Initiating Coverage September 25, 2012 Rating Matrix Zee Entertainment Enterprise (ZEETEL) Rating : Hold Target : | 175 | 175 Target Period : 12-15 months Potential Upside : 0% Growth in sight; valuations stretched… Zee Entertainment Enterprise Limited (ZEEL), one of the leading YoY Growth (%) broadcasting companies with a bouquet of 30 channels across genres (YoY Growth) FY11 FY12 FY13E FY14E and languages will be a major beneficiary of the digitisation wave Net Sales 37.0 0.9 10.8 13.3 resulting in doubling of subscription revenues with complete digitisation. EBITDA 34.7 (10.5) 22.1 15.7 Continual investment in high quality content and increasing programming Net Profit 0.4 (7.5) 14.9 18.2 hours have catapulted Zee TV to the No. 2 Hindi GEC slot from No. 4 last EPS (55.5) (5.7) 14.9 18.2 year. We believe the flagship channel would be able to maintain healthy Valuation Summary GRPs, going ahead, resulting in higher than industry ad revenue growth. FY11 FY12 FY13E FY14E Recently formed JV Media Pro would further enhance bargaining power P/E 26.9 28.5 2 4.8 21.0 to extract better deals from distributors. We expect 12.1% and 16.5% Target P/E 2 6.9 28.5 24.8 21.0 CAGR over FY12-14E in revenue and EPS, respectively. Over aggressive EV / EBITDA 1 9.8 22.3 18.0 15.3 bidding for quality content may be a key risk for ZEEL. We value ZEEL at P/BV 5 .5 4.9 4.3 3.7 21x (in line with last five year average) FY14E arriving at a target price of | RoNW 20.6 17.1 17.2 17.5 175. Though there has been marked improvement in the company’s RoCE 25.9 20.5 21.7 21.7 operating performance, due to the recent run up, the stock looks fairly Stock Data valued at current levels. We initiate coverage on ZEEL with HOLD rating. Market Capitalization | 16782.5 Crore Strategy change to benefit ad growth Total Debt (FY12) | 24 Crore Cash and Investments (FY12) | 328.3 Crore Change in strategy to acquire quality content and increase programming EV | 16478.2 Crore hours has started to pay off, with Zee TV reaching the No. 1 position after 52 week H/L 185 / 112 several years in the Hindi GEC space for week 34 and 36 in 2012 (overall Equity capital | 95.9 Crore No. 2 position post FY12 at weekly GRP of 225 vs. 183 in FY12). Going Face value | 1 ahead, we expect the company to increase programming hours further MF Holding (%) 13.1 and monetise recently acquired movies to sustain leadership position. FII Holding (%) 35.4 High GRP in both GEC and Hindi movie space would enable ZEEL to post Comparative return matrix (%) higher than industry ad revenue growth of 10.6% over FY12-14E. 1M 3M 6M 12M Digitisation to drive subscription revenue Sun TV Network 7.8 16.6 1.2 8.6 Network 18 -9.3 -9.7 -22.0 -66.9 Subscription revenue is expected to grow at 19.6% CAGR over FY12-14E, ZEEL 4.1 31.7 41.3 52.6 led by the digitisation mandate. It will also enable the company to recover investments in sports and niche channels, which rely primarily on Price movement subscription revenue. Moreover, a gradual decline in carriage fees would help the margins, going ahead. 6,000 200 5,000 Expensive valuation 150 ZEEL has traded at an average multiple of ~21x one year forward EPS 4,000 since 2007. However, during its recent peak in 2007, ZEEL traded at 39x, 3,000 100 over 200% premium to Sensex. It is currently trading at ~84% premium 2,000 to the Sensex vs. its long term average of 48%. Valuing ZEEL at 21x FY14 50 1,000 EPS at | 175, we initiate coverage with HOLD rating. Further improvement in Zee TV’s GRPs and market share could lead to expansion in multiples. 0 0 Oct-11 Jan-12 Mar-12 Jun-12 Sep-12 Exhibit 1: Valuation Metrics Price (R.H.S) Nifty (L.H.S) (Year-end March) FY10 FY11 FY12 FY13E FY14E Net Sales (| crore) 2,199.8 3,013.6 3,040.5 3,370.3 3,819.9 EBITDA (| crore) 613.5 826.6 739.5 903.0 1,044.7 Analyst’s name Net Profit (| crore) 634.4 637.0 589.1 677.0 800.0 EPS (|) 14.6 6.5 6.1 7.1 8.3 Karan Mittal [email protected] P/E (x) 12.0 26.9 28.5 24.8 21.0 Price / Book (x) 2.0 5.5 4.9 4.3 3.7 Anil Shenoy RoCE (%) 14.8 25.9 20.5 21.7 21.7 [email protected] RoE (%) 16.6 20.6 17.1 17.2 17.5 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Shareholding pattern (Q1FY13) Company background Shareholder Holding (%) Zee Entertainment Enterprise Ltd (ZEEL) is a part of the Essel group Promoter 43.87 FII 35.35 promoted by Subhash Chandra. Apart from ZEEL, Essel group also owns DII 13.11 the television network Zee News. Also, it has a presence in print media (DNA), cable distribution (Wire & Wireless), DTH (Dish TV), satellite Others 7.67 communication (Agrani & Procall), theme parks (Essel World and Water Kingdom), online gaming (Playwin), education (Zee Learn), flexible FII & DII holding trend (%) packaging (Essel Propack), infrastructure development (Essel Infraprojects) and family entertainment centres (Fun Cinemas). 37 40 35 36 35 ZEEL owns one of the largest broadcasting networks in India with 30 TV 30 channels including four HD channels and 22 beams in international markets with a global viewership of above 650 million. The company 20 13 13 13 13 launched its flagship channel Zee TV in 1992, which currently operates in a highly competitive market and forms a major part of the revenue. After 10 falling to the No. 4 slot in the Hindi GEC space in FY12, the company 0 changed its strategy to aggressively acquire high cost properties. Post Q2FY12 Q3FY12 Q4FY12 Q1FY13 FY12, Zee TV has improved its ranking and after many years and reached the No. 1 position in week 34 and 36 of CY12 (overall No. 2 position post FII DII FY12). The company’s Hindi movie offerings include four channels, which have collectively been dominating the Hindi movie space. Also, the company has a significant presence in regional markets with a presence in Maharashtra, West Bengal, Karnataka, Andhra Pradesh and Tamil Nadu (newly launched). With its acquisition of a 50% stake in Taj TV (Ten Sports) in 2007 and a further 50% in 2012, Zee has a strong presence in the sports segment, with four channels viz. Ten Sports, Ten Action, Ten Cricket and Ten Golf. ZEEL also has a presence in content distribution through both analogue & digital platforms through Media Pro Enterprise India, which is a joint venture between Zee Turner & Star Den Media Services. The bargaining power of Media Pro enables Zee along with Star and Turner channels to command a higher share of the ARPU than their combined market share. The company derived 52% of its revenues in FY12 from advertising while subscription income accounted for 43% of total revenues. While majority of the subscription revenue (30%) came from domestic operations, international subscription revenues contributed 13%. Exhibit 2: ZEEL - FY12 revenue split International Others, 4% Subscription, 13% The company derived 52% of its revenues in FY12 from advertising while subscription income accounted for 43% of total revenues Ad revenue, 52% Domestic Subscription, 30% Ad revenue Domestic Subscription International Subscription Others Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Exhibit 3: Diversified set of channels Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 3 Investment Rationale Ever growing media industry As with every emerging market, India has been home to a growing media industry, which has grown at a CAGR of 9% in CY07-11. The growth has been in spite of the global recession, which led to subdued growth of 1% in CY09. Even in CY11 when the economy started showing signs of slowing down, the media industry grew by 11.7% representing a digital dawn. Going forward, the media industry is expected to grow at a CAGR of 14.9% from | 728 billion in CY11 to | 1457 billion in CY16. Exhibit 4: Media industry | billion 2007 2008 2009 2010 2011 CAGR (07-11) % 2012E 2013E 2014E 2015E 2016E CAGR% (11-16) % Television 211 241 257 297 329 11.7 380 435 514 618 735 17.4 Print 160 172 175 193 209 6.9 226 247 270 295 323 9.1 Film 93 104 89 83 93 0.0 100 110 121 135 150 10.1 Radio 7 8 8 10 12 13.2 13 16 20 24 30 20.7 Music 7 7 8 9 9 6.5 10 11 13 15 18 15.1 OOH 14 16 14 17 18 6.2 20 22 24 26 29 10.3 Animation 14 17 20 24 31 22.0 36 43 51 61 69 17.4 Gaming 4 7 8 10 13 34.3 18 23 29 37 46 28.8 Digital 4 6 8 10 15 40.1 20 26 34 44 57 29.9 Total 516 579 587 652 728 9.0 823 932 1076 1254 1457 14.9 Source: FICCI-KPMG report 2012, ICICIdirect.com Research The television industry has been the major contributor to the media industry, contributing ~45% of the total revenue of the industry in CY11 up from 41% in CY07.