>ZEE NEWS (ICICI SECURITIES)

Ramp up continues

Zee News (ZNL) registered healthy Q1FY10 results, with ad revenues growing a moderate 22.7% YoY to Rs1,091mn and subscription revenues growing 25.2% YoY, albeit but declining 7.2% QoQ on account of seasonality. The positive impact of elections on ad revenues was negated by the general slowdown. Cost rationalisation paid off, with 310bps QoQ increase in EBITDA margin to 18%. PAT of Rs119.2mn was impacted by higher-than-expected finance costs of Rs77mn (ISec:
Rs58mn) on account of debt increasing to Rs2.25bn from Rs2bn at end- Q4FY09. While ZNL’s channels continue to gain GRP shares in most markets and costs in the new business segment remain under control, the increasing debt & high interest costs pose a risk to ZNL’s valuations. Increase in competition in Bengal and poor performance of Zee Tamizh is also a drag. We maintain BUY on ZNL, with target price of Rs45/share based on FY10E EV/sales of 2x.

■ Ad slowdown negated positive impact of elections; Pay TV revenues down QoQ on seasonality. Ad revenues grew 22.7% YoY to Rs1,091mn, with the positive impact of election-related ad spends negated by the ad slowdown. Subscription revenues grew 25.2% YoY, but were down 7.2% QoQ owing to seasonality, with DTH revenues growing 52% YoY to Rs100mn. Existing business segment revenues declined 3.4% QoQ, while new business segment revenues increased 5.8% QoQ.

■ EBITDA margin improved 310bps QoQ to 18% driven by 14% QoQ decline in programming costs and the shutdown of Zee Gujarati channel. SG&A costs increased 11.4% QoQ on higher carriage fees owing to addition of two new channels – Zee 24 Ghantalu and Zee UP News. New channels losses remained flat QoQ at Rs169mn, while existing business EBITDA margin increased 580bps to 41.9%.

■ PAT impacted by high interest charges. In spite of higher-than-expected EBIT, ZNL reported PAT of Rs119.2mn compared with I-Sec estimates of Rs123.4mn, mostly due to higher-than-expected finance costs of Rs77mn (I-Sec:Rs58mn). Debton -books at end-Q1FY10 stood at Rs2.25bn, up from Rs2bn at end-Q4FY09. Cash outflow for the quarter included Rs200mn in gross block, Rs300mn in Movies acquisition and Rs150mn in working capital.

■ Maintain BUY on ZNL, with target price of Rs45/share based on FY10E EV/sales of 2x. The stock currently trades at FY10E P/E of 17x and EV/EBITDA of 8.3x.

To see full report: ZEE NEWS