Zee Entertainment: Near-term margin concerns on network expansion

An uptick in revenue growth and lower costs could partly offset some of the pressure

The Zee Entertainment stock, under pressure over the past few months due to concerns on initial losses for new hindi general entertainment channel, &TV, is down 13 per cent to Rs 339 from its highs in January, when the new channel was launched. While analysts believe there could be pressure on profitability, Zee expects to maintain it at the level of FY15, when margins came in at 25.7 per cent.

The company, according to analysts, expects to gain market share at the network level, helped by channel launch and increase in original programming hours. Faster revenue growth (from the estimated 15 per cent) would come about if the phase III and phase IV of the digitisation process is completed before schedule. Analysts at CLSA say the stock corrected on concerns of initial losses in the new channel launch but the worst seems to be behind and digitisation of cable should help growth.

However, not all analysts are so sanguine about the company’s ability to improve margins in FY16. Analysts at Antique Stock Broking say while &TV has made a credible start with a four per cent share according to TAM Media Research, it has to double its rating share from here on to achieve breakeven without significantly cannibalising Zee TV's ratings.

Further, subscription growth prospects have been pushed back due to delay in Phase III DAS (digital addressable system) rollout to December 2015, which means monetisation is unlikely to happen in FY17. Antique’s analysts expect Ebit margins to come off by 200 basis points in the current financial year before rebounding in FY17.

 

There, however, are means to offset the pressure. Analysts at IIFL say margins are set to expand to 30-35 per cent, as losses of the new GEC subside. Ad revenue growth dipped to 12 per cent in FY15, from 20-24 per cent in FY13 and FY14 due to slowdown.  This is also expected to revert to 15-20 per cent in the current financial year. About 54 per cent of Zee Entertainment’s revenue in FY15 had come from the advertising. Subscription revenue growth, had been flattish, should also perk up with ongoing digitisation.

At current price, the stock is trading at 26.6 times its FY17 estimates. The company commands a premium to peers, given ad revenue growth over the three years have been significantly ahead of others in the sector. Half of the analysts have a ‘buy’ on the stock. Their consensus target price of Rs 360 indicates limited gain from the current levels. Await further correction to buy, as the long-term story seems intact.