>Zee Entertainment (DEUTSCHE BANK)

Improving GRPs, weak ad scenario

Weak ad scenario, strong DTH revenues
A relatively weaker advertising environment has nullified the 35% sequential growth in DTH revenues and led to a 19% YoY decline in Zee's Q4 earnings. We expect a weaker Q1 FY10 due to a strong base in Q1 FY09, and thus we cut our FY10 earnings estimates by 12%. However, this comes at a time when GRPs (the key driver for higher ad rates) have improved in a consolidating GEC scenario and DTH revenues remain strong. Thus we recommend Buy with a new TP of INR 160.

New programming drives operational metrics
Zee’s GRPs have remained solid: The flagship channel improved its average GRPs to 208 for the quarter against 201 GRPs in Q3 FY09 (the latest GRPs stand at 235 with an improvement across time bands which should be reflected from the September quarter onwards). New prime time programming has been the key driver of relatively strong ratings.

Competitive landscape has eased, consolidation of GRPs
Competition has eased among the general entertainment channels (GEC), with Sony, NDTV Imagine and 9X continuing to struggle. Although Star Plus has lost momentum over the past two weeks, we believe it will recover as it strengthens its weekend slots. Overall, the top three networks achieved more than 800 GRPs, i.e. 85% of the GRPs of the mainline GECs.

Revising our target price to INR 160 (from INR 175)
Our new, DCF-derived target price of INR 160 is based on 12.7% cost of equity, 11% earnings growth FY9-11E and 4% terminal growth. We believe our earnings growth estimates are conservative, factoring in a drop in Zee’s relative market share and the uncertain ad environment. At the current price, Zee trades at 13.8x FY10E earnings. Key risk includes a significant drop in weekly GRPs. See valuation and risk details on pages 6-8.

To see full report: ZEE ENTERTAINMENT