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Zee: Rich valuations may limit near-term upside

Long-term investors could thus wait for a better entry point

Read more on:    Ebidta | Zee | Revenues | Sensex | A&p
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Entertainment Enterprises (Zee) outperformed the Street's expectations on the back of reviving ad and strong growth in subscription revenues in the December 2012 quarter. The company's healthy performance is expected to continue, thanks to the improving dynamics of the media industry. Zee is expected to be a key beneficiary of the on-going digitisation process which will drive strong double-digit growth in its subscription revenues, alongwith improving margins.

Analysts believe, the sports business break-even is still some time away (around FY15-16). On the flip side, while ad growth is expected to pick up in the near term, Zee's volatile viewership ratings is a key monitorable. Analysts would also keenly watch the company's investments in new businesses, which would have a bearing on margins going forward.

The Zee scrip has outperformed over the past year, and prices in the most of the near-term positives of strong subscription revenue growth and improving returns from the Sports and new ventures. It now trades at a valuation of 29.5 times FY14 estimated earnings, which is rich.

“Zee is trading at 100% premium to market Price/Earnings–close to the last 5-year highs versus 42/30% average premium in the last 3/5 years. This makes risk-reward unfavourable, in our view. However, sharp subscription ARPU increases and Index entry may give some technical support”, says Surendra Goyal of Citigroup.

Overall, most analysts remain confident of Zee's longer term business prospects. But, given the limited near-term upside (about 10%), they advice that longer term investors could wait for a better entry point.

Q3: All-round growth

Zee surprised the Street with better than expected performance on topline, margin as well as bottomline fronts. Robust growth in both ad revenues (up 29%) as well as subscription revenues (up 26%) drove its topline growth in December quarter. Notably, both these revenue streams posted strong double-digit growth for the third quarter in a row. While higher spends by consumer durables and FMCG giants during festive season boosted ad growth, Zee's subscription business gained from the on-going digitisation process.

"The ad growth recovery has been faster and sharper than our expectations. Further, FMCG companies’ (HUL in particular) healthy A&P spend increase gives us added comfort on ad growth visibility. This together with a better-than-expected margin performance has led to an earnings upgrade for Zee", says Ballabh Modani, Media analyst at Religare Institutional Research.

The contraction in EBITDA margin was much lower than Street expectations driven by lower losses in Zee's new ventures and sports channel. This is important in the backdrop of higher programming hours and investments in new channels, which pushed up Zee's operating expenses by 26%. Going forward, the management expects its margins to be above 25% levels.

Zee's losses in its sports businesses narrowed to Rs 8.6 crore (versus Rs 17 crore in September 2012 and Rs 10 crore in December 2011 quarter). Further, lower tax rates of 32.5% (versus 36.2% last year) boosted net profit which grew by 34% to Rs 194 crore.

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