�� We re-assess our estimates for Zee News following meetings with
management and media ad sales consultants. We have scaled back our ad
growth forecast but increased our near-term margin forecast. Maintain OP
rating with 36% potential upside from current levels.
�� Tough operating environment. Indian TV broadcasters have a gloomy ad
outlook as a sports heavy calendar coupled with an economic slowdown has
hurt ad growth prospects for other genres. We learnt from management that it
would be difficult for ad sales for the news genre to grow by double digits. We
are building in conservatism in our revenue forecasts and now estimate 7%
ad growth in FY12 (vs 15% earlier).
�� ZEEN – strong positioning in news genre. The flagship channel Zee News
has consistently maintained its No. 4 position over the last year. Management
sees no difficulty in this steady performance and believes that its power ratio
(ie, ad rev share/viewership share) is better than its peers.
�� Subscription revenue growth on track. The company gets 30% of its
subscription income from DTH platform. Flagship channel Zee News is one of
the two pay news channels in its category. This should help the company to
deliver 8% YoY growth in both FY12 and FY13.
�� Near-term margin performance has room to surprise. ZEEN reported 1Q
FY12 margin of 12% as revenues slumped. We learnt from management that
this was due largely to seasonality in the 1Q numbers. The same was not
evident in the 1Q FY10 and 1Q FY11 numbers due to the ad boost from the
elections. The company is confident of improved margin trajectory for the rest
of the year (Macq FY12 margins: 15%). We see upside risks to our margin
forecasts if the performance of new channel launches is better than expected.
Earnings and target price revision
�� We update our model for the 2011 annual report. We have reduced our YoY
ad growth estimate to 5% / 10% from 15% /12% earlier for FY12 and FY13
resp. Our revised EPS is Rs0.76/Rs0.96 due to changes mentioned above.
Our new target price is Rs17 (vs Rs18 earlier).
�� 12-month price target: Rs17.00 based on a DCF methodology.
�� Catalyst: Revival in advertising revenue growth
Action and recommendation
�� Retain OP, +ve FCF, attractive valuations and robust business model.
We like ZEEN for its strong track record amongst news broadcasters. The
company is FCF positive and we believe would not need fresh equity to fuel
its growth plans. The stock is trading at 13x FY13E PER, undervaluing our
estimated 25% earnings growth.