ZEE ENTERTAINMENT ENTERPRISES LTD: BETTER PLACED AS CONTENT PROVIDER !!!

Scrip Code: 505537 / ZEEL

CMP:  Rs. 392.00; Market Cap: Rs. 37,649.58 Cr; 52 Week High/Low: Rs. 421.70 / Rs. 280.80.

Total Shares: 96,04,48,720 shares; Promoters : 41,36,70,212 shares –43.07 %; Total Public holding : 54,67,78,508 shares – 56.93 %; Book Value: Rs. 26.74; Face Value: Rs. 1.00; EPS: Rs. 8.53; Dividend: 225.00 %; P/E: 45.95 times; Ind. P/E: 43.16; EV/EBITDA: 25.25.

Total Debt: Rs. 2.20 Cr; Enterprise Value: Rs. 38,197.98 Cr.

ZEE ENTERTAINMENT ENTERPRISES LTD: Zee Entertainment Ltd was founded in the year 1982, based in Mumbai. Company was formerly known as Zee Telefilms Limited and changed its name to Zee Entertainment Enterprises Limited in January 2007. The Company came out with an IPO in 1993 offering 90,00,000 equity shares of Rs. 10 each for Rs. 20 per share raising Rs. 18.00 Cr. ZEEL announced split in its face value from Rs. 10 to Rs.1 on September 1999, later in September 2010 it announced bonus in ratio of 1:1 and on completion of 20 years of broadcasting business in May 2013, the Company announced the distribution of about Rs. 2,015 Crs by way of Bonus issue of 6 % Non-Convertible Redeemable Preference Shares of Face value of Re. 1 each. This bonus issue was in ratio of 21 non-convertible redeemable preference shares with tenure of eight years of Re. 1 each for every 1 Equity share of Re. 1 held in a company. The bonus issue was with one-fifth of the amount i.e. around Rs. 400 Cr redeemable from fourth year onwards in five equal instalments till eight year, this was issued on March 4, 2014. ZEEL, together with its subsidiaries, operates as a vertically integrated media and entertainment company in India. It operates in three segments: Broadcasting and Content, Education, and Film Production. The Broadcasting and Content segment develops, produces, and procures television programming and film content, and delivers through satellites, cable, and Internet. It broadcasts channels, such as Hindi general entertainment channels and regional language general entertainment channels, Bollywood channels, sports channels, English entertainment channels, alternate lifestyle channels. The company broadcasts Hindi entertainment channels - Zee TV, Zee Smile, and 9X; Hindi movies channels - Zee Cinema, Zee Premier, Zee Action, and Zee Classic; English entertainment, movies, and life style channels - Zee Studio, Zee Café, and Zee Trendz; and Sports channels - TEN Cricket, TEN Action, TEN Sports, and TEN Golf. It also broadcasts Regional language entertainment channels, including Zee Marathi, Zee Bangla, Zee Talkies, Zee Telegu, Zee Kannada, ETC Punjabi, and Zee Tamil; religious and alternate lifestyle channels comprising Zee Jagran and Zee Salaam; music channels, such as Zing and ETC Music; niche and special interest channels comprising Zee Khana Khazana; and HD channels, including Zee TV HD, Zee Cinema HD, Zee Studio HD, and TEN HD. Company earns revenues by the way of advertisement and subscription revenues and syndication. The Education segment engages in distribution of software learning products; and provides education and training in information technology. Zee Entertainment Enterprises Ltd has approximately 959 million viewers in 169 countries worldwide. The Film Production segment produces and distributes films. The company has a library housing approximately 2,10,678 hours of television content and about 3,500 hours of movie titles. Effective March 29, 2010, Zee News Ltd. demerged its Regional General Entertainment channel business undertaking and transferred its operation to Zee Entertainment Enterprises Limited. It has operations in India, the United States, Canada, Europe, Africa, the Middle East, Southeast Asia, Australia, and New Zealand. ZEEL can be locally be compared with Balaji Telefilms Ltd, New Delhi Television Ltd, Sri Adhikari Bros Tele Network, Sun TV Network Ltd, Network 18 Media & Investment Ltd and TV18 Broadcasts Limited, Raj Television Networks Ltd, and Globally with UTV Media PLC of UK, CBS Corporation of USA, British Sky Broadcasting Group of UK, Viacom Inc of USA, Comcast Corp of USA, Direct TV USA, Discovery Communications of USA, Dish Network of USA, Dreamworks Animations SKG of USA, Time Warner Cable Inc of USA, TV Tokyo Holdings Corporation of Japan, Chubu-Nippon Broadcasting Co., Ltd of Japan, Wowow Incorporated of Japan, Twenty First Century Fox of USA, Walt Disney company of USA, News Corp of USA, NBC Universal of USA.

Investment Rationale:

Zee Entertainment Enterprises Limited is one of India’s leading television, media and Entertainment Company. It is amongst the largest producers and aggregators of Hindi programming in the world, with extensive library housing over 2,10,678 hours of television content. ZEE has rights to more than 3,500 movie titles from foremost studios and of iconic film stars; Zee houses the world's largest Hindi film library. Through its strong presence worldwide, Zee entertains over 67 Cr+ viewers across 169 countries. The Zee stable owns an integrated range of businesses. All of these in singularity adhere to the content to consumer value chain model of media and entertainment business. Zee is a pioneer in every aspect of content aggregation and distribution through traditional media like satellite and cable and new media like the internet, in India. Zee Entertainment Enterprise is the first listed media company in India and first to launch a Hindi General Entertainment Channel as Zee TV. Zee Entertainment Enterprise is the first listed media company in India and first to launch a Hindi General Entertainment Channel as Zee TV, Hindi Cinema Channel as Zee Cinema, a 24 hour Hindi News Channel as Zee News, 24-hour Food Channel as Zee Khana Khazana, Urdu infotainment channel as Zee Salaam. The company recently launched HD Offering include Zee TV HD, Zee Cinema HD, Zee Studio HD and Ten HD. Zee Entertainment Enterprises Limited is one of the largest Indian programming content distributors with an estimated reach of more than 959 million viewers in over 169 countries including USA, Canada, Europe, Africa, the Middle East, South East Asia, Australia and New Zealand. The Indian Media and Entertainment Industry witnessed a moderate growth in 2014. The industry grew from Rs. 91,800 Cr in 2013 to Rs. 1,02,600 Cr in 2014, registering a growth rate of 12 %. Television sector grew from Rs. 41,700 Cr in 2013 to Rs. 47,500 Cr in 2014, registering a growth of 14 % as per the FICCI-KPMG Indian Media and Entertainment Industry Report 2015. The Total advertising spend across media was Rs. 41,400 Cr in 2014 contributing to 40 % of Media & Entertainment industry revenues. In light of the continued economic growth, advertising revenues saw a growth of 14 % in 2014. On account of improving monetization due to digitization, in 2014, subscription revenues grew at annualized growth rate 16 %. Last year 2014-2015 was another landmark year for the television industry in many ways. FY15 saw the formation of the viewership measurement system by Broadcast Audience Research Council (BARC). BARC is expected to deliver superior viewership data on account of more relevant classification parameters (NCCS instead of SEC), tracking of substantially higher viewership universe of about 15 Cr Households including rural households, as well as higher quality of data monitoring through audio watermarking of channel feeds. The Indian Media & Entertainment industry is making strides in the economy, backed by rising advertising revenues and consumer payments. 61 % of all households in India are now equipped with a television making us the second largest TV viewership market after China. With digitization, subscription revenues in urban and rural areas are growing, resulting in a healthy impact on the industry. The entertainment industry is dominated by the television segment with 45 % of the market share, which is expected to reach 50 % by 2018. The Government of India has supported this sector's growth by taking various initiatives such as digitising the cable distribution sector to attract greater institutional funding, increasing foreign direct investment (FDI) limit from 74 % to 100 % in cable and DTH satellite platforms, and granting industry status to the film industry for easy access to institutional finance. The Indian Media & Entertainment industry is on an impressive growth path. According to the CII-PwC study, the revenue from advertising is expected to grow at a CAGR of 13 % and will exceed US$ 9.64 billion in 2018 from Rs US$ 5.62 billion in 2013. Internet access has surpassed the print segment as the second-largest segment contributing to the overall pie of M&E sector revenues. Television and print are expected to remain the largest contributors to the advertising pie in 2018 as well. Internet advertising will emerge as the third-largest segment, with a share of about 16 % in the total M&E advertising pie. The film segment estimated at US$ 2.02 billion in 2015 is projected to grow steadily at a CAGR of 12 % on the back of higher domestic and overseas box-office collections as well as cable and satellite rights Digital advertising is expected to lead the CAGR with 27.7 %, followed by radio with 18.1 %. Gaming and television are expected to register a CAGR of 16.2 % each, followed by growth rates of animation and VFX (15.9 %), music (13.2 %), films (11.9 %) and OOH with 9.% expected CAGR. Within TV, subscription revenues are expected to be three times more than advertising revenues, by 2018. Growth in the regional reach of print and radio shall provide opportunities to further improve the advertisement revenue. In a bid to augment its regional presence, Zee acquired a 100 % equity stake in Sarthak Entertainment Pvt Ltd, an entity which owns and operates Sarthak, a leading Odia language general entertainment channel with a 25 % viewership share. The deal is said to have been all-cash valued at Rs. 115 crore. Zee had recently launched two new channels viz. Zee Zindagi last year and &TV in current year, which would escalate the programming and administrative expenses for the company. Though the ad inventory is expected to see a linear increase, the demand from advertisers and increase in ad yields from new channels would only happen gradually and could be margin accretive in the longer term. Zee is expected to post an EBITDA margin of about 23.2 % and 25.4 % in FY16E and FY17E, respectively. Zee Entertainment currently operates advertising inventory of about 30 hours that has peaked. The coming growth would only be price led. The company has benefited from improved rating and higher than industry advertisement growth of about 18.9 % over FY12-15 to Rs. 2,660 crore. Though the corporate earnings have remained weak, but it is believed that there would be a gradual revival in the ad growth scenario, which would benefit Zee. The recently launched GEC, &TV, is utilising 22 hours inventory while the Company intends to increase utilisation in the range of the flagship channel which is about 30 hour. With the complete impact of &TV and Zee Zindagi in the coming years, it could be expected that ZEE’s ad revenue to grow at 18.0 % CAGR in FY15-17E to Rs. 3703.8 crore. By CY15 end, India alone is expected to have 21.3 Cr mobile internet users. Global mobile connections are projected to increase to almost 9,500 Cr in CY19 from around 6,900 Cr in CY14 on account of rapid growth in mobile phones, tablets and other devices. ZEE is in sync with this process of change and is geared to offer its entertainment content through ‘NOW media’ i.e., through digital tools and OTT platforms, among others. It is also adopting cutting‐edge, advance formats like ‘high definition’ and ‘4K’. Ditto TV has 2 Cr plus users and nearly 50,000 hours of content, and is consistently growing. Essel Vision, the production arm, is a step in the content‐innovation direction. It creates proprietary and differentiated content across genres and formats including TV shows and feature films. ZEE Music Company is another one of the initiatives that seeks to close the loop in terms of genre offerings from ZEE. ZEE Music Company’s repertoire of projects comprises 36 Hindi movies, 15 Marathi movies, 2 Punjabi movies and 30 popular single numbers. Looking at the GDP recovery, improvement in market share of ZEE in regional and movies genres and new launches will aid ad revenue growth. Higher penetration of DTH and the digitisation process augur well for faster growth in subscription revenue over the long term. And with the rapid growth in mobile usage and internet connections and looking at the content hours and quality of ZEE, the company can retain its leadership in media space and command higher premium in valuations and is well poised to benefit from this favourable environment.

Outlook and Valuation:

Zee Entertainment Enterprises Ltd (ZEEL) is one of India’s leading television, media & entertainment companies. In a reflection of India's growing influence, domestic television channels are increasing their networks internationally. Zee Entertainment is a leading provider of entertainment content across genres in the Hindi, English & regional languages. With leading channels like Zee Marathi, Zee Bangla, Zee Telugu, Zee Kannada, Zee Tamizh and ETC Channel Punjabi within its fold, Zee Entertainment would now have an unparalleled reach across the country in the fast growing regional markets. Bollywood - The Indian Film industry is acclaimed as one of the largest film industries of the world. ZEE's Hindi movie channels, Zee Cinema, Zee Premier, Zee Action and Zee Classic maintain its objective in delivering the best of programming in the Hindi Movies Genre. During last couple of years, Digitisation activity has still remained in slow in light of the shift in the Phase III and IV digitisation deadline. In such a scenario, the revenue stream for GEC’s could get a fillip, going ahead, as and when the company shifts to RIO based deals and new channels are able to garner increasing market share. The company awaits the Supreme Court decision on the 27.5 % hike in the non-DAS areas before shifting towards the RIO related pricing. The company is striving hard to win additional India specific sports properties, which will augment subscription revenues. Zee’s mobile app Ditto TV is also gaining traction. Currently, it has 1.5 Cr subscribers of which a million are paid with an average realisation of Rs. 50 per month. It is expected to gain traction as the mobile internet continues to grow. ZEE reported a quarter of positive EBITDA from the sports business in the quarter, which was at about Rs. 1.5 crore. This is expected to reduce the yearly losses from the sports business. The sports business is lumpy in nature and varies as per the sports related properties in its kitty. The company has guided at sports losses of about Rs. 100 crore in the coming year. The number could vary depending on any additional sports property on its platform. However, going ahead, with digitisation benefits accruing, the monetisation may be easier while sports losses are expected to reduce. To strengthen its bouquet, Zee had already launched two new channels, Zindagi and &TV, for domestic viewers. With a view to further strengthening its global presence, it launched GEC, Zee Hiburan, in Indonesia, and Zee Nung, in Thailand, which is a 24/7 Bollywood movie channel. Zee World, English GEC with Indian content was launched in Africa. Zee TV launched Parwaaz, drama series that was entirely produced in UAE, which broke all viewership records in UAE among South Asians. On Financial side Zee’s cash flow from operations (CFO) increased 78 % yoy in FY15, despite muted EBITDA growth of 4 % yoy. This is primarily attributable to lower working capital, driven by stable inventory and continued improvement in receivable days. Its Revenue grew 23.4 % YoY was primarily aided by incremental ad revenues from newly launched channels and sports revenues that resulted in ad revenue growth of 25.4 % YoY to Rs. 779.9 crore. ZEE’s Subscription revenues came in at Rs. 462.5 crore. The other operating income came in at Rs. 97.4 crore, its EBITDA came in at Rs. 311.2 crore. The EBITDA was also aided by positive contribution of | 1.5 crore vs. loss expectations from the sports business. EBITDA margins came in at 23.2 % and its PAT came in at Rs. 243.8 crore due to higher operating leverage Zee Entertainment, one of the leading media conglomerates with a bouquet of 33 domestic channels, has a presence across genres ranging from general entertainment (GEC) to music, sports and regional. Zee TV, its flagship GEC, has a viewership share of 18.2 %, and has consistently remained among the top three GECs in the last two years. The company has benefited from improved rating and higher than industry advertisement growth of 18.9 % over FY12-15 to Rs. 2,660 crore. The company reported ad revenue growth of 25.4 % YoY aided by the incremental revenue flows from &TV and Zee Zindagi and improved performance of the overall portfolio. Improving ad outlook due to stable government, best play on digitisation, product innovations and net cash of Rs. 1,800 Cr are key positives in favour of ZEE. It is believed that irrespective of higher subscriber additions by DTH or cable operators, broadcasters like ZEE will be one of the safest and most attractive plays on the digitisation theme. Amongst listed players, the company is the best placed to benefit due to its huge brand and bouquet of 34 domestic excluding 9x channel closing next month and including Sarthak TV and 36 international channels. Also, it is underpinned by sturdy free cash flow, a secular growth story and stable dividend policy, ZEE is best placed to buy in media sector. At the current market price of Rs. 392.00, the stock is trading at 34.65 x FY16E and about 31.48 x FY17E. Company can post Earnings per share (EPS) of Rs. 11.31 for FY16E and of Rs. 12.45 for FY17E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALS	FY14	FY15	FY16E	FY17E
SALES (₹ Crs)	4,421.70	4,883.65	5,538.05	6,147.24
NET PROFIT (₹ Cr)	892.08	977.50	1,086.23	1,195.60
EPS (₹)	9.29	10.18	11.31	12.45
PE (x)	40.45	36.92	33.22	30.18
P/BV (x)	13.26	10.22	8.29	6.87
EV/EBITDA (x)	25.26	22.43	20.46	18.42
ROE (%)	32.71	27.63	24.80	22.68
ROCE (%)	52.72	43.85	38.51	35.00

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