For Q3’09, Zee Entertainment Enterprises Limited (Zee) reported a weaker-than-expected performance owing to the operators’ strike and the Mumbai terror attacks in November 2008, which resulted in increased viewership of the news channels.
Revenues slipped 4.6% q-o-q to Rs5.5 billion due to lower advertisement revenues (down by 5.9% q-o-q).
The weak operating performance of the segment pulled down the EBITDA margin by 4% pts q-o-q to 22%, despite the decline in staff costs (adjusted for the provision of staff incentives made in Q2’09).
We remain concerned about Zee’s loss of market share in the last 2–3 quarters due to new entrants such as 9x and Colours.
This is partially attributable to high-quality content and issue-based shows aired on the new channels; as a result, the Company’s weekly gross rating points (GRP) fell to 201 from 219 in the last quarter.
Moreover, Zee’s share in the Hindi general entertainment channel (GEC) genre declined to 18% from 20% in Q2’09. In order to prevent a further slide in market share, we believe Zee should maintain the investment level in its programming activities for the next 2-3 years.
In our view, subscription revenue will achieve modest growth in the near-to-medium term as it is less prone to the current economic slowdown.
Besides, the increasing traction of DTH, expanding subscriber base, and improved recovery from cable operators will help in increasing the subscription revenue. Thus, we expect subscription revenue to grow at around 19.5% and 9% in FY09 and FY10, respectively.
At the current market price (CMP) of Rs107, Zee’s stock is trading at a forward P/E of 11x and 15.1x for FY09E and FY10E, respectively.
Based on our DCF valuation, we have arrived at a target price of Rs114 for the stock, assuming a 5% terminal growth rate and a 13.9% WACC. This provides an upside of 6.2% from the current levels.
Zee has a wide portfolio of channels that should ensure growth in the medium-to-long term. Moreover, we continue to believe that Zee will work towards improving its programming mix in the next couple of years in order to tide over the current difficulties. We maintain our HOLD rating on the stock.