Zee Entertainment: Watch out for clarity - Hold

The stock of Zee Entertainment (Zee), a leading broadcaster, has gained 25 per cent since our hold call in January. A strong performance in 2015-16 and the first half of the current fiscal has buoyed the stock.

Now, the stock is pricey. At ₹484, it trades at 46 times its estimated 2016-17 earnings, much higher than its five-year historical average valuation of 34 times. Investors can, therefore avoid taking fresh exposure but can continue holding the stock.

That apart, investors can wait for clarity on the impact of TRAI’s yet-to-be finalised interconnection regulations on TV broadcasters. The draft regulations were released in October and are open to comments until November 15.

With its dominant presence in the Hindi and regional general entertainment space, which account for a lion’s share of the TV viewership base, Zee is well-placed to garner a good share of ad spends. Revenue from advertisements, which accounts for around 60 per cent of Zee’s income, has shown healthy double-digit growth in the past few years.

For the half-year ended September 2016 too, the company managed to grow ad revenue at over 17 per cent (year-on-year) despite the cut-back from the FMCG sector, the single biggest ad spender. The company’s strengthening regional market presence, despite the fall in the TRP ratings of Zee TV — the company’s flagship channel — seems to have helped.

In the coming quarters too, FMCG and e-commerce sector ad spends are expected to moderate. Rising competition in telecom is, however, likely to buoy ad spend. Zee also expects some tax savings for companies on account of GST to find their way into higher ad spends. Besides, the company’s plans to raise the programming hours of Zee TV and &TV — its new Hindi entertainment channel — too can help rake in higher ad revenue.

Over the years, Zee has managed to grow its subscription revenue too at a healthy pace. For the half-year ended September 2016, it posted 18 per cent growth in revenue from this segment but it does not expect the second half to be this good.

In the long run though, the company stands to gain from the implementation of Phase III and IV of digitisation. The benefits should flow in the form of a larger subscriber base and higher yields with better channel packaging.

Zee’s exit from its loss-making sports business (TEN Sports channels) too will hold it in good stead. The company entered into an agreement with Sony Pictures Networks in August to sell its sports business for $385 million. It expects to close the transaction by this fiscal end.

For the half-year ended September 2016, Zee posted revenue of ₹3,267 crore, up 21 per cent from the year-ago period. This helped the company grow its operating profit 40 per cent (Y-o-Y) to ₹942 crore and net profit 24 per cent to ₹455 crore.

It upped its operating profit margin to 29 per cent (from 25 per cent in the year-ago period) and maintained its net profit margin at 14 per cent.

The recent TRAI draft regulations for TV broadcasters have however, brought in some uncertainty for TV industry players. The regulations propose to change , among other things, the revenue shares of TV broadcasters and distributors (cable TV operators and DTH players).

For instance, the draft regulations forbid existent arrangements such as fixed-fee deals, where the broadcasters are paid a lumpsum by the distributors irrespective of the subscribers garnered by the latter.

On the other hand, the proposal that no carriage fee be paid by a broadcaster if a particular channel subscription is at least 20 per cent of the subscriber base, works in favour of big broadcasters.

But until the regulations are finalised, their impact on broadcasters will not be known.