"Zee Entertainment, ad growth is expected to decline from ~27% for 9MFY13 to 12-14% YoY going forward as TV industry ad growth remains sluggish (initial estimates of ~5% in FY13E and 8-9% in FY14E) and majority of Zee's market share and sports business led outperformance vs industry is likely behind. We are downgrading our ad revenue estimates by ~2%; model 14% ad revenue CAGR for FY13-15E.
Likely bunching-up of sports and new business losses in 4QFY13 (combined loss could be INR0.8-1b) could result in relatively muted margins in the nearterm. We now expect FY13/14/15 sports loss of INR0.77/0.97/0.23b vs earlier estimate of INR0.67/0.91/0.17b.
New business EBITDA loss (Zee Q, Zee Alwan, Ten Golf, New media initiatives, Zee Bangla Cinema, HD channels) guidance remains at ~INR1.5b for FY13E, with losses unlikely to decline in FY14E as these initiatives remain in the ramp-up mode and have break-even time-lines of 3-4 years.
Assuming no major industry-wide ARPU improvement, there seems to be limited upside to our 22% CAGR estimate for domestic subscription revenue during FY13-15E. Phase I/II digitization led revenue is unlikely to surprise positively as some part of phase I (~13m HHs) upside is already captured and monetization from phase II (~16m HHs) markets is already strong in the current pre-digitization environment. However long-term digitization potential remains high from ~95m Phase III/IV HHs.
Valuation and view: We are downgrading our EPS estimates by 3-5% led by lower ad revenue and margin estimates. We now expect an EPS of INR8.5 in FY14E (up 14% YoY) and INR10.6 in FY15E (up 25% YoY). Digitization upside in the subscription revenue and potential ad market recovery remain key positives for Zee but are unlikely to provide near-term upgrade catalysts. Valuations at P/E of 26.5x FY14 and 21.2x FY15 adequately reflect the longterm positive outlook, in our view. Maintain Neutral with a revised target price of INR232 (vs INR240 earlier) based on 22x FY14 EPS," says Motilal Oswal research eport.
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