Zee News

 

Zee News will emerge as a one-stop shop for advertisers looking for a national audience across all categories. Investors can accumulate the stock

 

THE media and entertainment industry in India is at an inflexion point right now. The companies that are well-paced in terms of cashflows and earnings are seeking inorganic growth, while others are undergoing restructuring to improve their ability to take advantage of growth opportunities. One such development is the recent demerger of regional general entertainment channels from Zee News into Zee Entertainment Enterprise. With the addition of regional entertainment channels, the company would emerge as a one-stop shop for advertisers looking for a national audience across various categories. This is expected to significantly improve its bargaining chip with advertisers and thus improve profitability. Currently, Zee Entertainment operates over 15 different TV channels, a cable company SitiCable, a record label Zee Records and a production company. It has expanded operations overseas and its channels are available in the UK, the US, Africa and Asia.

THE INDUSTRY:

The media and entertainment industry in India is highly fragmented. In the past few years, players had to deal with issues like increasing digitisation of digital infrastructure and mushrooming of channels to cover each possible niche in the market. Of the huge analogue subscriber base — it is estimated to be around 71 million and is growing at a robust rate of 8-10% — cable companies had been able to digitise around 12 million subscribers by the end of March 2009. This is a 100% growth in digital subscription in the past one year.

   Digitisation boosts broadcasters' subscription revenues and makes it difficult for multi-service operators (MSOs) to underreport subscribers in their service areas. According to reports by independent media research firms, Informa Telecoms and Media Group and Media Partners Asia (MPA), the total digital cable subscribers will grow to 154 million by 2012 in the region and to 209 million by 2017. This implies that close to 60% of the region's cable homes will have at least one set-top-box by 2017. Big players like Zee Entertainment Enterprise are bound to benefit from this trend.

BUSINESS & FINANCIALS:

Due to entry of new players like Colors, NDTV Imagine and others, the pie of general entertainment viewership has shrunk for established players. Especially considering that the new broadcasters offer free or discounted subscription even at the cost of lower subscription revenues. This puts pressure on the subscription revenues of established broadcasters, besides dividing advertising spends pie. However, Zee Entertainment Enterprise through its flagship channel Zee TV still dominates the general entertainment space. The de-merger of regional general entertainment channels from Zee News into it, the former will further enhance its market power. The addition of regional channels such as Zee Marathi, Zee Bangla, Zee Talkies, Zee Telugu and Zee Kanada, which have an average viewership of around 20%, are expected to boost the company's total revenues by around 23%. And its impact on the company's finances would be visible from the first quarter of FY11.

   In December '09, the company's subscription revenues increased by 8% on year-on-year basis, while its advertising revenues increased by 1% for the same period previous year. Going forward, revenues from regional general entertainment channels would boost both these revenue streams. Globally, the company caters to more than 500 million viewers and broadcasts to over 167 countries worldwide. As of December '09, the company's international subscription revenues contributed to over 19% to its total revenues.

GROWTH PROSPECTS:

Going forward, the company would concentrate on three things — exploiting the market synergy between its existing bouquet of channels and regional channels, minimising operating costs, and extending and deepening its international presence. In December '09 quarter, it cut its programming and operating costs by 14% on a year-on-year basis. It also reduced its employee costs by 3% in December '09 on a year-on-year basis. It also forayed into new markets such as Russia, Indonesia, Malaysia, and Saudi Arabia.

VALUATIONS :

Valuation at its current stock price, stock is trading at a price to earnings multiple of around 29x on consolidated basis. This is comparable to its peer Sun TV Network, which is trading at a P/E of 32.7x. With the addition of regional channels, revival in advertising situation and increasing global reach, the company would see increased flow of revenues in the coming quarters. Investors are advised to accumulate the stock at current level