Valuations overshadow strong outlook for Zee

Stable ad revenue growth and subscription upsides are positives

The Zee Entertainment scrip has been hitting its 52-week highs recently on expectations that higher advertising spends and strong subscription growth will boost its revenues and margins. Analysts believe that the company’s consistency on advertising revenue growth will continue and expect it to outperform the sector growth in FY17. The media sector is expected to achieve 15-16 per cent ad revenue growth led by FMCG, telecom and to an extent auto, which will compensate for lower e-commerce spends. Ambit Capital Research believes the company will report 19 per cent growth in ad revenues for FY17 due to cricketing events.

Advertising revenues for the March quarter were up 29 per cent year-on-year and FMCG spends continue to contribute about half of the revenues from ads. While the ad uptick is expected to be led by the launch of Reliance Jio on the telecom front, new car launches should keep spends by auto companies high.

On the subscriptions front, the company estimates mid-teens growth in domestic business on the back of price hikes in phase-I and -II markets and volume uptick in phase-III markets. Phase-I and -II are urban/semi-urban regions where digitisation has been implemented, while phase-III includes those cities where implementation is awaited/in process. Further, Ambit upgraded its subscription growth estimates given commentary from MSOs (multi-system operator) which have offered rate increases to broadcasters in anticipation of phase-III subscriber monetisation. Higher share of direct-to-home (DTH) segment in set-top box deployment is beneficial to the broadcast sector as DTH offers more transparency and therefore higher content fees.

Higher growth for the company is expected to come from its existing portfolio, digital platform and movie business. Analysts at Edelweiss Research identify a number of factors which augur well including higher programming hours, regional market share gain and ad rate increases for free-to-air channels. The other triggers include subscription boost from digitisation and penetration of high-definition content, and cross-platform monetisation.

However, investors need to be watchful given the company’s investments in the movie business. Though the success of Marathi movie Sairat produced by Zee is a positive, higher investments in areas (such as movies) where the returns tend to be erratic, is a risk.

At the current price, the stock is trading at 37 times its FY17 earnings estimates, which is on the higher side. Investors could look at the stock on a meaningful correction.