) (118) 20 20 Profit after minority interest 5,124 6,344 6,370 6,177 7,371 Basic shares outstanding (mn) 868 978 978 966 966 Basic EPS (INR) 4.2 6.2 6.2 6.4 7.6 Diluted equity shares (mn) 869 978 978 966 966 Diluted EPS (INR) 4.2 6.2 6.2 6.4 7.6 CEPS (INR) 4.7 6.5 6.3 6.7 8.0 Dividend per share (INR) 1.0 2.0 2.0 2.0 2.0 Dividend payout (%) 27.6 37.4 37.8 36.4 30.5
Common size metrics ‐ as % of net revenues Year to March FY09 FY10 FY11 FY12E FY13E Operating expenses 74.8 72.1 72.6 74.3 72.8 Employee expenses 9.3 8.9 9.1 9.1 8.4 S G & A expenses 20.4 20.2 15.8 17.0 16.5 Direct Cost 45.1 43.0 47.7 48.1 47.9 Depreciation 1.4 1.3 1.0 0.8 0.9 Interest expenditure 6.2 1.5 0.3 0.3 0.1 EBITDA margins 25.2 27.9 27.4 25.8 27.2 EBIT margins 23.7 26.6 26.5 24.9 26.3 Net profit margins 17.3 26.7 19.6 19.6 20.6
Growth ratios (%) Year to March FY09 FY10 FY11 FY12E FY13E Revenues 18.6 1.0 37.0 5.0 13.6 EBITDA 1.1 11.9 34.7 (1.5) 20.0 PBT (7.0) 24.7 29.5 1.5 19.3 Net profit (9.9) 56.0 0.5 4.8 19.3 EPS (4.7) 46.7 (0.5) 3.7 19.3
8 Edelweiss Securities Limited Zee Entertainment Enterprise
Balance sheet (INR mn) As on 31st March FY09 FY10 FY11 FY12E FY13E Equity capital 434 489 978 966 966 Reserves & surplus 33,561 37,811 29,970 33,900 39,026 Shareholders funds 33,995 38,300 30,948 34,866 39,992 Minority interest (BS) 948 (22) (119) (99) (79) Secured loans 5,261 591 17 18 17 Unsecured loans 495 604 ‐ ‐ ‐ Borrowings 5,757 1,195 17 18 17 Deferred tax liability (113) (133) (192) (192) (192) Sources of funds 40,587 39,339 30,654 34,594 39,738 Gross block 3,692 3,581 3,502 4,102 4,902 Depreciation 1,508 1,501 1,670 1,936 2,253 Net block 2,184 2,080 1,832 2,167 2,650 Capital work in progress 669 1,108 399 399 399 Intangible assets 15,239 16,399 6,232 6,232 6,232 Investments 1,271 3,203 6,964 7,200 8,000 Inventories 4,576 4,713 5,396 5,356 6,053 Sundry debtors 6,437 7,488 8,955 8,628 9,802 Cash and equivalents 1,926 5,864 3,858 7,871 10,595 Loans and advances 14,087 6,325 4,818 4,818 4,818 Total current assets 27,026 24,389 23,026 26,673 31,268 Sundry creditors and others 3,250 4,376 4,435 4,669 5,276 Others current liabilities 1,067 1,023 880 924 1,050 Provisions 1,486 2,441 2,486 2,486 2,486 Total current liabilities & provisions 5,803 7,840 7,801 8,078 8,811 Net current assets 21,223 16,549 15,225 18,595 22,457 Miscellaneous expenditure ‐ ‐ ‐ ‐ ‐ Uses of funds 40,587 39,339 30,654 34,594 39,738 Book value per share (INR) 39.2 39.2 31.6 36.1 41.4
Free cash flow (INR mn) Year to March FY09 FY10 FY11 FY12E FY13E Net profit 5,124 6,344 6,370 6,177 7,371 Depreciation 310 285 288 265 317 Deferred tax 108 26 (113) ‐ ‐ Others 1,054 (788) 1,522 973 1,104 Gross cash flow 6,596 5,868 8,066 7,415 8,792 Less: Changes in WC 5,594 (2,088) 1,592 (643) 1,137 Operating cash flow 1,002 7,956 6,475 8,059 7,655 Less: Capex 525 328 (788) 600 800 Free cash flow 477 7,628 7,262 7,459 6,855
Cash flow metrics Year to March FY09 FY10 FY11 FY12E FY13E Operating cash flow 1,002 7,956 6,475 8,059 7,655 Investing cash flow (798) 3,332 (5,841) (1,899) (2,744) Financing cash flow 71 (7,515) (2,848) (2,147) (2,187) Net cash flow 274 3,773 (2,214) 4,013 2,724 Capex (525) (328) 788 (600) (800) Dividends paid (1,013) (2,272) (2,281) (2,246) (2,246)
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Profitability & efficiency ratios Year to March FY09 FY10 FY11 FY12E FY13E ROAE (%) 12.0 16.3 17.1 18.8 19.7 ROACE (%) 14.7 15.5 26.7 30.8 32.0 Inventory day 131 179 128 129 121 Debtors days 103 116 100 101 94 Payable days 120 147 112 109 105 Current ratio 4.7 3.1 3.0 3.3 3.5 Debt/EBITDA 1.1 0.2 ‐ ‐ ‐ Debt/Equity 0.2 ‐ ‐ ‐ ‐ Adjusted debt/equity 0.4 0.3 0.3 ‐ ‐ Interest coverage 3.9 17.6 77.0 87.5 236.4
Operating ratios Year to March FY09 FY10 FY11 FY12E FY13E Total asset turnover 0.6 0.6 0.9 1.0 1.0 Fixed asset turnover 10.5 10.3 15.4 15.8 14.9 Equity turnover 0.7 0.6 0.9 1.0 1.0
Du pont analysis Year to March FY09 FY10 FY11 FY12E FY13E NP margin (%) 17.3 26.7 19.6 19.6 20.6 Total assets turnover 0.6 0.6 0.9 1.0 1.0 Leverage multiplier 1.2 1.1 1.0 1.0 1.0 ROAE (%) 12.0 16.3 17.1 18.8 19.7
Valuation parameters Year to March FY09 FY10 FY11 FY12E FY13E Diluted EPS (INR) 4.2 6.2 6.2 6.4 7.6 Y‐o‐Y growth (%) (4.7) 46.7 (0.5) 3.7 19.3 CEPS (INR) 4.7 6.5 6.3 6.7 8.0 Diluted PE (x) 26.9 18.3 18.4 17.8 14.9 Price/BV (x) 2.9 2.9 3.6 3.1 2.7 EV/Sales (x) 4.7 4.7 3.3 3.0 2.5 EV/EBITDA (x) 18.6 16.8 12.1 11.6 9.3 Dividend yield (%) 0.9 1.8 1.8 1.8 1.8 FCFPS (INR) 0.5 7.8 7.4 7.7 7.1 Y‐o‐Y growth in FCFPS (%) (83.0) 1,319.7 (4.8) 4.0 (8.1) FCFPE (x) 206.8 14.6 15.3 14.7 16.0
10 Edelweiss Securities Limited RATING & INTERPRETATION
Company Absolute Relative Relative Company Absolute Relative Relative reco reco risk reco reco Risk Dish TV India BUY SO M Jagran Prakashan BUY SP M PVR BUY SP M Sun TV Network UNDER REVIEW UNDER M REVIEW TV18 Broadcast BUY SU H Zee Entertainment Enterprise BUY SO M
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
11 Edelweiss Securities Limited Media
Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai – 400 098. Board: (91‐22) 4009 4400, Email: [email protected] Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206 Nischal Maheshwari Head Research [email protected] +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Media Dish TV India, Jagran Prakashan, PVR, Sun TV Network, TV18 Broadcast, Zee Entertainment Enterprise
Recent Research
Date Company Title Price (INR) Recos
16‐Nov‐11 Dish TV Pricing power to the fore; 68 Buy EdelFlash 15‐Nov‐11 Videocon Expanding bandwidth; d2h Visit Note 14‐Nov‐11 Dish TV Raising funds to be future 72 Buy ready; EdelFlash
Distribution of Ratings / Market Cap Edelweiss Research Coverage Universe Rating Interpretation
Buy Hold Reduce Total Rating Expected to
Rating Distribution* 119 47 15 184 Buy appreciate more than 15% over a 12‐month period * 3 stocks under review Hold appreciate up to 15% over a 12‐month period > 50bn Between 10bn and 50 bn < 10bn
Reduce depreciate more than 5% over a 12‐month period Market Cap (INR) 111 57 16
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