Zee Entertainment

Investors can consider buying the shares of Zee Entertainment Enterprises (Zee), given the company’s leading position in the general entertainment category, its reasonable profitability picture compared to peers and steady business prospects.

The stock’s large cap status may also make it a preferred option in the media space. Zee is a broadcasting player with a large bouquet of channels, prominent among them being Zee TV.

These channels cater to a wide variety of audience across entertainment segments. Among players in the broadcasting business, Zee is one of the very few profit making companies. At Rs 92, the stock trades at 10 times its likely 2008-09 earnings. Considering the fact that advertising revenues may come down on the back of an economic slowdown, the company may still be able to grow earnings by 15-20 per cent over the medium term.

Zee’s good standing in the general entertainment space, substantial growth likely in subscription based revenues on the back of cable digitisation and DTH platforms and gains from movie channel Zee Cinema provide scope for earnings growth over the next couple of years.

The company’s December quarter numbers, though, were below expectations with advertising revenues falling 5.9 per cent over the previous quarter, and a marginal growth in subscription revenues. Zee appears to have factored this slowdown, and has indicated a 15 per cent growth in advertising revenues for the full year.
Digital subscription to drive growth

Subscription-based revenues contribute nearly 40 per cent of Zee’s revenues. This segment has been growing at over 30 per cent over the last few quarters. This has slowed down in the December quarter, but the company still hopes to grow revenues from this segment by 23 per cent over 2007-08.

This growth thus far has been largely on the back of increased digitisation in cable television networks around the country and increasing penetration of newer platforms such as DTH (direct to home). Over half the company’s subscription revenues are derived from overseas and allows opportunity for Zee to grow revenues by increasing the user charges.

Conditional access system or viewing satellite channels through set top boxes may continue to make headway over the next few years. The Telecom Regulatory Authority of India has made conditional access in 55 cities across the country by 2011. This will mean better reporting of revenues by cable operators and in turn a better share of revenue for broadcasters such as Zee.

The company has gone on a deactivation drive, to recover dues from a section of cable operators; which may improve the receivables position.

This apart, the steady headway of DTH is also a positive for Zee. By the end of 2008, the country had as many as 10 million subscribers on this platform; DTH operators estimate that this will double by 2009. Apart from Dish TV and Tata Sky who are established players in DTH, new entrants such as Reliance – Big TV and others such as Sun Direct and Bharti Airtel may expand the overall DTH pie. All these ensure a larger opportunity for the company to garner advertising revenues.
Broadcasting business stabilising

On the advertising revenue front, a slowdown does appear likely. But players such as Zee who have an entrenched position in the category, a larger proportion of original content and a diversified portfolio of channels may remain the preferred options for advertisers, even if the overall pie grows at a lower rate.

In this context, it needs to be noted that the company’s flagship channel Zee TV no longer accounts for the lion’s share of advertisement revenues for the company.

Other channels in its bouquet such as Zee Cinema, which maintains its leadership in the Hindi cinema genre, Zee Café’ and Zee Studio have also started to contribute significantly (nearly half) to advertisement revenues.

But Zee TV by itself has seen lowering TV viewership rating points in the general entertainment category over the last couple of quarters. Colors, a newly launched channel has managed to pip Zee TV to the second spot just behind Star Plus.

This might be discomforting for Zee, as a lower rating may mean lesser ad revenues. But the gulf between Zee TV and channels such as Sony and NDTV Imagine, both of which are struggling with lower viewer-ship, is quite wide. SET Max though may garner higher ratings during the IPL cricket season. But this will snatch viewership across all channels.

As the environment for smaller players and new entrants becomes more challenging and funding remains difficult to access, new entrants may find it difficult to sustain heavy investments.

Being an established player and with more original programming hours than its rivals, Zee TV appears well placed to ride out competition and still attract advertisers. It still has as many as 15 programmes in the top 50 viewed programs according to media rating agencies. In the cinema genre, Zee Cinema, has managed to retain a market share of 34 percent, despite a host of new launches in this segment.

The company has also not adopted any knee jerk reaction to claw back to the top slot. Zee Next one of its recent channel launches has been put on maintenance mode with no significant investments lined up.

On advertising revenues per se, though financial advertisers (barring insurance players) have cut back, FMCG and telecom players continue to spend on advertising.