Zee Entertainment
Off the pedestal, reducing TP
Event
We spoke with media ad sales consultants following a slip in channel rankings
for Zee TV to assess the damage on the top-line. We cut back our ad growth
est. for FY12 and FY13 and reduce our TP to Rs110. We remain cautious on
the stock and incorporate three key changes in our model: (1) Cut back in ad
forecast, (2) Giving the company the benefit of higher margins in a slowing
economic environment, and (3) A Rs7bn buyback through Mar-12. We believe
investors looking for an attractive entry point should wait for a 10% correction.
Impact
Viewership fragmentation to eat into ad revenue pie. Zee TV has now
remained at the #4 slot for five consecutive weeks. Our checks with ad sales
consultants suggest that the strength of Sony’s popular game show KBC
through the festive season could upset the revenue share between GECs in
FY13. Our FY13 ad growth now stands at 8% (vs. 10% earlier). Our FY12 est.
moves down to 6% from 8% earlier.
GDP slowdown makes for a pessimistic backdrop. Our India economist
believes that FY13 GDP growth has headwinds. The TV ad growth market
remains tightly linked to GDP performance. As the overall market remains
sluggish, loss of viewership for key channels could accentuate the pain for Zee.
Regional channels – facing the competition heat. Key regional genres
Marathi and Bengali have seen Zee channels slip in recent months (See
Figure 3 and 4). We estimate that regional channels contribute ~25% of Zee’s
consolidated ad revenues. This segment has held up well during the 2008
slowdown and altered competitive dynamics this time around could see the
pressure on Zee.
Buyback to provide downside support. The latest regulatory filing shows
that the company has bought back 11.8m shares through 22 Sept. The
company has put aside Rs7bn for buybacks at a maximum price of Rs126.
Earnings and target price revision
We lower our advertising outlook leading to PAT reduction of 6% in
FY12/FY13. We revise our TP to Rs110 (vs Rs130 earlier).
Price catalyst
12-month price target: Rs110.00 based on a DCF methodology.
Catalyst: Pick-up in channel rankings for flagship channel Zee TV
Action and recommendation
Remain cautious, prefer Dish TV. Cut back in ad growth assumption could
necessitate a reset in street margin expectations (at 28% vs. Macq: 27%). We
recommend investors wait for EPS expectations to possibly reset. Zee stock
has corrected 22% since 15 June (vs. BSE Sensex down 7%); see our note
Time for commercial break. Even so, a 10% correction could cause us to
become more constructive
Off the pedestal, reducing TP
Event
We spoke with media ad sales consultants following a slip in channel rankings
for Zee TV to assess the damage on the top-line. We cut back our ad growth
est. for FY12 and FY13 and reduce our TP to Rs110. We remain cautious on
the stock and incorporate three key changes in our model: (1) Cut back in ad
forecast, (2) Giving the company the benefit of higher margins in a slowing
economic environment, and (3) A Rs7bn buyback through Mar-12. We believe
investors looking for an attractive entry point should wait for a 10% correction.
Impact
Viewership fragmentation to eat into ad revenue pie. Zee TV has now
remained at the #4 slot for five consecutive weeks. Our checks with ad sales
consultants suggest that the strength of Sony’s popular game show KBC
through the festive season could upset the revenue share between GECs in
FY13. Our FY13 ad growth now stands at 8% (vs. 10% earlier). Our FY12 est.
moves down to 6% from 8% earlier.
GDP slowdown makes for a pessimistic backdrop. Our India economist
believes that FY13 GDP growth has headwinds. The TV ad growth market
remains tightly linked to GDP performance. As the overall market remains
sluggish, loss of viewership for key channels could accentuate the pain for Zee.
Regional channels – facing the competition heat. Key regional genres
Marathi and Bengali have seen Zee channels slip in recent months (See
Figure 3 and 4). We estimate that regional channels contribute ~25% of Zee’s
consolidated ad revenues. This segment has held up well during the 2008
slowdown and altered competitive dynamics this time around could see the
pressure on Zee.
Buyback to provide downside support. The latest regulatory filing shows
that the company has bought back 11.8m shares through 22 Sept. The
company has put aside Rs7bn for buybacks at a maximum price of Rs126.
Earnings and target price revision
We lower our advertising outlook leading to PAT reduction of 6% in
FY12/FY13. We revise our TP to Rs110 (vs Rs130 earlier).
Price catalyst
12-month price target: Rs110.00 based on a DCF methodology.
Catalyst: Pick-up in channel rankings for flagship channel Zee TV
Action and recommendation
Remain cautious, prefer Dish TV. Cut back in ad growth assumption could
necessitate a reset in street margin expectations (at 28% vs. Macq: 27%). We
recommend investors wait for EPS expectations to possibly reset. Zee stock
has corrected 22% since 15 June (vs. BSE Sensex down 7%); see our note
Time for commercial break. Even so, a 10% correction could cause us to
become more constructive
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