Stock recommendation: Zee Entertainment
Price target: Rs 280
CMP: Rs 235
For Q3FY2013 Zee Entertainment Enterprises Ltd (ZEEL) has reported consolidated revenues of Rs938.8 crore, which is marginally ahead of our estimate of Rs919.7 crore and shows a growth of 24.4% year on year (YoY). Its advertisement revenues were up by 28.8% YoY and down 3.5% quarter on quarter (QoQ) to Rs509.4 crore whereas its subscription revenues rose by 25.6% YoY and by 3.7% QoQ to Rs409.8 crore during the quarter. The revenues from the other sales and services fell by 40.7% YoY and 35.4% QoQ to Rs 19.7 crore.
The EBITDA margin for the quarter surprised positively, with an improvement of around 500 basis points QoQ and a marginal decline of 60 basis points YoY to 27.8% (which is better than of our expectation of 25%). On a sequential basis, the margin improvement was largely driven by a drop of 12.6% QoQ in the programming and content cost. Part of the margin improvement was also driven by lower losses in the sports business--Rs8.6 crore in Q3FY2013 as compared with Rs10 crore in Q3FY2012 and Rs17 crore in Q2FY2013. Ex sports business the margin for the quarter stood at 32.5% as compared with 30.4% in Q2FY2013 and 34% in Q3FY2012.
ZEEL’s performance for the quarter was ahead of our estimates and its operating profit margin (OPM) surprised us positively. The management commentary indicates the advertisement market has improved in the recent months and it is hopeful that the same would improve further. On the other hand, the positive impact of the compulsory digitisation policy would start reflecting in the performance in the coming years. Further, a decline in the losses of the sports business and a gradual improvement in the performance of the new initiatives would drive the margin improvement. At the current market price of Rs236, the stock trades at 26x and 21x FY2014E and FY2015E earnings. We have broadly maintained our earnings estimates for the company and rolled over our target multiple to the FY2015 estimate. Consequently, we have increased our price target to Rs280 and maintain our BUY rating on the stock.
Source: Sharekhan Fundamental Research
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