ZEE Entertainment Ltd. - KR Choksey Stock Recommendations

Q3 FY08 Result Update

Key Data

Investment Rationale

Diversified Bouquet of channels

Zee Entertainment has presence across all genres. Its flagship channel Zee TV is the No 2 channel across all genres and is a strong contender for the No 1 spot currently occupied by Star TV. Zee Cinema is the leader in the movie genre and No 3 channel across all genres after Star TV and Zee TV. Zee Café targeting the English speaking youth is the market leader among English GEC. Zee Sports coupled with Ten Sports commands one-third of the market share.

Strong Challenger to the No 1 position

Zee Entertainments flagship channel Zee TV has closed in significantly on Star TV in the past year. Its GRP (General Rating Points) have grown from 181 GRPs in April 06 to 282 GRPs in Dec 07. GRP growth is mainly due to increase in time spent due to high content stickiness. In the case of Prime Time Performance the gap between Zee TV and the leader has decreased even more dramatically with Zee TV having 184 GRPs compared to 187 of Star TV as on December 15 2007.

Subscription Revenues to grow

The CAS/DTH market in India, though nascent, offers good long-term potential, given its advantages over cable and will also offer indirect benefits to all broadcasters. Increasing implementation of CAS and DTH would lead to better addressability in terms of subscriber declaration. Prior to the implementation, due to the under declaration of subscribers by the Local Cable Operators, out of the total consumer spend on cable television only 10% trickled down to the Broadcasters compared to 40% in USA and 37% in UK. Since most of Zee’s channels are pay it would benefit considerably due to growing penetration of CAS/DTH.

Growing Advertisement Revenues

Most of its Zee’s advertisement contracts with the advertisers are signed on a quarterly basis, which gives the company the advantage to hike its ad rates on strong viewer ship data. Of late, viewer ship of the channel has been continuously improving. In Q308 Zee had 24 shows in the top 50 in the GEC segment. Moreover, Zee Cinema is the market leader in the movie genre and Zee Café is the leader in the English GEC segment. In the quarter ended December 2007 the company recorded an advertisement growth of 25.3% over the prior quarter and the company expects the advertisement revenue to grow at 32% in FY08.

Key Developments

Zee Entertainment Ltd in December 2007 launched a new channel Zee Next targeting the age group between 20-32 years in the Hindi speaking markets. The main idea of the channel is to capitalize on the existing gap in GEC wherein programming genres viz. thriller, comedy and action are absent or minimal. Hence, Zee next will complement the flagship channel through differentiated content.

Financial Performance

Consolidated net sales of the company grew 24 percent from Rs210.5 crore to Rs263.8 crore in Q3 FY08. Net Advertising revenue grew 25 percent y-o-y due to superior ratings for its flagship channel Zee TV. Net Sales of the company grew to Rs113.5 crore, an increase of 18.4 percent y-o-y compared to the corresponding quarter last year.

Valuations

Based on its TTM (December 07) earnings, Zee Entertainment Ltd is quoting at P/E multiple of 37.9x at CMP of Rs240. M Cap/ Sales stands at Rs11.1

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