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Improving ad, subscription revenues key catalysts for media stocks

EBITDA margins contracted sequentially for all media companies driven by higher costs

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Despite challenging ad environment, most media companies reported decent set of numbers for the recently concluded quarter. Ad revenues remained subdued for most players - with Enterprises (Zee) being a strong outperformer. Notably, ad growth remained subdued ranging from -2% growth (HT Media) to 4% (Jagran Prakashan).

In sharp contrast, Zee's ad revenues surged by a huge 34% over last year - driven largely by Sports business as well as improving ratings. Subscription and circulation revenues grew at a healthy pace for all players (between 9-36%) with lagging behind at 4% growth in this metric. Zee again led the pack with 36% growth in subscription revenues.

contracted sequentially for all media companies driven by higher costs.

"Overall ad environment remained weak in Q2'FY13 but has likely bottomed-out. Interest in the broadcasting sector is likely to remain strong due to the implementation of mandatory digitization" says Shobhit Khare, media analyst at Motilal Oswal Securities. Zee, Sun TV and are the top picks of most brokerages in the media sector.

Zee Entertainment:

Robust growth in its sports business drove Zee's growth in the quarter. Its ad revenue growth was largely led by a 156% jump in sports' ad revenues. Consequent to increased investment in new businesses, launch of new channels and higher programming hours, Zee's EBITDA margin contracted by 600 basis points over last year to 22.8%. Going forward as well, its margins are likely to be under pressure as the company plans to invest about Rs 150-180 crore in new initiatives such as India.com,Ditto TV, Zee Tamil, etc. "Historically margin performance has been lower than expected despite strong growth in subscription revenue and a similar trend is not ruled out. With likely increase in programming hours to 32-34 from current levels of 27-29 over the next six months, margins likely to remain under pressure in our view", says Pratish Krishnan of Antique Stock Broking.Thus, while Zee is likely to be a key beneficiary of improving ad environment as well as digitisation (as subscription revenues grow manifold), its margin pressure is expected to continue. Zee management expects its Sports business to continue making losses for FY14 as well.Analysts expect Zee's earnings to grow at a compounded rate of 19% over the next couple of years.

Sun TV:

Sun TV struggled to grow ad as well as subscription revenues which resulted in revenues falling by 4% to Rs 433 crore over last year. Notably, lower cable revenues hit its subscription revenues for the quarter. Sun TV's EBITDA margins contracted 506 basis points over last year to 75.9% driven by higher costs towards a non-fictional show as well as shift from Insat to Intelsat satellite.Going forward, though, improving ad environment and Arasu Cable TV tieup should aid its topline growth. Analysts believe the full benefit of higher revenues is likely to come through in FY14.Analysts expect its earnings to grow by 20% in FY14. "With revival in ad growth, sequential improvement in subscription revenues we believe the stock could re-rate to 18 times FY14 estimated earnings. Re-iterate Buy with target price of Rs 400, upside of 22%", says Pratish Krishnan of Antique Stock Broking.

Dish TV:

Dish TV posted its lowest ever subscription revenue growth of 14% (year-on-year) due to weak subscriber adds.While the company witnessed EBITDA margin squeeze of 393 basis points to 29.2%, going forward analysts expect this metric to inch up. The full impact of recent price hikes will be reflected in coming quarters in the form of higher Average Revenues per user (ARPU). Further, analysts believe recent promotional packages offered will restrict subscriber churn and thus increase revenue growth sustainability."Incremental subscriber addition from the digitization with stable churn would continue to remains key catalyst for Dish TV stock. We have marginally increased our ARPU estimates for FY13 and FY14 largely on the back of higher than expected ARPU in Q2FY13", says Naval Seth of Emkay Global.

Analysts expect Dish TV's ARPU to grow at 6% compounded rate over the next two years. However, any equity dilution could act as a near-term overhang on the stock.

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