Citigroup
The Zee Entertainment stock has had a stellar run ? up 91% in a year and outperforming the market/media index by 70%/37%. The market thumbs-up was driven by benefits of ?potentially? higher subscription revenues due to digitalisation, advertising tailwinds and being equated to consumer multiples.
ZEEL remains an attractive long-term business, but we think valuations are now stretched. Digitisation upsides are being priced in too soon and perhaps too much; and risks on future ad growth and margins are there ? we downgrade to ?sell? with a target price of R205 (24x FY14E EPS). Good Q3FY13 results on a low base could be used as opportunity to book profits.
DTH is already 30-35% of the market, contribution from which is already flowing through. Cable revenues for ZEEL are on a similar scale to DTH ? which could mean that resultant growth may not be as high as the market hopes, unless sharp ARPU hikes kick in. Also, investments in content will cap margin upsides.
Zee?s viewership shares have been volatile in the past ? sustainability always is a risk. FY13 ad revenues were supported by a weak base (-7% y-o-y in FY12), return of consumer ad spends and buoyed by sports. It is difficult to rule out risks on ad growth going forward ? we model around 12% y-o-y ad growth in FY14E.
Interestingly, ZEEL now trades almost on a par with less volatile, faster growth, higher ROE consumer businesses ? we find that difficult to understand, despite the long-term opportunity in Indian media. ZEEL is trading at around 100% premium to market P/E ? close to the last five-year highs versus 42-30% average premium in the last 3-5 years. This makes risk-reward unfavourable. Upside risks include: a) sharp subscription ARPU increases; b) Index entry may give some technical support.
