1. Lilladher
Prabhudas Zee Entertainment Enterprises
CMP: Rs280 TP: Rs330 Rating: BUY MCap: Rs269.1bn
Paradigm shift in business model from cyclicality to annuity: Broadcasting
industry is likely to witness a paradigm shift in its business model. With the
implementation of digitization, subscription revenues will increase, while the
reliance of broadcasters on advertising will come down. Subscription revenues
for the industry are likely to increase at a CAGR of 26% from Rs69bn in CY13
to Rs220bn in CY18E. We expect Zee’s domestic subscription revenues to
increase at a CAGR of 17.7% over FY14-16E.
Digitization - Soon to become a reality: Though implementation of
digitization has encountered several hurdles leading to a considerable delay,
we believe, digitization is bound to happen sooner than later. With TRAI
upping the ante lately, gross billing has finally kicked off in Phase-I. In Phase-II,
~80-90% of seeding of set top boxes has been completed and Customer
Acquisition Form (CAF) is being collected. We assume gross billing to pick up
in H2FY15E. Delay in implementation of digitization is one of the reasons why
stock has underperformed over the last 12 months. However, strong
subscription trajectory and cash flows should result in a strong performance,
going forward.
Earnings likely to compound at a CAGR of 16%; RoE/RoCEs to inch up by
50bps/120bps by FY16E: With strong advertising growth and implementation
of digitization, we expect Zee’s top-line to increase at a CAGR of 14% over
FY14-16E. EBITDA margins are likely to increase by 180bps to 29.0% by FY16E.
PAT is likely to increase at a CAGR of 16% over FY14-16E, with EPS likely to be
Rs12.5 in FY16E. Consequently, Zee’s RoEs/ROCEs are likely to increase to
21.1%/27.6% by FY16E.
Strong FCFF generation to further strengthen b/s: Going forward, improved
profitability, coupled with limited capex, is likely to translate into strong FCFF
generation for Zee. We expect Zee to generate FCFF of Rs10.5bn/9.5bn in
FY15E/16E, translating into cumulative FCFF of Rs20bn. Debt-free status,
coupled with robust FCFF generation, would further strengthen B/S and
enable it to invest in niche content during the post-digitization era. With
strong earnings growth, debt-free b/s, limited capex, robust FCFF generation,
improvement in return ratios, we believe Zee would continue to trade at
premium valuations.
8/18/2014 47
Key Financials (Rs m)
Y/e March FY12 FY13 FY14 FY15E FY16E
Revenue (Rs m) 30,405 36,996 44,217 49,560 57,505
Growth (%) 1.1 21.7 19.5 12.1 16.0
EBITDA (Rs m) 7,395 9,543 12,043 13,421 16,685
PAT (Rs m) 5,891 7,196 8,921 9,727 12,018
EPS (Rs) 6.1 7.5 9.3 10.1 12.5
Growth (%) (2.7) 22.8 23.1 9.1 23.6
Net DPS (Rs) 1.5 2.0 2.0 2.4 2.7
Source: Company Data, PL Research
Profitability & valuation
Y/e March FY12 FY13 FY14 FY15E FY16E
EBITDA margin (%) 24.3 25.8 27.2 27.1 29.0
RoE (%) 18.0 19.6 20.6 19.3 21.1
RoCE (%) 21.6 24.9 26.4 24.8 27.6
EV / sales (x) 8.7 7.1 6.0 5.2 4.4
EV / EBITDA (x) 35.9 27.5 21.9 19.2 15.2
PER (x) 45.6 37.2 30.2 27.7 22.4
P / BV (x) 7.8 6.8 5.7 5.1 4.4
Net dividend yield (%) 0.5 0.7 0.7 0.9 1.0
Source: Company Data, PL Research
Stock Performance
(%) 1M 6M 12M
Absolute (4.9) 5.1 12.7
Relative to Sensex (9.5) (24.5) (23.6)

2. Lilladher
Prabhudas Financials
Zee Entertainment Enterprises
8/18/2014 48
Income Statement (Rs m)
Y/e March FY12 FY13 FY14 FY15E FY16E
Net Revenue 30,405 36,996 44,217 49,560 57,505
Direct Expenses 14,311 17,401 20,688 23,303 26,501
% of Net Sales 47.1 47.0 46.8 47.0 46.1
Employee Cost 2,925 3,491 3,905 4,361 5,060
% of Net Sales 9.6 9.4 8.8 8.8 8.8
SG&A Expenses - - - - -
% of Net Sales 0.0 0.0 0.0 0.0 0.0
Other Expenses 5,774 6,561 7,581 8,475 9,258
% of Net Sales 19.0 17.7 17.1 17.1 16.1
EBITDA 7,395 9,543 12,043 13,421 16,685
Margin (%) 24.3 25.8 27.2 27.1 29.0
Depreciation 323 399 501 760 731
PBIT 7,072 9,144 11,541 12,661 15,955
Interest Expenses 50 86 158 50 50
PBT 8,406 10,519 13,190 14,411 17,805
Total tax 2,500 3,337 4,291 4,683 5,786
Effective Tax rate (%) 29.7 31.7 32.5 32.5 32.5
PAT 5,891 7,196 8,921 9,727 12,018
Extraordinary Gain/(Loss) - - - - -
Adjusted PAT 5,891 7,196 8,921 9,727 12,018
Source: Company Data, PL Research
Balance Sheet (Rs m)
Y/e March FY12 FY13 FY14 FY15E FY16E
Share Capital 959 954 21,130 21,130 21,130
Reserves & Surplus 33,396 38,162 26,247 32,068 39,844
Shareholder's Fund 34,355 39,116 47,377 53,198 60,974
Preference Share Capital - - - - -
Total Debt 12 17 17 17 17
Other Liabilities(net) (32) 33 719 658 658
Deferred Tax Liability - - - - -
Total Liabilities 34,335 39,166 48,113 53,873 61,649
Gross Block 11,205 12,306 14,564 15,258 16,005
Less: Depreciation 2,006 2,400 2,901 3,662 4,393
Net Block 9,199 9,906 11,663 11,596 11,613
Capital Work in Progress 201 69 69 69 69
Cash & Cash Equivalent 11,597 13,562 14,295 20,911 26,107
Total Current Assets 25,105 32,051 39,638 46,560 54,968
Total Current Liabilities 8,820 11,393 12,204 13,599 15,248
Net Current Assets 16,285 20,658 27,435 32,961 39,720
Other Assets 337 288 298 298 298
Total Assets 34,335 39,166 48,115 53,875 61,650
Source: Company Data, PL Research

3. Lilladher
Prabhudas
Disclaimer
8/18/2014 70
BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months
Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months
Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month
Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly
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