Continued investment in content and higher sports losses due to the rupee weakness are likely to impact margins. However, Zee remains a key pick in the space due to its market positioning, strong balance sheet and potential benefits from the digitisation process. We maintain ?overweight?.
Zee?s Ebitda margin in Q1FY14 was 30%, primarily due to lower sports losses (R9.5 crore). However, the sports calendar is heavy for the rest of the year and the recent rupee weakness has created further stress, taking up our sports loss estimate to Rs 140 crore.
We have, therefore, taken down our FY14 Ebitda margin from 27.3% to 25.2%, which is 60 bps lower than margins in FY13. We believe the recent stock price correction has tempered expectations and valuations.
These are primarily on the back of lower industry ad-spend growth, higher sports losses and continued investment in new channels/content. The stock is now trading at 19.4x FY14 EV/Ebitda, and on a growth-adjusted basis, valuations are reasonable and well positioned amongst global broadcasters. We expect Zee to be a key beneficiary of India?s planned digitisation. We expect digitisation momentum to drive a 16% CAGR in Zee?s subscription revenues, FY13-15.
Morgan Stanley
