Zee Entertainment Enterprises Limited revenues for Q109 grew 38.4% y-o-y to Rs5.4 billion on the back of a strong growth in advertising revenue.
Despite a slowdown in consumption in the economy and the intensifying competition post a flurry of new channels, advertisement revenue grew at an impressive 38.4% y-o-y.
As a result, we have revised our advertisement revenue growth to around 22.5% for FY09E and overall revenue growth to around 17% for FY09E.
Although management has given a guidance of total revenue growth of ~30%, we remain cautious considering the aggressive entry of channels in the General Entertainment category and the likely rationalization of advertisement budgets in the FMCG sector.
We maintain our EBITDA margin estimate for FY09 to ~28% despite the hive-off of Zee Next as the company may need to invest in its selling and programming efforts to maintain its market share.
ZEE’s Gross Rating Points (GRPs) came down to 226 during the quarter from 273 in the last quarter. However, we believe EBITDA margin will improve to ~30% in FY10, helped by a higher operating leverage.
Based on DCF, we have arrived at a target price of Rs261 for the stock. We have revised our target price upwards from Rs. 225 based on our assumption of margin expansion post FY09 and a strong growth in advertisement revenues. We upgrade our rating on the stock to BUY.