There is more to Zee Entertainment than just the flagship general entertainment channel (GEC). Its advertising revenues are well diversified — the mother channel now accounts for less than 60% of the company’s advertising revenues, and less than 30% of its overall revenues.
The recent increase in number of GEC channels has been one of the key concerns of investors. In our view, this concern is overdone, as the company’s well-diversified revenue stream would protect earnings even if the flagship channel’s market share declines.
More importantly, subscription revenues, which account for 41% of the company’s total revenues, are more stable than ad revenues, as they are less dependent on individual channels’ ratings.
FICCI estimates the Indian television advertising industry’s revenues at Rs80 billion in 2007. Of this, 25%, came from Hindi GECs. Further, the top two channels corner over 60% of this figure, which leaves Rs8 billion to be shared by all other GECs.
The road ahead
We expect Zee’s subscription revenues to register 18% CAGR over FY08-11 to Rs12.3 billion. This growth will be driven by a revamp of the domestic cable distribution business and strong growth in the DTH subscriber base.
The stock has corrected by over 40% over the past ten months, weighed down by apprehension of competition from the imminent launch of three new channels. Additionally, expected losses of Zee Next (which is now to be hived-off) reduced earnings visibility for the company.
Zee is currently trading at a PE of 18.9x on FY09 and 15.7x on FY10. During the past five years, its one-year forward PE has averaged 27x. Even in FY05 and FY06, when ratings of Zee’s flagship channel were the lowest, its one-year-forward PE averaged 15x.
Although the imminent launch of new competing channels and prospect of a slowdown in ad spends do warrant a lower multiple than the historical average, the current valuations do not capture its 17% earnings CAGR over FY08-11. We maintain ADD on the scrip and a one-year target price of Rs216 based on 18x FY10.