We maintain our ‘buy’ rating on Zee Entertainment Enterprises with a target price of Rs 340 a share. We believe the stock is the best play on digitisation, product innovations and net cash of ~Rs 1,500 crore are the key positives for Zee.
In the near term, margin pressures could emerge due to new launches. At the current market price, the stock is trading about 28.1x and 21.6x FY15e and FY16e EPS, respectively. Zee's Q4FY14 ad revenues and overall PAT exceeded expectations.
Key positives were a 21.5% y-o-y ad growth; and profit of R35.1 crore in sports business (after 16 consecutive quarters of loss) due to high syndication revenues from the West Indies-England series. Key negatives were a 0.9% y-o-y decline in domestic subscription revenues, mainly due to prior-period items in Q4FY13, which led to a high base; and drop in non-sports Ebitda margin by 428 bps y-o-y to 28.7% due to elevated investments in content.
Despite a likely slowdown due to possible delay in Phase 3 and 4 digitisation and MediaPro split, ZEE’s domestic subscription growth in FY15 will receive a boost from the Trai-mandated tariff hike and induction of sports channels into the overall bouquet.
Also, with a stronger Central government, we see upside risks to ad growth owing to GDP recovery. New channel launches and investments are key monitorables.
Ad revenues were buoyed by market share gains, new launches and some benefits arising from election-related spends. The company’s overall subscription revenues grew by mere 2% y-o-y in Q4FY14, while international subscription revenues posted 10.2% y-o-y growth, aided by currency movement.