Zee Entertainment Enterprises: Buy

Among the many players in the television broadcast space, very few are profitable, with the rest rarely achieving substantial scale.

In this light, Zee Entertainment Enterprises (Zee) a pan-India broadcaster with deep reach in both the regional and national (Hindi) markets is an exception. This scale has been reached by remaining profitable.

Investors with a one-two year horizon can buy the shares of Zee. At Rs 125, the share trades at 17 times its likely per share earnings for FY13. At this valuation, it is lower than the levels that it had traded historically. Also, it is the only large profitable company in the listed space.

Strong viewership of its general entertainment channels (GECs) regionally and in Hindi drives the company's advertising revenues. Besides, a healthy proportion of subscription-based inflows is a key positive for the company.

From an industry perspective, the telecom regulator's directions towards digitising cables over the next year or so can prop up subscription revenues.

In the first nine months of FY12, Zee's revenues and net profits declined marginally over the same period in the previous fiscal. Revenues for this period stood at Rs 2,171.5 crore, while net profit recorded was Rs 427.7 crore.

Given the overall weakness in the market, advertising revenue was under pressure for the company and, hence, the stagnation in growth. But this is expected to change as regional channels enhance viewership, which is likely to be followed by a thrust in ad income.

Healthy bouquet

Zee has a healthy proportion of over 43 per cent of revenues coming from subscription. This is among the best in the industry and makes the company resilient to fluctuation in ad revenues when there are economic shocks.

Its bouquet of channels includes flagship Zee TV (Hindi GEC), Zee Cinema, and regional channels in Marathi, Bengali, Telugu and Kannada, among others.

Zee TV has been successful in attracting eye balls and has consistently been among the top two-three channels in the lucrative Hindi GEC genre, which is the largest advertising market. Zee TV has also had steady viewership, measured by weekly gross rating points, despite increasing competition.

Advertising revenues tend to be concentrated heavily within the top three-four players in this genre and Zee TV's position augurs well for garnering a good share of the ad pie.

Zee Cinema is another property that is the among the top few in the movie genre as it gains from a large bank of movies and also broadcasts newly released ones.

Interestingly, even in the highly competitive regional markets, the company has done well to be among the top three or four broadcasters. As a result, in the Marathi, Bengali, Telugu and Kannada markets, it has narrowed the viewership gap with regional players.

Many FMCG, telecom, and consumer durables companies are now looking to grow in the underpenetrated markets of Tier-2 and 3 cities and are increasing spends there.

Industry triggers

The enhanced viewership in regional languages is likely to translate into ad revenues as even in these markets, advertising share tends to be concentrated at the top.

The telecom regulator (TRAI) has mandated complete digitisation of cables in metros by June this year and another 37 cities are to be brought in to the fold by March 2013.

This move is important because it would drastically reduce under-reporting of subscription revenues that are as prevalent in the current analogue system.

That would be an added boost to subscription revenues and also would give a clearer picture on viewership of different channels, which is an important criterion for advertisers.

Risks include a protracted and a deeper slowdown in the economy which can moderate advertising revenues and strain the company's growth.

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