>ZEE ENTERTAINMENT ENTERPRISE LIMITED (MORGAN STANLEY)

Conclusion: We are upgrading ZEEL from EW to OW as we believe ZEEL’s earnings improvement shall beat street expectations in the medium to long term. Our revised price target, based on a DCF model, of Rs246 implies potential upside of 20% from current levels. At
our price target, the stock would trade at a P/E of 19.4x on our F2011E EPS with estimated EPS CAGR of 23% over F2009-11. This compares well with target Sensex P/E and EPS CAGR for the corresponding period of 15.3x and 14.9%, respectively, based on our India strategist’s top-down expectations.

What drives our upgrade: Our view now is that: 1) high inventory utilization of ad slots is sustainable; 2) ad rates will start increasing in 3-6 months, 3) ZEEL’s flexibility in cost management will be beneficial; and 4) high-quality revenue streams will grow in prominence for ZEEL.

Earnings drivers from here – Cost management over next two quarters, ad revenue in F2010E, digital subscriber revenue in F2011: By scaling down its films operation and cutting non-content-related expenses, ZEEL is likely to keep its costs under a tight control in the next six months. On ad revenue, however, we are forecasting an 8% YoY decline in F2010 (implying a 9% increase in F2H10) and 18% improvement in F2011, which may surprise the Street positively. In our view, F2011 will be marked by higher proportion (coming closer to a critical mass) of digital subscriber revenues, thus aiding margins.

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