Zee Entertainment: Hold

The medium-term prospects for Zee Entertainment (ZEEL) appear bright, as its flagship channel, Zee TV, closes in on Star Plus for the leadership status in broadcasting. Operating from a position of greater strength, ZEEL has recently hiked advertising rates, which will sustain the advertisement growth momentum over then next year. Continuing penetration of DTH (direct-to-home) and CAS (conditional access system) will increase domestic subscription revenues, which has till now been a small contributor to overall subscription revenues.

However, sustainability of this growth over a longer period is uncertain, as competition in the broadcasting space hots up. The current market price values the stock at about 36 times its likely 2007-08 consolidated per-share earnings, factoring in sustained momentum in advertising and subscription.

Given the high valuations, the stock may be vulnerable to downside in the event of a disappointing earnings performance. Shareholders can, therefore, retain the stock and wait for greater clarity to emerge on the impact of channel launches on market share and advertising revenues.

Closing the gap on Star

Over the past year, the company's flagship channel, Zee TV, has seen a steady rise in its viewership rating. According to recent data from audience-measurement agency TAM (week ending September 9), it has 29 programmes in the top 100 programme rankings, only slightly behind Star Plus at 34.

Ratings have been driven by the Sa Re Ga Ma Pa challenge, which has been consistently topping the programme charts for the last couple of weeks. It has a 36 per cent market share in the prime time slot and is only 23 gross rating points behind Star Plus in the prime-time weekday slot.

ZEEL's other channels are also faring well. English entertainment channel, Zee Café, has overtaken Star World in recent ratings. Zee Cinema, which has been the No.1 Hindi movie channel, has managed to take on competition from Max, which has been gaining strength on the back of its cricket telecasting rights.

The continuing improvement in performance has helped ZEEL initiate two rounds of ad rate hikes in 2007. Advertising revenues grew close to 40 per cent in the first quarter. The share of advertising in overall revenues, now at 55 per cent, could further increase on the back of recent hikes.

Operating margins have also improved from 23 per cent to 31 per cent during the quarter. If Zee TV manages to overtake Star Plus and sustain its top slot , it might be able to command significantly higher ad rates than its competitors, new entrants included.

Competition hots up

Even as it aims for the No.1 slot in channel share ZEEL might lose some of its well-earned market share to new entrants in the general entertainment category. The competition is formidable with Viacom18, NDTV and INX Media lining up their entertainment channels for launch over the next couple of quarters.

The share of general entertainment in the overall television advertising pie is also reducing, which adds to the concern. Although ZEEL targets a larger audience through its movie and sports properties, much of its current strengths are supported by Zee TV's performance.

Preparing for fresh onslaught

Admittedly, ZEEL is on a much stronger footing now to tackle competition. This is evident from the fact that Zee TV was able to increase viewership amidst intense competition from Star Plus and Sony Entertainment. Both channels have tried to wean away Zee TV's viewers through Star Voice of India and Indian Idol respectively, but have not succeeded in displacing SaReGaMaPa from the top slot.

Secondly, the success formula for general entertainment channels continues to be driven by family soaps. This may limit the potential for the new entrants to significantly differentiate themselves from the incumbents.

However, establishing leadership may come at a price, with higher content and marketing costs. Also, even if ZEEL manages to capture and retain its leadership position in the general entertainment category, there is the risk of migration of some of the advertisement spending to youth and lifestyle channels as these genres have a more specific target audience. ZEEL's response to this has been its plans to launch Zee Next, a channel targeted at a younger audience. But breaking from the clutter of channels now aiming at this space will be a challenge

Other initiatives

ZEEL does not have any significant investment plans. Except for Zee Next and the proposed new channel launch of Zee Arabic Hindi movie channel for the West Asian market, ZEEL has not lined up any other launches. This will limit the pressure of operational costs from new channel launches on its profitability.

The management expects its sports business to turn profitable by the end of the year. The promoters have floated the Indian Cricket League as a parallel to BCCI-controlled league. It expects to start a twenty20 tournament in the next quarter, which will be telecast on Zee Sports. While the idea of an alternative league has evinced interest from some advertisers, the stiff opposition from BCCI's Indian Premier League could pose challenges to ICL. ZEEL may have to continue to rely strongly on recently acquired Ten Sports to generate advertising revenues in the near-term.

Aside from competitive pressures, the risk to ZEEL's earnings includes delays in extension of CAS, which could limit growth from subscription revenues. There could also be some re-negotiation on channel pricing with DTH operators, effective December, as new regulations allow operators to pick channels on a-la-carte basis. An inability to market the entire bouquet to DTH operators could limit the upside from subscriber additions.