Zee Entertainment Enterprises

An investment can be considered in the stock of Zee Entertainment Enterprises (ZEEL) with a two-year perspective. As the broadcaster inches closer to the No.1 slot in the general entertainment category (GEC), it stands most to gain from increasing advertising spends. The strength in its programming and the improvement of ratings across the network suggests sustained growth in earnings. The nearly 25 per cent decline in the stock price since the beginning of the year has trimmed valuations, with the stock trading at about 31 times its trailing consolidated earnings per share.

While, on an absolute basis, the valuation remains high, we believe that ZEEL is well-placed to record an annualised growth rate of 25 per cent over the next three years on the back of improving advertising income. While the pace of overall subscription revenue growth has been slower than expected, this too is likely to improve upon the entry of more DTH players, as the ZEE bouquet will be an essential offering for all players. However, we recommend accumulating the stock in small lots, given the volatile market conditions.
Increasing strength

Flagship channel, Zee TV, continues to bridge the gap with STAR TV in the overall ratings and now dominates prime-time viewing. Improvement in ratings has resulted in better utilisation of advertising slots at 95 per cent levels. Zee TV is also riding on the strength of several programmes that are now in the top 50; which could inspire advertiser confidence. If ZEEL manages to attain and maintain market leadership, it could also implement further advertising rate hikes.

Earlier concerns of over-dependence on Zee TV have begun to dissipate with other channels in the Zee bouquet such as Zee Café and Zee Cinema also gaining strength. In the latest earnings conference call, the management claimed that Zee TV’s contribution to advertising revenue was just below 50 per cent, implying that all its channels contribute to advertising revenue.
Taking on competition

With competition picking up in the general entertainment category, the ability of Zee TV to maintain its market share remains a concern. However, Zee TV appears to have withstood the onslaught of NDTV Imagine fairly well, while Star Plus and Sony have lost market share (according to recent ratings and news reports).

The new channel from Viacom 18 is also in the offing and, therefore, maintaining its slice of the GEC ad pie remains a challenge for Zee TV. ZEEL’s new channel, Zee Next, was launched earlier this year to take on fresh competition from NDTV and UTV’s Bindass, but does not appear to have made much of an impact.

However, the improving strength in ZEEL’s bouquet and its higher connectivity and reach should enable it maintain a chunk of GEC ad spends. Zee TV as an incumbent is better placed than new entrants in terms of spending on carriage fees.
Concerns

Intense competition is likely to keep ZEEL on its feet as the Star network is not likely to give up its turf in a hurry and is increasing spends on content and new programming. This limits the scope for margin expansion in the near term; operating margins are likely to remain at 30 per cent levels.

While the upside from domestic subscription exists, a weakening dollar may mute gains on international subscription, which has till now been driving subscription revenues. ZEEL’s advertising-subscription ratio is currently an even mix. But over the next year or so, the ratio is likely to tilt in favour of the former.

We expect growth in advertising spends to continue as there is nothing yet to suggest a slowdown in consumption. On the contrary, advertisers are likely to bank on higher disposable income (courtesy the latest budget) to sustain spending. Waning share of GEC channels in the television advertising pie is also a concern. However, Zee TV as a market leader is well-placed to protect its advertising share.

Via BL