Zee News BUY. Performance Highlights. 3QFY2010 Result Update I Media

Transcription

1 3QFY2010 Result Update I Media January 27, 2010 Zee News Performance Highlights BUY CMP Target Price Rs59 Rs68 Zee News (ZNL) posted a strong set of numbers, with Top-line growth of 19.3% yoy and Earnings growth of 26.6% yoy during the quarter. Advertising revenues grew by 25.6% yoy and Subscription revenues grew by 18.8% yoy. After the strong 3QFY2010 results, we have marginally tweaked our revenue estimates upward for ZNL, factoring in higher Advertising revenues. In terms of Earnings, we have revised our estimates upward in the range of 2-4%, factoring in lower Programming costs and lower losses from Zee Tamizh (with the channel getting converted into a news channel). We believe that the current restructuring move will help ZNL unlock tremendous value for its shareholders. Hence, we upgrade the stock to Buy. Stellar Earnings performance despite muted Top-line: Zee News (ZNL) reported a Top-line growth of 19.3% yoy to Rs170.6cr (Rs143cr) on a consolidated basis, driven by a 25.6% yoy (9.5% qoq) growth in Advertising revenues to Rs140cr (Rs111.7cr) and a 18.8% yoy growth (1.7% qoq) in Subscription revenues to Rs28.1cr (Rs23.6cr). The existing business posted a muted growth of 5.9% yoy (partially impacted by a high base), while the new business posted a strong growth of 62.6% yoy. At the Operating front, the company delivered a mere 41bp expansion in Margins, driving a modest 21.7% yoy growth in EBITDA to Rs36.4cr (Rs29.9cr). The margin in the existing businesses contracted sharply by 460bp to 32%, and losses in new businesses reduced to Rs3cr (Rs9.8cr), owing to traction in Zee Tamizh. Earnings grew at 26.6% yoy to Rs19.1cr (Rs15.1cr), despite a 22.6% drop in Other Income to Rs4.7cr (Rs6.1cr), largely driven by a strong Top-line growth and a 500bp drop in the Tax rate. Outlook and Valuation: We rate ZNL as a proxy play for Zee Entertainment and value the stock on an SOTP basis: 1) Rs58 per share value for its Regional GECs business (based on the CMP of Zee Ent.), in accordance with 50.5mn shares to be issued by Zee Ent. under the share swap, and 2) Rs10 per share value for its Residual business, based on 1.5x EV/Sales multiple to FY2010E Sales of Rs213cr, reduced for Rs80cr debt. Hence, we upgrade the stock to Buy, with a revised Target Price of Rs68 (Rs56). However, the residual business will attract significantly lower valuations, owing to the lack of growth drivers (post restructuring) and lower profitability. Hence, in the long term, we believe that this move would be negative for ZNL shareholders. Investment Period 15 Months Stock Info Sector Media Market Cap (Rs cr) 1,423 Beta WK High / Low 66/28 Avg. Daily Volume 201,121 Face Value (Rs) 1 BSE Sensex 16,290 Nifty 4,853 Reuters Code ZEEN.BO Bloomberg Code Shareholding Pattern (%) Promoters 54.1 MF/Banks/Indian FIs 30.2 FII/NRIs/OCBs 7.5 Indian Public 8.2 Abs. (%) 3m 1yr 3yr Sensex (0.4) Zee News Key Financials Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Sales % chg Net Profit % chg OPM (%) EPS (Rs) P/E (x) P/BV (x) RoE (%) RoCE (%) EV/Sales (x) EV/EBITDA (x) Anand Shah Tel: Ext: anand.shah@angeltrade.com Chitrangda Kapur Tel: Ext: chitrangda.kapur@angeltrade.com Please refer to important disclosures at the end of this report Sebi Registration No: INB

2 Exhibit 1: Financial Performance Update Y/E March (Rs cr) 3QFY10 3QFY09 % chg 9MFY10 9MFY09 % chg Net Sales Programming Cost (% of Sales) Staff Cost (% of Sales) Administrative Cost (% of Sales) Selling and Other Cost (% of Sales) Total Expenditure Operating Profit OPM (%) Interest (13.8) Depreciation Other Income (22.6) PBT (excl Ext. Items) Ext Income/(Expenses) PBT (incl. Ext Items) (% of Sales) Prov. for Taxation (% of PBT) Minority Interest 0.9 (0.2) 1.3 (0.3) Reported PAT PATM (%) Equity Shares (cr) EPS (Rs) Strong advertising revenue boosts Top-line Zee News (ZNL) reported a Top-line growth of 19.3% yoy to Rs170.6cr (Rs143.0cr) on a consolidated basis, driven by a 25.6% yoy (9.5% qoq) growth in Advertising revenues to Rs140cr (Rs111.7cr) and a 18.8% yoy growth (1.7% qoq) in Subscription revenues to Rs28.1cr (Rs23.6cr). Subscription revenues from DTH grew by 52% yoy. The advertising revenues continued to register a robust growth this quarter, aided by the economic recovery, festive spends and improved traction in new businesses. The existing business posted a muted growth of 5.9% yoy (partially impacted by a high base), while the new business posted a strong growth of 62.6% yoy. Robust Earnings growth, largely Top-line driven ZNL posted a robust Earnings growth of 26.6% yoy to Rs19.1cr (Rs15.1cr), despite a 22.6% drop in Other Income to Rs4.7cr (Rs6.1cr), largely driven by the strong Topline growth and a 500bp drop in Tax rate. January 27,

3 Higher Staff and administrative costs limit Margin expansion At the Operating front, the company delivered a mere 41bp expansion in Margins, driving a modest 21.7% yoy growth in EBITDA to Rs36.4cr (Rs29.9cr). Savings from a 220bp drop in Programming costs and a 327bp reduction in Selling costs were negated due to an 183bp rise in Staff costs and a 324bp rise in Administrative costs. The margin in the existing businesses contracted sharply by 460bp to 32%, and losses in new businesses reduced to Rs3cr (Rs9.8cr), owing to traction in Zee Tamizh. Zee News to unlock value via restructuring of regional GECs Zee News (ZNL) recently approved a decision to divest its six regional GECs (Zee Marathi, Zee Bangla, Zee Talkies, Zee Telugu, Zee Kannada and Zee Cinemalu) to Zee Entertainment (ZEEL), in lieu of shares of ZEEL through a share swap. The proposed de-merger would be funded by the issuance of new shares by ZEEL to shareholders of ZNL, and the share swap ratio has been proposed at 4 equity shares of ZEEL for 19 equity shares held in ZNL, as a consideration for the de-merger of the R-GEC business undertaking. Based on the share swap ratio, ZEEL will issue 50.48mn new shares to ZNL shareholders (10.4% dilution on post-diluted equity base), increasing its effective paid-up capital from Rs43.4cr to Rs48.4cr (FV of Re1). Regional GECs Cash cow of ZNL During FY2009, the regional entertainment business had a turnover of Rs340.3cr, an EBITDA of Rs79.7cr and capital employed of Rs231.9cr. Hence, based on the financials, the regional bouquet accounted for 65% of the consolidated revenues and almost 95% of the EBITDA in FY2009. We expect Regional GECs to close FY2010E with a turnover of Rs435cr and an EBITDA of Rs135cr. Exhibit 2: Financials for Regional GECs and Residual Business (Rs cr) FY09 FY10E Consolidated Entity Revenues EBITDA OPM (%) Regional GECs Revenues % of Total EBITDA % of Total OPM (%) Residual Business Revenues % of Total EBITDA 3.9 (10.9) % of Total 4.1 (10.0) OPM (%) 2.1 (5.1) January 27,

4 Residual Business Lower profitability due to losses in new initiatives Post restructuring, ZNL will be left with mainly a news portfolio (Zee News, Zee Business, Zee 24 Taas, Zee 24 Ghanta, Zee 24 Ghantalu, Zee News UP) and two entertainment channels (Zee Punjabi and Zee Tamizh). The residual has lower profitability, partially due to losses in Zee Tamizh (Tamil GEC) and losses from two newly launched news channels Zee News UP and Zee 24 Ghantalu (Telugu News). After restructuring, the ZNL management has indicated the conversion of Zee Tamizh into a news channel, which should significantly reduce the losses in the residual business. Going ahead, ZNL will have to build multiple growth levers in the residual business. We reiterate possible entries into the English News space and expansion into city-centric channels. ZNL could also explore its franchise model further. Outlook and Valuation After the strong 3QFY2010 results, we have marginally tweaked our Revenue estimates upwards for ZNL, factoring in higher advertising revenues. We continue to remain bullish on ZNL s regional portfolio, which is exhibiting strong growth. In terms of Earnings, we have revised our estimates in the range of 2-4%, factoring in lower programming costs and lower losses from Zee Tamizh (with the channel getting converted into a news channel). We believe that the current restructuring move will help ZNL unlock tremendous value for its shareholders. ZNL s valuations have been suppressed due to higher losses in its new initiatives (Zee Tamizh, Zee News UP and Zee 24 Ghantalu) and high debt on its books. Moreover, the transfer of debt from ZNL s books to ZEEL, and the conversion of Zee Tamizh into a news channel will boost ZNL s residual business earnings. We rate ZNL as a proxy play for Zee Entertainment and value the stock on an SOTP basis: 1) Rs58 per share value for its Regional GECs business (based on the CMP of Zee Ent.), in accordance with 50.5mn shares to be issued by Zee Ent. under the share swap, and 2) Rs10 per share value for its Residual business, based on 1.5x EV/Sales multiple to FY2010E Sales of Rs213cr, reduced for Rs80cr debt. Hence, we upgrade the stock to Buy, with a revised Target Price of Rs68 (Rs56). However, the residual business will attract significantly lower valuations, owing to the lack of growth drivers (post restructuring) and lower profitability. Hence, in the long term, we believe that this move would be negative for ZNL shareholders. January 27,

5 Research Team Tel: Website: DISCLAIMER This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whose possession this document may come are required to observe these restrictions. Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein. The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and risks of such an investment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. Certain transactions - futures, options and other derivatives as well as non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technical analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company's fundamentals. We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Angel Securities, its subsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or other reasons that may prevent Angel Securities and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Angel Securities Limited and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. Angel Securities Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past. Note: Please refer important `Stock Holding Disclosure' report on Angel web-site (Research Section). Disclosure of Interest Statement ZNL 1. Analyst ownership of the stock No 2. Angel and its Group companies ownership of the stock No 3. Angel and its Group companies Directors ownership of the stock No 4. Broking relationship with company covered No Note: We have not considered any Exposure below Rs 5 lakh for Angel, its Group companies and Directors. Address: Acme Plaza, A Wing, 3rd Floor, M.V. Road, Opp. Sangam Cinema, Andheri (E), Mumbai Tel : (022) / Angel Broking Ltd: BSE Sebi Regn No : INB / CDSL Regn No: IN - DP - CDSL / PMS Regn Code: PM/INP Angel Securities Ltd:BSE: INB /INF NSE: INB /INF Membership numbers: BSE 028/NSE:09946 Angel Capital & Debt Market Ltd: INB / NSE FNO: INF / NSE Member code Angel Commodities Broking (P) Ltd: MCX Member ID: / FMC Regn No: MCX / TCM / CORP / 0037 NCDEX : Member ID / FMC Regn No: NCDEX / TCM / CORP / 0302 January 27,