PL India- Zee Entertainment Enterprises- ERr Group- Digitization Cash Generating Machine

Company Report Industry: Media Entertainment

Balwindar Singh ([email protected]) +91-22-66322239

Zee Entertainment Enterprises Digitization Cash generating machine

January 17, 2014 2

Zee Entertainment Enterprises

Prabhudas Lilladher Pvt. Ltd. and/or its associates (the 'Firm') does and/or seeks to do business with companies covered in its research reports. As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of the report. Investors should consider this report as only a single factor in making their investment decision.

Please refer to important disclosures and disclaimers at the end of the report

Contents Page No.

Investment Arguments ............................................................................................... 5

Digitization - Will completely alter the dynamics of broadcasting industry... ................................... 5

Broadcasting industrys subscription revenues to grow at a CAGR of 26.2% from CY12-17E ........... 7

Zees domestic subscription revenues likely to clock CAGR of 20.9% over FY13-16E ....................... 7

How will Zee benefit from digitization in different scenarios? ......................................................... 8

DTH revenue growth to remain strong ............................................................................................. 9

Carriage fees set to reduce with implementation of digitization ...................................................... 9

ARPU set to increase with digitization ............................................................................................ 10

Long gestation period & considerable investments remain key entry barriers .............................. 12

Digitization - How is it shaping up? ................................................................................................. 13

Regional broadcasting - Zee gaining increased traction .................................................................. 16

Sports Business - subscription revenues under digitization to reduce sports losses going forward17

DMCL acquisition A tax bonanza .................................................................................................. 20

Advertising - TV remains one of the fastest growing mediums ....................................................... 21

TV Ratings/Viewership share - Zee TV continues to strengthen its position ................................... 23

Business Background ................................................................................................ 24

Risks .......................................................................................................................... 25

Financials .................................................................................................................. 26

Valuations ................................................................................................................. 29

Annexure ................................................................................................................... 30


Company Report January 17, 2014

Rating BUY

Price Rs278

Target Price Rs330

Implied Upside 18.7%

Sensex 21,265

Nifty 6,319

(Prices as on January 16, 2014)

Trading data

Market Cap. (Rs bn) 265.2

Shares o/s (m) 954.0

3M Avg. Daily value (Rs m) 1147

Major shareholders

Promoters 43.08%

Foreign 47.25%

Domestic Inst. 4.05%

Public & Other 5.62%

Stock Performance

(%) 1M 6M 12M

Absolute (1.3) 15.8 24.8

Relative (4.3) 8.7 17.5

How we differ from Consensus

EPS (Rs) PL Cons. % Diff.

2015 11.2 10.8 3.7

2016 13.1 12.9 1.9

Price Performance (RIC: ZEE.BO, BB: Z IN)

Source: Bloomberg

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Digitization - Soon to become a reality: Though implementation of digitization

has encountered several hurdles leading to a considerable delay, we believe

digitization is bound to happen sooner than later. The intent of the Govt, along

with industrys willingness to push for digitization while forcing blackout of

analogue services, clearly demonstrates that the govt. is in no mood to

compromise and leave digitization midway. With TRAI upping the ante lately,

our channel checks suggests that gross billing has finally kicked off in the last

few days in Phase-I. In Phase-II, ~70-80% of seeding of set top boxes has been

completed and Customer Acquisition Form (CAF) is being collected. We assume

gross billing to commence from Q4FY14E in Phase-I and Q2FY15E in Phase-II.

Paradigm shift in business model from cyclicality to annuity: Broadcasting

industry, which was plagued by revenue leakage under the analogue system, is

likely to witness a paradigm shift in its business model. With the

implementation of digitization, subscription revenues will increase while the

reliance of broadcasters on advertising will come down. As per FICCI-KPMG,

subscription revenues for the broadcasting industry are likely to increase at a

CAGR of 26.2% over CY12-17E. Consequently, domestic broadcasting industrys

subscription revenues are likely to increase from Rs70bn in CY12 (36% of

broadcasting industry revenues) to Rs224bn (48% of broadcasting industry

revenues) in CY17E. On the contrary, contribution of advertising is likely to

reduce from 64% in CY12 to 52% of the broadcasting industry in CY17E.

Contd4

Key financials (Y/e March) 2013 2014E 2015E 2016E

Revenues (Rs m) 36,996 43,243 49,376 56,512

Growth (%) 21.7 16.9 14.2 14.5

EBITDA (Rs m) 9,543 11,334 14,093 16,851

PAT (Rs m) 7,196 8,554 10,648 12,542

EPS (Rs) 7.5 9.0 11.2 13.1

Growth (%) 22.8 18.9 24.5 17.8

Net DPS (Rs) 2.0 2.5 2.8 3.2

Profitability & Valuation 2013 2014E 2015E 2016E

EBITDA margin (%) 25.8 26.2 28.5 29.8

RoE (%) 19.6 20.4 22.2 22.8

RoCE (%) 24.9 26.1 28.5 29.8

EV / sales (x) 7.0 5.9 5.1 4.4

EV / EBITDA (x) 27.2 22.7 17.9 14.7

PE (x) 36.9 31.0 24.9 21.1

P / BV (x) 6.8 5.9 5.2 4.5

Net dividend yield (%) 0.7 0.9 1.0 1.2

Source: Company Data; PL Research


January 17, 2014 4

...will result in increase in Zees domestic subscription revenues by 20.9%

CAGR: We expect Zees domestic subscription revenues to increase at a CAGR of

20.9% over FY13-16E. Consequently, domestic subscription revenues, which

accounted for 31.5% of total revenues in FY13, are likely to increase to 36.4% of

total revenues by FY16E. Robust growth in subscription revenues are likely to

continue over the next few years driven by commencement of gross billing in

Phase- I & II and digitization in Phase-III & IV markets. In the longer term, ARPU

growth also remains a promising driver driven by multiple factors including

increasing number of niche channels for kids/sports, HD offerings, Movie on

Demand, etc.

Advertising revenues to benefit from revival in economy: Advertising revenues,

which are directly related to the state of economy, have demonstrated strong

resilience to downturn in the economy, driven by strengthening of Zees market

share and consolidation of advertising towards top three GECs. We expect these

initiatives to culminate into strong advertising growth for Zee reflected in 13.7%

CAGR during FY13-16E.

Earnings likely to compound at a CAGR of 20.3%; RoE/RoCEs to inch up by

320bps/500bps by FY16E: With strong advertising growth and implementation

of digitization, we expect Zees top-line to increase at a CAGR of 15.2% over

FY13-16E. EBITDA margins are likely to increase by 400bps to 29.8% by FY16E.

We expect margins to improve for Zee though a portion of it would have to be

ploughed back to strengthen content over the long term. PAT is likely to

increase at a CAGR of 20.3% over FY13-16E with EPS likely to be Rs13.1 in FY16E.

Consequently, Zees RoEs/ROCEs are likely to increase to 22.8%/29.8% by FY16E.

Strong FCFF generation to further strengthen balance sheet: Going forward,

improved profitability, coupled with limited capex, is likely to translate into

strong FCFF generation for Zee. We expect Zee to generate FCFF of

Rs6.2bn/8.7bn/10.6bn in FY14E/15E/16E, respectively, translating into

cumulative FCFF of Rs25bn. Debt-free status, coupled with robust FCFF

generation, would further strengthen Zees balance sheet and enable it to invest

in niche content during the post-digitization era.

Zee will continue to trade at premium valuations: We believe Zee would

continue to trade at premium valuations due to the inherent opportunity laid

forward for broadcasters by way of digitization. Broadcaster is the only entity to

be benefited in the entire value chain without incurring any additional cost for

digitization. With strong earnings growth, debt-free balance sheet, limited

capex, robust FCFF generation, improvement in return ratios Zee presents an

attractive investment opportunity. We value Zee at 29x FY15E earnings resulting

into target price of Rs330 and recommend BUY.


January 17, 2014 5

Investment Arguments

Digitization - Will completely alter the dynamics of broadcasting industry

The much-awaited digitization in the domestic broadcasting industry finally kicked

off in FY13. Transformation to the Digital Addressable System (DAS) for television

distribution has been the single largest development in the last decade in the cable

television industry. While digitization is widely being touted as a gamechanger for

the broadcasting industry, we highlight some of the key changes that digitization can

bring across.

Exhibit 1: Implications of digitization and what it means for industry

Implications What it means Who will benefit Who will lose

Transparency in subscriber declaration

Under the analogue regime, Local Cable Operators (LCOs) used to under-report the number of subscribers leading to revenue

leakage in the system

Digitization will benefit Multi System Operators (MSOs) and

Broadcasters

LCOs will lose as revenue leakage will be plugged

Carriage fees reduction In the analogue era, broadcasters used to pay huge sum to MSOs to carry their channels as

the bandwidth was limited

Broadcasters will benefit as even with the same amount of money they will be able to carry higher

number of channels

MSOs will lose

Increase in ARPU To be driven by higher number of channels, niche content, value-added services, pay-as-

per-requirement Broadcasters, MSOs, LCOs

Increase in newer/niche offerings Consumers will pay for what they want to see Consumers, Broadcasters

Source: PL Research

Under-reporting in analogue to be a past story

Analogue cable system was plagued with revenue leakage as under-reporting of the

total number of actual subscribers benefited only LCOs, while MSOs and

broadcasters lost out. Not only did LCOs report lower number of subscribers, they

also shared lower ARPUs with MSOs and broadcasters (this was also because of the

fact that 2nd and 3rd TV in a particular home were provided with cable access free of

charge). Hence, analogue cable system benefited only LCOs, while the other two

parties in the value chain lost out.

All this is set to change with the implementation of digitization as eventually every

television having cable access in the country will become paid. Digitization will bring

about transparency in the entire system as LCOs will be forced to report every

subscriber. Hence, subscription revenues for MSOs and broadcasters will get a boost

through the implementation of digitization. In the TV distribution value chain,

broadcaster is the only entity which will benefit from the roll-out of digitization

without shelling out any additional cost.

MSOs and broadcasters will benefit in post-

digitization era as LCOs will be forced to

report actual number of subscribers


January 17, 2014 6

Exhibit 2: How the revenue sharing mechanism will change post digitization?

Particulars Pre digitization Post 2016

ARPU of consumer 100% 100%

LCO 65-70% 35-50%

Distributor 5% 0-5%

MSO 15-20% 25-30%

Broadcaster 10-15% 30-35%

Source: FICCI-KPMG Report 2012, PL Research

Broadcasters business model to shift from cyclical to annuity

Internationally, subscription revenues are quite substantial (60-65% of broadcasters

revenues in the US) and form the primary source of revenues for broadcasters. On

the other hand, in India, their contribution is comparatively lower. Indian

broadcasters have traditionally been dependent on advertising as under-reporting of

total number of subscribers has impacted the subscription bouquet. With the

implementation of digitization, broadcasters business model is likely to shift from

cyclical to annuity-driven as subscription revenues are quite sticky in nature. This

transition will be a welcome one as the current volatility related to advertisement

would reduce and a steady stream of subscription revenues would emerge.

Exhibit 3: TV Industry - Subscription revenues set to zoom (Rs bn)

CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E CY16E CY17E

CAGR '07-'12

CAGR '12-'17

Subscription rev 140 158 169 194 214 245 281 345 427 518 607 11.8% 19.9%

% YoY 14.8% 12.9% 7.0% 14.8% 10.3% 14.5% 14.7% 22.8% 23.8% 21.3% 17.2%

% of TV revenues 66.4% 65.8% 65.8% 65.3% 64.8% 66.2% 66.9% 68.7% 70.3% 71.4% 71.7%

Advertisement rev 71 82 88 103 116 125 139 157 180 207 240 12.0% 13.9%

% YoY 16.4% 15.5% 7.3% 17.0% 12.6% 7.8% 11.2% 12.9% 14.6% 15.0% 15.9%

% of TV revenues 33.6% 34.2% 34.2% 34.7% 35.2% 33.8% 33.1% 31.3% 29.7% 28.6% 28.3%

Total Revenues 211 240 257 297 330 370 420 502 607 725 847 11.9% 18.0%

% YoY 15.3% 13.7% 7.1% 15.6% 11.1% 12.1% 13.5% 19.5% 20.9% 19.4% 16.8%


Subscription model is quite sticky in nature

and provides for steady stream of

revenues. Hence, growth in subscription

revenues will gradually reduce dependence

on advertising


January 17, 2014 7

Broadcasting industrys subscription revenues to grow at a CAGR of 26.2% from CY12-17E

With the implementation of digitization, we expect broadcasting industrys fortunes

to change dramatically over the next few years. We expect broadcasting industrys

subscription revenues to grow at a CAGR of 26.2% from CY12-17E.

Exhibit 4: Broadcasting industry revenues (Rs bn)

CY11 CY12 CY13E CY14E CY15E CY16E CY17E CAGR '12-'17

Subscription revenues 49 70 87 116 156 191 224 26.2%

% YoY 42.9% 24.3% 33.3% 34.5% 22.4% 17.3%

Contribution to broadcasting industry 29.9% 35.9% 38.5% 42.5% 46.4% 48.0% 48.3%

Advertisement revenues 115 125 139 157 180 207 240 13.9%

% YoY 8.7% 11.2% 12.9% 14.6% 15.0% 15.9%

Contribution to broadcasting industry 70.1% 64.1% 61.5% 57.5% 53.6% 52.0% 51.7%

Broadcasting Industry size 164 195 226 273 336 398 464 18.9%

% YoY 18.9% 15.9% 20.8% 23.1% 18.5% 16.6%

Source: FICCI-KPMG report 2013, PL Research

Zees domestic subscription revenues likely to clock CAGR of 20.9% over FY13-16E

We expect Zees domestic subscription revenues to increase at a CAGR of 20.9%

over FY13-16E. Domestic subscriptions revenues will be helped by:

Ongoing digitization implementation

Continued growth in DTH subscriber base

Better negotiating power through MediaPro joint venture

Increase in ARPU

Exhibit 5: Zees domestic subscription revenues

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

5,000

10,000

15,000

20,000

25,000

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

(Rs

m)

Domestic Subscription Revenues YoY gr. (RHS)

Source: Company Data, PL Research

Exhibit 6: Contribution of domestic subscription revenues to increase

23.9%

30.3%31.5%

32.7%34.4%

36.4%

20%

23%

26%

29%

32%

35%

38%

FY11 FY12 FY13 FY14E FY15E FY16E


Zee expects total subscription revenues to

increase to 50% of total revenues in the

next 4-5 years compared to 42% in FY13


January 17, 2014 8

How will Zee benefit from digitization in different scenarios?

Exhibit 7: Scenario Analysis

Post Phase I Post Phase II Post Phase III Post Phase IV

BEAR CASE

No. of subscribers - m 10 32 67 87

Penetration of Zee 50.0% 50.0% 50.0% 50.0%

Potential Zee subscribers - m 5 16 34 44

Zee's DTH ARPU - Rs/month 19 19 19 19

Zee's analogue ARPU - Rs/month 5 5 5 5

Incremental ARPU owing to digitization - Rs/month 14 14 14 14

Incremental Revenues - Rs m 840 2,688 5,628 7,308

Tax @33% 33.0% 33.0% 33.0% 33.0%

Incremental PAT owing to digitization 563 1,801 3,771 4,896

No. of shares 954 954 954 954

Incremental earnings/share - Rs 0.6 1.9 4.0 5.1

BASE CASE







Incremental Revenues - Rs m 1,008 3,226 6,754 8,770

Tax @33% 33.0% 33.0% 33.0% 33.0%


No. of shares 954 954 954 954


BULL CASE







Incremental Revenues - Rs m 1,176 3,763 7,879 10,231

Tax @33% 33.0% 33.0% 33.0% 33.0%


No. of shares 954 954 954 954




January 17, 2014 9

DTH revenue growth to remain strong

Increasing DTH penetration has been a major growth driver for Zees subscription

revenues over the last few years. Transparent declaration of number of subscribers,

along with higher ARPU, has led to DTH revenue growth remaining strong. Success of

DTH clearly shows that the Indian consumer is willing to pay for quality services even

if it comes at a slightly higher cost. Our channel checks suggest that DTH has been

able to capture only 15-20% of the opportunity in Phase-I & II. However, Phase-III &

IV are likely to see DTH witness higher seeding due to cable-dark areas and lack of

bigger MSOs in these regions. As per FICCI - KPMG, DTH subscribers in India are likely

to grow at a CAGR of 15.4% over CY12-17E.

Exhibit 8: DTH subscribers in India

0%

5%

10%

15%

20%

25%

30%

35%

5.0

15.0

25.0

35.0

45.0

55.0

65.0

75.0

85.0

95.0

CY10 CY11 CY12E CY13E CY14E CY15E CY16E CY17E

(Rs

m)

DTH subscribers in India YoY gr. (RHS)


Carriage fees set to reduce with implementation of digitization

Carriage fees has increased considerably over the last few years as limited

availability of bandwidth for analogue pushed broadcasters to shell out higher

amounts to MSOs to carry their channels. However, with the implementation of

digitization, we believe carriage fees will reduce as shift to digital removes the

bandwidth constraints and higher number of channels can now be carried. Further,

as subscription revenues increase for MSOs, it can lead to rationalization in carriage

fees by the MSOs as their reliance on carriage fee decreases.

Our recent channel checks point out that post the Phase-1 digitization, Mumbai and

Delhi have witnessed a 15-20% drop in carriage fees. In many cases where carriage

fee has not decreased, broadcasters are allowed to carry a larger number of

channels at same cost.

DTH performance has been below

expectations in Phase-I & II. However,

Phase-III & IV are likely to see DTH witness

higher seeding

In Phase-I cities, carriage fees has reduced

by 15-20%. In cases where absolute

carriage fees have not decreased,

broadcasters are allowed to carry more

number of channels resulting into lower

carriage fees/channel


January 17, 2014 10

ARPU set to increase with digitization

ARPUs in India have historically been lower during the regime of analogue cable due

to under-reporting by LCOs and also unfavourable sharing mechanism between

LCOs/MSOs and broadcasters. However, with the implementation of digitization,

ARPUs are bound to increase over the medium term gradually. Improvement in

ARPU would be driven by:

Mapping of subscribers to MSOs eliminating under-reporting by LCOs

Increase in offerings, value-added services like Movie on Demand, Pay/ view etc.

Increasing number of HD channels

Increasing content and launch of niche channels

Exhibit 9: ARPUs on a northward trajectory

Category CY12 CY13E CY14E CY15E CY16E CY17E

Cable 166 174 194 227 260 289

DTH 170 180 209 236 266 293


Currently, MSOs offer base packs at Rs170/month while premium packs are

being offered around Rs250/month. On the other hand, DTH base pack starts at

Rs200/month. Comparison of these packages clearly shows that MSOs packages

offer lower channels/services to consumers. MSOs have time and again indicated

that package prices are set to go up for the consumer in the future.

In the post-digitization era, ARPUs are

bound to increase. Success of DTH clearly

shows that consumers are willing to pay

for better quality and services


January 17, 2014 11

Exhibit 10: Package price comparison for DTH players & MSOs

No. of channels Rate Comments

DTH Players

Videocon D2H

Super Gold 296 196 Exclusive of service tax

New Gold Sports 305 254 Exclusive of service tax

New Diamond Pack 350 303 Exclusive of service tax

Platinum 361 352 Exclusive of service tax

DISH TV

Super Family 215 196 Exclusive of service tax

Super Gold 245+ 250 Exclusive of service tax

Super World 260+ 285 Exclusive of service tax

Super Platinum 280+ 356 Exclusive of service tax

Titanium 285+ 444 Exclusive of service tax

Tata SKY (packages include HD)

Dhamaal Mix 92 220 Inclusive of service tax

Dhamaal Cricket Music 100 250 Inclusive of service tax

Supreme Sports Kids 112 300 Inclusive of service tax

Metro 120 340 Inclusive of service tax

Grand Sports 144 430 Inclusive of service tax

Airtel DTH

Value Sports 158 220 Inclusive of service tax

Economy Sports Plus 191 300 Inclusive of service tax

Mega 210 350 Inclusive of service tax

Ultra 219 430 Inclusive of service tax

MSOs

Hathway Cable

Digital Starter pack 199 160 Exclusive of service tax

Digital Popular Pack 259 245 Exclusive of service tax

Digital Premium Pack 278 275 Exclusive of service tax

DEN Networks

Intro 181 180 Exclusive of service tax

Family 239 225 Exclusive of service tax

Platinum 258 270 Exclusive of service tax

SITI CABLE

Popular 169 170 Exclusive of service tax

Grand 211 222 Exclusive of service tax

Premium 228 267 Exclusive of service tax

DIGICABLE

Digi Chrome 154 180 Exclusive of service tax

Digi Glitter 169 225 Exclusive of service tax

Digi Explode 211 295 Exclusive of service tax

Source: Industry, PL Research


January 17, 2014 12

Post digitization, it would simply not be possible for MSOs to offer such low-priced

packages as MSOs balance sheets are already stretched. Current ARPU levels of

around Rs170-180 for a digital pay TV service is among the lowest in the world.

We acknowledge that near-term ARPUs may not increase significantly during the

implementation phase as both MSOs and DTH players target the same consumer.

Further, delay in deployment of channel packages for already digitized cable

consumers have led to muted improvement in ARPUs till now. However, as

digitization picks steam and deployment of packages happens, ARPUs would

automatically increase.

Sports subscription will drive ARPU higher

Sports broadcasting is another genre which would play a key role in driving ARPU

higher in the digitization era. Previously, under analogue, cricket was made available

to every subscriber as the LCO/MSO provided the relevant cricket channel (which

was broadcasting live cricket games). However, with digitization kicking off,

subscribers would have to buy sports/cricket packages as sports channels are

available as add-ons and not included in base packages. Cricket is among the few

genres where subscribers are ready to pay higher prices and can influence selection

of packages.

Exhibit 11: A-la-carte sports packages comparison- price/channel

Category Videocon D2H Dish TV Tata SKY

GECs Rs 5-20 Rs 15-25 NA

Sports Rs10-35 Rs 25-45 Rs 10-30

Regional Rs5-15 Rs5-10 Rs5-10

Kids Rs 5-15 Rs 25-45 Rs 5-15

English Rs 5-20 NA Rs 5-10

Hindi Movies Rs 5-20 NA Rs 5-10

Hindi News Rs 5-10 Rs 10-15 NA

Music Rs 5-10 Rs 5-15 Rs 5-10


Long gestation period & considerable investments remain key entry barriers

The nature of broadcasting business is such that it requires long gestation period,

considerable marketing investment as well as aggressive content to become a

meaningful force in a market dominated by 3-4 networks. These broadcasters are all

well-settled players in the market and for any new player to challenge them would

require huge investments in content. For example, Hindi GEC space has witnessed 6-

7 new channel launches in the last decade, of which, only couple of the channels

have been successful.

Sports channels command significantly

higher ARPU. In the post- digitization era,

consumers would have to subscribe to

sports packages since they are available as

add-ons and not included in base package

Hindi GEC space witnessed at least 7-8 new

channel launches during the last decade.

However, only a couple of them have been

successful


January 17, 2014 13

Zee continues to uphold a balanced strategy of investing in content as well as

maintaining margins. We do not foresee any further large international broadcaster

venturing into India as all major players have presence in India. Existing networks

may launch new channels, going forward. However, Zee is well-prepared to fight

with competition as demonstrated in the past.

Exhibit 12: New channel launches over last few years

Channel Broadcaster Amount invested (Rs bn) Launched in Status

Unsuccessful channels in last few years

SaharaOne Sahara NA Mar'00 Negligible market share

Zee Next Zee 5 Dec'07 Shut in Sep'08

Imagine TV Turner Broadcasting System 10 Jan'08 Shut in May'12

Real Turner International India 5 Mar'09 Real has shut down the channel

INX Zee 10 Nov'07 INX Network sold off the channel to Zee in 2010

Successful channels in last few years

Life OK Star NA Dec'11 Current market share of 14% in Hindi GEC

Colors Viacom 18 NA July'08 Current market share of 18% in Hindi GEC


Digitization will enable broadcasters to focus on content creation

Broadcaster is the only party within the entire distribution chain who stands to

benefit from digitization without incurring any additional costs. With the

implementation of digitization, while subscription revenues are expected to increase

for broadcasters, carriage fees are expected to decline, resulting in significant

improvement in profitability for the industry. Hence, broadcasters ability to invest in

niche content would get significantly enhanced over the medium term.

Digitization - How is it shaping up?

Though digitization implementation is running behind schedule, we believe it is

broadly in line with expectations. Even before digitization had kicked off, most

stakeholders had indicated a delay of at least 6-12 months. Since it was a new

experience altogether for MSOs as well as LCOs, challenges were bound to creep up.

Nonetheless, industry has demonstrated a willingness to eventually move towards

digitization as govt. remained firm on its stand and even pushed for blackout of

analogue services beyond the stipulated extension granted.


January 17, 2014 14

Exhibit 13: Timeline for Digitization

Phase Areas Revised Timeline Extended Timeline When we expect gross billing

No. of households to be digitized- m

Phase I Delhi, Mumbai, Kolkata & Chennai 30-Jun-12 31-Oct-12 Q4FY14E 10

Phase II Cities with population greater than 1m 31-Mar-13 31-Dec-13 Q2FY15E 22

Phase III All urban areas (municipal areas) 30-Sep-14 NA FY16E 35

Phase IV Rest of India 31-Dec-14 NA FY17E 18-20

Source: Ministry of Information and Broadcasting, PL Research

Phase I

Phase 1 which includes cities of Delhi, Mumbai, Kolkata & Chennai saw its original

timeline being extended from June 30, 2012 to October 31, 2012. While by the end

of December 2012, Delhi and Mumbai witnessed almost 90% of the subscribers

shifting to digital cable from analogue, Kolkata and Chennai lagged behind. By the

end of Mar 2013, Kolkata almost completed seeding of set-top boxes. However,

digitization is still a distant reality in Chennai.

Though seeding of set-top boxes has been completed in Delhi, Mumbai and Kolkata,

the mapping of subscribers and deployment of packages is still underway. Consumer

Application Form (CAF) is being collected. Unless the mapping of subscribers and

deployment of packages are completed, the true benefits of digitization may not be

completely visible. Currently, ARPU at the consumer level has not increased

materially and the customer mostly still continues to pay analogue rates.

Exhibit 14: Phase-I digitization progress

Cities Seeding of STB CAF compliant Packages deployment Gross Billing Current ARPU

Delhi 90-95% CAF filling almost

complete Underway

DEN - started Dec'13, InCable- first week of Jan'14

Rs 200-300; post DAS 10-15% increase

Mumbai 90-95% CAF filling almost

complete Underway

DEN - started Dec'13, InCable- Jan'14

Rs 200-300; post DAS 10-15% increase

Kolkata ~90-95% CAF filling almost

complete Underway To start from first week of Jan'14

Rs 150-250; Unchanged ARPU; gross billing will result in increase

Chennai ~30-40% NA NA NA Rs 125-225; Unchanged ARPU

Source: PL Research

Phase II

Given the fact that Phase I digitization implementation had witnessed manifold

challenges, all stakeholders were anticipating Phase II digitization to be delayed by at

least 6-9 months. Phase II involves significant investment required by MSOs towards

digital head-ends and other back-end infrastructure apart from set-top boxes costs.

Phase II is also expected to present new challenges in terms of managing logistics.

Our interactions with industry experts and channel checks suggests that, while


January 17, 2014 15

seeding of set-top boxes has been witnessed across cities, the mapping of

subscribers and deployment of packages will still take couple of months. Currently,

the filling of the CAF forms have picked up pace and certain cities are also on the

verge of a blackout. TRAI has extended the deadline of CAF submission in Phase-II

cities to Dec 31, 2013. ARPU in Phase-II cities has remained more-or-less unchanged

and we expect improvement only after the deployment of packages.

Exhibit 15: Phase-II digitization progress

Cities Seeding of STB CAF compliant Packages deployment Gross Billing Current ARPU

Vishakhapatnam 70%-80% CAF filling underway ;

should take few weeks Post collection of CAFs,

packages will be deployed Not yet started

Rs 150-250; Unchanged ARPU

Ahmedabad ~90% CAF filling

almost complete Underway To start in near future


Patna ~80-85% CAF filling underway ;

should take few weeks Package deployment

started To start in near future


Bangalore ~90% CAF filling


Rs 200-250; minor improvement seen till now

Amritsar ~90% CAF filling


Rs 150-250; minor improvement seen till now

Allahabad ~90% CAF filling

almost complete Underway To start in near future Rs 150-250; minor

improvement seen till now

Thane 90-95% CAF filling

almost complete Underway To start in near future Rs 200-300; post

DAS 10-15% increase

Pune 90-95% CAF filling

almost complete Underway To start in near future Rs 150-250; post

DAS 10-15% increase

Kanpur 70%-80% CAF filling underway Started To start in near future Rs 150-250;

Unchanged ARPU

Jaipur ~90% CAF filling underway Started To start in near future Rs 150-250;

Unchanged ARPU

Source: PL Research

Phase III & IV

Though the revised deadline of digitization in Phase-III & IV cities holds true, we

believe it will be delayed by at least a year. Experiences of Phase-I & II clearly

demonstrate that MSOs require significant upgrade of the existing infrastructure and

network. During Phase I & II, we have witnessed that efforts were more focussed

towards forced transition from analogue to digital and the looming prospects of

analogue blackout rather than demonstrating the benefits that digitisation could

provide to the consumer. We believe meaningful digitization can be achieved in

Phase III only in FY16E, while Phase IV is likely in FY17E.


January 17, 2014 16

Regional broadcasting - Zee gaining increased traction

Regional channels are the second largest category in terms of viewership and

accounted for 26.6% of total TV viewership in CY12. In terms of language popularity,

Tamil and Telugu markets collectively accounted for ~50% of total regional

viewership, while Marathi and Bengali markets collectively accounted for ~29% of

total regional viewership in CY12. Within the regional broadcasting industry, regional

GEC is the most dominant genre accounting for 76-78% of viewership in Bengali and

Marathi markets, while in the Southern markets, regional GEC accounted for 65-70%

of viewership. With growing regional clamour, national broadcasters are increasingly

competing to strengthen their portfolio through launch of new channels - In CY12,

Zee and Star both launched their Bengali movie channels Zee Cinema Bangla and

Jalsha Movies. Star-owned Asianet Communications also launched Asianet Movies.

Exhibit 16: Viewership share of regional channels in FY13

Category Broadcaster Market share (%)

Marathi GEC

Star Pravah Star 40%

Zee Marathi Zee 30%

ETV Marathi TV18 21%

Bangla GEC

Star Jalsha Star 47%

Zee Bangla Zee 37%

ETV Bangla TV18 10%

Telugu GEC

Gemini TV Sun Network 36%

Maa TV MAA Television Network 25%

ETV telugu TV18 20%

Zee Telugu Zee 19%

Kannada GEC

Udaya TV Sun Network 39%

Suvarna Star 25%

ETV Kannada TV18 19%

Zee Kannada Zee 18%

Tamil GEC

Sun TV Sun Network 63%

Star Vijay Star 12%

Zee Tamil Zee 6%


Zee continues to strengthen its regional

portfolio which is evident from

improvement of market share over last few

years.

In Marathi GEC space, Zee ranks 2nd with

market share of 30%, while in the Bengali

GEC category, Zee holds 37% market share

and occupies 2nd slot


January 17, 2014 17

Zee has created a strong foothold in the regional markets and its strong content

ranks amongst the top 2 players in Marathi and Bengali space. During FY13, Zee

Marathi improved its market share to 30% and firmly held onto its No.2 position. Zee

Bangla consistently ranks amongst the top 2 players in Bengali with 37% overall

market share and an 87% market share in non-fiction genre. In the Telugu market,

Zee Telugu has been gradually gaining traction demonstrated in market share

improving slowly to 19%. Though Zee Telugu ranks 4th currently, it is very close to

the 3rd player in this market in terms of viewership share. Zee Kannadas market

share stood at 18%. In the Tamil genre, Zee is a marginal player currently though it

has been gradually strengthening its position.

Sports Business - subscription revenues under digitization to reduce sports losses going forward

Zee entered the sports business through the launch of Zee Sports in 2005. Zee has

gradually strengthened its sports bouquet by adding TEN Sports (acquired through

Taj TV Mauritius) and launch of TEN Cricket and TEN Golf. TEN Cricket boasts of

cricket telecast rights for South Africa, West Indies, Zimbabwe, Sri Lanka and

Pakistan. TEN Cricket has renewed its contracts with South Africa, Zimbabwe and

West Indies cricket boards upto 2019-20. Remaining contracts with Sri Lanka and

Pakistan are due for renewal.

Exhibit 17: Zee's multi-year sports rights

Game Details Year

Cricket Zimbabwe 2012-19

South Africa 2013-20

West Indies 2013-19

Sri Lanka 2009-13

Pakistan 2009-13

Football Brazilian league 2012-14

English- The Football League 2012-15

English- The League Cup 2012-15

French Football League 2012-15

UEFA Champions League 2012-15

UEFA Europa League 2012-15

Tennis US Open 2013-16

Golf European Tour 2013-18

Asian Tour 2013-18

Hockey FIH Championship 2011-14


Digitization would force consumers to

subscribe for sports packages. Increase in

sports subscription revenues during the

post- digitization era would help Zee to

reduce losses, going forward


January 17, 2014 18

Though Zees non-sports portfolio earns superior profit margins, investors have been

concerned about Zees investment in loss-making sports business. However, the

nature of sports business is such that it entails huge investments to acquire multi-

year rights. Hence, Zee needs to invest in this business currently. Post digitization,

increase in subscription revenues would support the sports business and help to

reduce losses. Currently, most of the sports broadcasters make losses due to

aggressive acquisition of rights and primary dependence on advertising revenues.

However, post digitization ownership of sports properties would be a key

determinant for subscribers selection of packages. Sports channels would also help

to improve ARPU as sports packages are priced at a premium.

Recent Rupee depreciation is likely to increase losses for the sports business as

revenues are denominated in Rupees, while sports rights are denominated in

Dollars. Typically, losses tend to increase when cricket matches involving India are

telecasted as the rights for India focussed matches are high-costs properties.

Though Zee was initially guiding for sports losses to be lower in FY14E (FY13 losses

were to the tune of Rs870m), it has now indicated that sports losses are likely to be

substantially higher than FY13. We model for sports EBITDA losses of Rs1.4bn/1.0bn

for FY14E/15E, respectively. For FY15E, sports losses are likely to be lower due to

lower number of cricket matches involving India.

Exhibit 18: Sports losses to reduce, going further

(2,000)

-

2,000

4,000

6,000

8,000

10,000

FY10 FY11 FY12 FY13 FY14E FY15E FY16E

(Rs

m)

Sports revenues Sports EBITDA


In FY15E, we expect sports losses to be

lower due to lower number of matches

involving India


January 17, 2014 19

Though movies come at a higher cost, their telecast helps spur overall ratings, generate ad revenues and strengthen brand

Over the last couple of years, the battle for acquiring satellite rights of new Hindi

movies has intensified, with broadcasters willing to shell out huge amounts to

procure exclusive rights for telecast. Even though Zee traditionally has been a low-

cost content broadcaster (focus on maintaining margins), it has upped the ante by

joining the race for acquisition of satellite rights. We believe that despite the huge

costs involved in acquisition of movie telecast rights, it still makes good sense as new

Hindi movies generate substantial viewership and self-promotes the channel.

Further, ability of new movies to pull viewership helps the broadcasters overall

ratings during periods of low viewership. One such example is Sonys aggressive

acquisition of movie rights has helped the company to maintain overall ratings

despite weak primetime performance. Advertising revenues also gets a boost when

a new movie is telecasted on the channel. In FY14, Zee plans to spend Rs2-3bn on

acquisition of movie rights.

Strengthening international presence

Zee has been gradually strengthening its international presence through new

channel launches as well as expanding into newer geographies. In FY13, Zee

launched two channels in UAE (Zee TV HD and Zee Cinema HD). ZEE entered the

Canadian market, with the launch of Zee TV HD in partnership with Ethnic Channels

Group Limited. Zees new launch, Zee Alwan (Zees first GEC for Middle East market)

has received encouraging response within a short span. Zee has also substantially

increased presence in the US by launching the first south Asian HD channel ZEE TV

HD. International subscription revenues amounted to Rs4.6bn in FY13 and

contributed 12% to total revenues. We expect international subscription revenues to

increase at a CAGR of 2.2% over FY13-15E.

Exhibit 19: International subscription revenues steady

-10%

-5%

0%

5%

10%

15%

20%

3,500

3,700

3,900

4,100

4,300

4,500

4,700

4,900

5,100


(Rs

m)

Int'l subscription revenues YoY gr. (RHS)


Movie acquisition has become an integral

part of content sourcing. Ability of new

movies to pull viewership helps overall

ratings during periods of low viewership.

Perfect example of this is Sony whose

aggressive acquisition of movie rights has

helped to maintain overall ratings


January 17, 2014 20

Joint Venture MediaPro has enabled better negotiation

MediaPro, a 50:50 joint venture between Zee Turner and Star-Den for combined

distribution of their channels, gives Zee increased bargaining power with MSOs/DTH

players. The joint venture commenced operations in July11 and has resulted into

improvement in yields for Zee. During FY13, Mediapro recorded revenues of

Rs584m, 22.6% YoY (Zees share).

DMCL acquisition A tax bonanza

Recently, Zee announced the acquisition of the media business undertaking of

Diligent Media Corporation (DMCL). DMCL is a group entity and its media business

includes one channel license, event management activities and three reality show

format licenses. DMCLs other business included DNA newspaper which will be

acquired by Zee Media (listed Essel group entity).

Through this acquisition, Zee will benefit to the extent of Rs3.1bn of deferred tax

assets which will be utilized by Zee to reduce its tax payouts during FY15E/16E.

Further, Zee can utilise DMCLs license for launching a new channel where getting

new licenses has been a challenge recently. Zee can also capitalise on DMCLs

holding of reality show formats to boost its content. DMCL had revenues of Rs50m

and EBITDA of Rs20m in FY13. Against this acquisition, Zee will issue Rs22.3m worth

of 3year, 6% coupon carrying non-convertible preference to DMCL and also take

over Rs1bn of unsecured loans. We have not incorporated the tax benefits of DMCL.

NPV of preference shares works out to Rs15

As a part of the celebration for the completion of 20 years of the brand Zee, Zee

recently announced distribution of Rs20bn through bonus issue of redeemable

preference shares. Zee will issue 21 preference shares of Re1 each for every one

equity share held by the shareholders. The preference shares carry dividend of 6%

p.a. and has tenure of eight years. Starting from the fourth year, every year Zee will

redeem 20% of the nominal value of these preference shares.

Exhibit 20: Calculation for preference shares

Rs/share FY14E FY15E FY16E FY17E FY18E FY19E FY20E FY21E FY22E

O/S value of preference shares 21.0 21.0 21.0 21.0 21.0 16.8 12.6 8.4 4.2

Repayment done 0 0 0 0 4.2 4.2 4.2 4.2 4.2

C/S value of preference shares 21.0 21.0 21.0 21.0 16.8 12.6 8.4 4.2 -

Interest due

1.3 1.3 1.3 1.3 1.0 0.8 0.5 0.3

Outflow - 1.3 1.3 1.3 5.5 5.2 5.0 4.7 4.5

Discount rate 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%

Discount factor 1.0 0.9 0.8 0.7 0.6 0.6 0.5 0.4 0.4

NPV - 1.1 1.0 0.9 3.4 2.9 2.4 2.1 1.7

Cumulative NPV 15.4


DMCL acquisition will enable Zee to benefit

to the extent of Rs3.1bn of deferred tax

assets and reduce its tax payouts over next

two years


January 17, 2014 21

Advertising - TV remains one of the fastest growing mediums

TV remains the second largest medium of advertising accounting for 38.1% of the

total advertising market in CY12. While TV ad revenues grew at a CAGR of 11.9% to

Rs125bn during CY09-12, growth is expected to accelerate to 14.0% during CY12-

17E. The TV ad market is significantly influenced by the prevailing overall macro-

economic situation.

Exhibit 21: TV ad growth to accelerate

Category- Rs bn CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E CY16E CY17E CAGR

'07-'12 CAGR

'12-'17

TV 82 88 103 116 125 139 157 180 207 240 11.9% 14.0%

% YoY 15.5% 7.3% 17.0% 12.6% 7.6% 11.1% 13.0% 15.0% 15.0% 16.0%

Contribution to mkt size 37.2% 38.5% 38.8% 38.7% 38.1% 38.3% 38.3% 38.3% 38.2% 38.1%

Print 108 110 126 139 150 162 179 200 222 248 8.4% 10.6%

% YoY 8.0% 2.2% 14.1% 10.6% 7.6% 8.0% 10.5% 11.7% 11.0% 11.7%


Radio 8 8 10 12 13 14 15 19 23 27 11.4% 16.6%

% YoY 13.5% -1.2% 20.5% 15.0% 10.4% 10.2% 10.0% 21.4% 21.4% 20.7%


OOH 16 14 17 18 18 19 21 23 25 27 5.4% 8.4%

% YoY 15.0% -14.9% 20.4% 7.9% 2.2% 6.0% 9.3% 9.0% 8.7% 9.2%


Digital Advertising 6 8 10 15 22 28 37 49 65 87 40.2% 32.1%

% YoY 50.0% 33.3% 25.0% 54.0% 40.9% 30.4% 31.1% 31.8% 33.1% 33.9%


Ad mkt size 221 228 266 300 327 362 409 471 542 630 10.8% 14.0%

% YoY 12.3% 3.6% 16.2% 13.0% 9.1% 10.6% 13.0% 15.0% 15.1% 16.3%

Source: FICCI-KPMG Report 2013, PL research

FMCG remains the largest advertiser on TV, accounting for ~33% of the total TV

advertising market in CY12. New product launches, ever increasing competition, race

to capture further market share are some of the key reasons which are likely to keep

FMCG advertising strong. Auto industry is also witnessing increasing ad spends as

companies launch new models and look to garner further market share.

We have modelled for Zees advertising revenues to grow at a CAGR of 14% over

FY13-16E driven by strong positioning of flagship Zee TV, launch of new channel

providing advertisers new options like &Pictures, increased traction in regional

broadcasting etc.


January 17, 2014 22

Exhibit 22: Zee's advertisement revenue growth to remain strong

-8%

2%

12%

22%

32%

42%

52%

62%

72%

5,000

10,000

15,000

20,000

25,000

30,000

35,000


(Rs

m)

Advertisement Revenues YoY gr. (RHS)


Regional broadcasting has emerged as a strong alternate source of revenues for

national broadcasters. Apart from generating subscription revenues, regional

channels provide growing opportunities for regional advertising. Localised content in

regional channels focussed on a specific target audience is attracting regional

advertisers towards advertising on these channels. Also, the cost of advertising on

regional channel is significantly lower than national channels providing opportunities

to regional advertisers. Currently, regional channels account for 27.2% of the overall

TV ad market size.

Language-wise, Tamil & Telugu ad markets are the largest followed by Bengali,

Malayalam, Kannada and Marathi. As highlighted earlier, Zee has created a strong

foothold in the regional markets and its strong content ranks amongst the top 2

players in Marathi and Bengali space. In the Telugu & Kannada market, Zee is close

to occupying the third slot.

Exhibit 23: Regional ad market size

Language TV Households Penetration of TV households

C & S Households

Penetration of C & S

households

Ad mkt size (Rs bn)

Tamil 16.4 92.7% 15.9 97.0% 13.5

Telugu 15.1 72.2% 14.8 98.0% 9.0

Bengali 9.5 46.8% 8.6 90.5% 7.0

Malayalam 7.6 93.8% 7.1 93.4% 6.6

Kannada 10.0 74.1% 9.9 99.0% 6.2

Marathi 16.8 67.5% 14.9 88.7% 4.1

Bhojpuri 16.6 29.4% 11.3 68.1% 1.0

Punjab 4.8 87.3% 4.3 89.6% 1.5

Oriya 4.2 42.0% 3.5 83.3% 0.8

Gujarati 8.1 63.8% 7.0 86.4% 0.5



January 17, 2014 23

TV Ratings/Viewership share - Zee TV continues to consolidate its position

After the loss of marketshare in FY12, Zees market share recovered in FY13 as

company introduced new programs and premiered blockbuster movies. Strong

momentum continued into FY14 as Zee TV strengthened its offerings further leading

to a gain in the market share.

Exhibit 24: Zee continues to maintain market share

8%

11%

14%

17%

20%

23%

26%

We

ek

35

We

ek

36

We

ek

37

We

ek

38

We

ek

39

We

ek

40

We

ek

41

We

ek

42

We

ek

43

We

ek

44

We

ek

45

We

ek

46

We

ek

47

We

ek

48

We

ek

49

We

ek

50

We

ek

51

We

ek

52

Star Plus Colors Zee TV Sony Sab TV Life OK


Exhibit 25: Number of shows of Zee TV in weekdays top 10

Week

35 Week

36 Week

37 Week

38 Week

39 Week

40 Week

41 Week

42 Week

43 Week

44 Week

45 Week

46 Week

47 Week

48 Week

49 Week

50 Week

51 Week

52

Star Plus 4 4 4 5 5 4 4 6 4 5 5 5 5 5 6 6 5 5

Colors 2 1 2 2 1 1 1 1 2 2 1 2 2 2 0 1 2 2

Zee TV 3 3 3 2 2 4 4 2 3 2 3 2 2 2 3 2 2 2

Sony 0 1 0 0 1 0 0 0 0 0 0 0 0 0 0 0 0 0

Sab TV 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1

Life OK 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0



January 17, 2014 24

Business Background

Zee Entertainment is one of Indias leading television, media and entertainment

companies. Zee is amongst the largest producers and aggregators of Hindi

programming in the world, with extensive library housing over 1 lakh hours of

television content. The company holds more than 3,000 movie titles and boasts of

holding one of the largest Hindi film library. Zee reaches out to over 670+ million

viewers across 169 countries. Started in 1992 with one channel, Zee now offers a

bouquet of 34 domestic channels and 29 international channels.

Key Personnel

Mr. Subhash Chandra, Chairman: Mr. Subhash Chandra, Chairman of Zee and

promoter of the Essel Group of Companies is amongst the leading lights of the global

media & entertainment industry. Mr. Chandra revolutionized the television industry

by launching the country's first satellite television channel, Zee TV in 1992 and later

the first private news channel, Zee News. For his contributions to the industry, Mr.

Chandra has been awarded the 2011 International Emmy Directorate Award. Mr.

Chandra became the first Indian ever to receive a Directorate Award recognizing

excellence in television programming outside the United States.

Punit Goenka, Managing Director and CEO: Mr. Punit Goenka, the eldest son of Mr.

Subhash Chandra, is the MD and Chief Executive Officer of Zee Entertainment. Punit

also holds an executive position of Managing Director of Zee News. In his tenure as a

MD & CEO, ZEE has achieved a global recognition and has attained many milestones

and bagged prestigious awards. His strategic guidance and approach has maintained

ZEE's ranking at the top most level in the M&E sector in the annual ET 500 Lists.

Atul Das, Chief Strategy Officer: Atul Das is the Chief Strategy Officer for Zee. Atul

joined ZEE in 1998 and in his current role as the Head of Corporate Strategy and

Business Development, his responsibilities include setting the company's strategic

direction, scout new opportunities for organic/in-organic growth and supporting

businesses in investments, strategic alliances and M&A. Atul also represents ZEE on

Corporate Boards including Media Pro Enterprise India Pvt. Ltd. and India Web Portal

Pvt. Ltd., a joint-venture between Zee and PMC, USA. Atul has held various positions

within Essel Group and has rich experience across content and distribution business

including Direct to Home (DTH), Cable Distribution and Broadcasting.

Hitesh Vakil, Chief Executive Officer - Service Excellence: Hitesh Vakil is the Chief

Executive Officer - Service Excellence. Mr. Vakil is responsible of setting up a state-

of-the-art shared service centre, which will offer shared services across the group.

Prior to this, he was Chief Financial Officer of the Company for 18 years. He joined

the Company in 1995. Mr. Vakil is also a member of the Board of Directors in joint

venture Companies, namely, Zee Turner Ltd. and subsidiary Company, Taj India Ltd.


January 17, 2014 25

Risks

TRAIs regulation on capping ad minutes to 12/hour- negative for all broadcasters

The Telecom Regulatory Authority of India (TRAI)s recent regulation related to

limiting advertising minutes to 10+2 (10 minutes for commercial advertisements and

2 minutes for channels self-promotion) minutes per clock hour from Oct 1, 2013 is

likely to have a negative impact on all broadcasters. Limiting ad minutes per hour

from the previously prevalent daily average basis would result in decline of prime-

time ad inventory. Certain genres of channels used to run higher advertising

minutes, while GECs used to run ad minutes of 14-16/hr, movie/news

channels/regionals run advertising minutes of even more than 18-20 minutes/hour.

Hence, this regulation is likely to have a negative impact on all broadcasters.

Though our recent channel checks suggests that leading GECs (Star Plus, Zee TV,

Colors) have raised ad rates by 2030% to counter the impact of declining inventory,

still we believe the current regulation can have some near-term impact on

advertising revenues. As per Zee, post the implementation of this regulation,

onetwo months might be volatile due to adjustments in advertising inventory.

Delay in digitization will put at risk our earnings estimates

Implementation of digitization has met with multiple headwinds in Phase-I and II

delaying the process by almost a year. While we are modelling for delay of 12-15

months in implementation, any further delay can put at risk our earnings

assumptions, going forward.

Aggressive bidding for movies/sports can offset benefits of digitization

Though implementation of digitization is likely to result in improved profitability for

broadcasters, aggressive bidding for movies/sports rights to strengthen content and

maintain market share might result into partially offsetting benefits of digitization.

Movie acquisition costs have more than doubled over the last few years (Zee

acquired Chennai Express rights for Rs480m compared to average movie

acquisition costs of Rs150-200m few years back). Successful monetization of such

high costs property remains a risk to earnings.

Restriction on MediaPro can negatively impact bargaining power

Recently, the TRAI released a consultation paper related to monitoring of

distribution of channels. We believe such a move, which can restrict bundling of

Zee/Star bouquet under the Mediapro joint venture, remains a major risk and can

negatively impact bargaining power of broadcasters against MSOs.


January 17, 2014 26

Financials

Revenues to grow at a CAGR of 15.2% over FY13-16E

We expect Zees revenues to grow at a CAGR of 15.2% over FY13-16E driven by

accelerated growth in domestic subscription stream of revenues. Domestic

subscription revenues are expected to increase by 20.9% CAGR over FY13-16E. On

the other hand, international revenues are likely to increase at a CAGR of 2.2%.

Collectively, subscription revenues (incl. domestic and international) are expected to

increase at a CAGR of 17.6%. We expect advertising revenues to increase at a CAGR

of 13.7% during the same period.

Exhibit 26: Revenues & revenue growth % YoY

0%

10%

20%

30%

40%

10,000

20,000

30,000

40,000

50,000

60,000

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

(Rs

m)

Zee's total revenues YoY gr. (RHS)


Exhibit 27: Break-up of Zees advertisement and subscription stream

-

10,000

20,000

30,000

40,000

50,000

60,000


(Rs

m)

Zee's Subscription Revenues Advertisement Revenues


Earnings likely to increase at a CAGR of 20.3% over FY13-16E

We expect Zees EBITDA to increase at a CAGR of 20.9% over FY13-16E, with EBITDA

margins expanding by 400bps during the same period. Improvement in margins is

driven primarily by higher growth in revenues without a commensurate increase in

costs. As highlighted earlier, broadcaster is the only entity within the entire value

chain that stands to benefit without incurring any additional cost. With the

implementation of digitization, we also expect carriage revenues per channel to

decline. Though we do not expect absolute carriage costs to decline, however,

positioning of higher number of channels at the same cost would lead to decline in

carriage costs/channel. PAT is likely to increase by 20.3% CAGR over FY13-16E with

EPS increasing to Rs13.1 by FY16E.


January 17, 2014 27

Exhibit 28: EBITDA & EBITDA margins

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

3,000

6,000

9,000

12,000

15,000

18,000

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

(Rs

m)

EBITDA Margins (RHS)


Exhibit 29: Adjusted PAT & Profitability growth

-10%-5%0%5%10%15%20%25%30%

3,000

6,000

9,000

12,000

15,000

FY10

FY11

FY12

FY13

FY14

E

FY15

E

FY16

E

(Rs

m)

Adjusted PAT YoY Gr. (RHS)


RoE/RoCEs likely to improve by 320bps/500bps during FY13-16E

With profitability set to improve in the post-digitization era, return ratios are likely

to follow suit. We expect RoE to improve by 320bps to 22.8% by FY16E from 19.6%

in FY13. Similarly, RoCEs are likely to improve by 500bps to 29.8% by FY16E from

24.9% in FY13. Strong jump in subscription revenues flowing directly to EBITDA is

likely to improve profitability substantially, going forward, resulting into higher

return ratios.

Exhibit 30: RoE/RoCEs on a northward trajectory

17.6%

18.4% 18.0%19.6% 20.4%

22.2% 22.8%

14.6%

22.5% 21.6%

24.9%26.1%

28.5%29.8%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%


RoE RoCE



January 17, 2014 28

Robust FCFF generation to translate into stronger Balance sheet

Going forward, improved profitability, coupled with limited capex is likely to

translate into healthy FCFF generation for Zee. We expect Zee to generate FCFF of

Rs6.2bn/8.7bn/10.6bn for FY14E/15E/16E, respectively, translating into cumulative

FCFF of Rs25.5bn during this period. Consequently, cash balances (incl. long & short

term investments) are likely to increase to Rs27bn from Rs13bn in FY13. Strong

balance sheet would enable Zee to invest further into content as digitization will

throw up newer opportunities for niche channels.

Exhibit 31: FCFF generation to remain strong

3,420 4,154

6,186

8,714

10,572

2,000

4,000

6,000

8,000

10,000

12,000

FY12 FY13 FY14E FY15E FY16E

(Rs

m)


Exhibit 32: Cash & Investments to increase, going forward

11,283 13,233

16,594

20,981

26,779

4,000

9,000

14,000

19,000

24,000

29,000

FY12 FY13 FY14E FY15E FY16E

(Rs

m)



January 17, 2014 29

Valuations

We believe Zee would continue to trade at premium valuations due to the inherent

opportunity laid forward for broadcasters by way of digitization. With strong

earnings growth, debt-free balance sheet, limited capex, robust FCFF generation,

improvement in return ratios Zee presents an attractive investment opportunity. We

value Zee at 29x FY15E earnings resulting into target price of Rs330 and recommend

BUY.

Exhibit 33: 1yr. forward PE

26.326.4

17.0

17.4

4.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Mar

-07

Aug

-07

Dec

-07

May

-08

Sep

-08

Feb

-09

Jun

-09

Nov

-09

Mar

-10

Aug

-10

Dec

-10

May

-11

Sep

-11

Feb

-12

Jun

-12

Oct

-12

Mar

-13

Jul-

13

Dec

-13

P/E (x) Peak(x) Avg(x) Median(x) Min(x)

Source: Company Data, Bloomberg, PL Research

Exhibit 34: 1yr. forward EV/EBITDA

5.0x

9.0x

13.0x

17.0x

21.0x

0

50,000

100,000

150,000

200,000

250,000

300,000

Mar

-07

Aug

-07

Dec

-07

May

-08

Sep

-08

Feb

-09

Jun

-09

Nov

-09

Mar

-10

Aug

-10

Dec

-10

May

-11

Sep

-11

Feb

-12

Jun

-12

Oct

-12

Mar

-13

Jul-

13

Dec

-13


Exhibit 35: Peer Comparison Financials

Name Sales (Rs bn) Sales Gr. (%) EBITDA (Rs bn) EBITDA Margin (%) PAT (Rs bn) PAT Gr. (%)

FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E

Zee Ent. Enterprises

43.2 49.4 56.5 16.9 14.2 14.5 11.3 14.1 16.9 26.2 28.5 29.8 8.6 10.6 12.5 18.9 24.5 17.8

Sun TV Network

22.8 26.2 30.0 18.6 14.8 14.4 15.3 17.8 21.0 66.9 68.1 70.1 7.8 9.2 10.7 9.8 18.6 15.8


Exhibit 36: Peer Comparison Valuation

Name EPS (Rs) PE (x) EV/EBITDA (x) RoE (%) RoCE (%)

FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E FY14E FY15E FY16E

Zee Ent. Enterprises

9.0 11.2 13.1 31.0 24.9 21.1 22.7 17.9 14.7 20.4 22.2 22.8 26.1 28.5 29.8

Sun TV Network

19.7 23.6 27.3 18.5 15.4 13.3 9.0 7.6 6.2 26.2 27.8 28.8 20.8 21.5 22.0



January 17, 2014 30

Annexure

Indias Media & Entertainment (M&E) industry - multiple drivers likely to result in sustained growth of 15.2% CAGR over CY12-17E

Domestic M&E industry is one of the fastest growing industries in the world with

market size estimated to be Rs820bn in CY12. Favourable demographics, increasing

media penetration, ongoing digitization, newer digital platforms and comparatively

lower spends on M&E are few of the reasons why we believe the domestic M&E

industry is poised to achieve newer heights. As per FICCI-KPMG, industry is projected

to grow at a healthy CAGR of 15.2% to reach Rs1,661bn by CY17E. During CY07-CY12,

the industry had grown at a CAGR of 9.8% from Rs514bn to Rs820bn.

Exhibit 37: M&E spend as a % of GDP

3.1%2.9% 2.8%

2.4% 2.3% 2.2%2.0% 2.0% 2.0%

1.7%1.5% 1.4%

1.2% 1.1%0.9%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

Source: FICCI-KPMG Report, PL Research

Exhibit 38: Domestic Media & Entertainment industry Rs bn

Medium CY09 CY10 CY11 CY12 CY13E CY14E CY15E CY16E CY17E CAGR

'07-'12 CAGR

'12-'17

TV 257 297 329 370 420 501 607 725 848 11.9% 18.0%

% YoY 6.6% 15.6% 10.8% 12.5% 13.5% 19.4% 21.1% 19.4% 16.9%

Contribution to M&E mkt 43.8% 45.6% 45.2% 45.1% 45.8% 47.4% 49.1% 50.4% 51.0%

Print 175 192 209 224 241 261 286 311 340 7.0% 8.7%

% YoY 1.9% 9.8% 8.6% 7.3% 7.5% 8.5% 9.3% 9.0% 9.3%


Film 89 83 93 112 122 138 154 172 193 3.9% 11.5%

% YoY -14.5% -6.7% 11.5% 21.0% 8.5% 13.4% 11.1% 11.8% 12.6%


Contd31

At present, India is the 14th largest M&E

market in the world, while China is the

third largest market globally. Over the next

decade, it is expected that China will

surpass Japan and become the second

largest market worldwide next to the US


January 17, 2014 31

Exhibit 39: Domestic Media & Entertainment industry Rs bn

Medium CY09 CY10 CY11 CY12 CY13E CY14E CY15E CY16E CY17E CAGR

'07-'12 CAGR

'12-'17

Radio 8 10 12 13 14 15 19 23 27 12.7% 16.6%

% YoY -1.2% 20.5% 15.0% 10.4% 10.2% 10.0% 21.4% 21.4% 20.7%


Music 8 9 9 11 12 13 15 18 23 8.7% 16.2%

% YoY 5.4% 10.3% 4.7% 17.8% 13.2% 9.2% 16.8% 19.6% 23.0%


Out of Home 14 17 18 18 19 21 23 25 27 5.4% 8.4%

% YoY -14.9% 20.4% 7.9% 2.2% 4.4% 11.1% 9.0% 8.7% 9.2%


Animation & Visual 20 24 31 35 41 47 54 63 73 20.3% 15.8%

% YoY 14.9% 17.9% 30.8% 13.9% 16.1% 14.1% 16.0% 16.2% 16.3%


Gaming 8 10 13 15 20 24 31 36 42 30.8% 22.4%

% YoY 14.3% 25.0% 30.0% 17.7% 30.7% 19.0% 29.8% 17.2% 16.3%


Digital Advertising 8 10 15 22 28 37 49 65 87 40.2% 32.1%

% YoY 33.3% 25.0% 54.0% 40.9% 29.0% 32.5% 31.8% 33.1% 33.9%


Domestic M&E Industry 587 651 728 820 917 1,058 1,238 1,438 1,661 9.8% 15.2%

% YoY 1.3% 10.9% 11.8% 12.6% 11.8% 15.4% 16.9% 16.2% 15.5%


Television industry likely to grow at 18.0% CAGR over CY12-17E

Amongst the various mediums of M&E, TV still remains the most dominant among

Indian households. Indian television industry has grown at a CAGR of 11.9% over

CY07-12 and is currently valued at Rs370bn contributing 45% to the M&E space in

CY12. We believe television industry currently is at an inflexion point where

digitization is touted to be a game changer and benefit all stakeholders viz.

broadcasters, MSOs, consumers. Due to the ongoing digitization, rapid increase in

media penetration, launch of new channels and increased activity on this platform,

domestic TV industry is expected to grow at a higher rate of 18.0% over CY12-17E.

FICCI-KPMG estimates that domestic TV industry will be worth Rs848bn by CY17E

and its contribution will increase to 51.0% of M&E industry.


January 17, 2014 32

Exhibit 40: Domestic television industry - Rs bn

0%

10%

20%

30%

40%

50%

60%

100

200

300

400

500

600

700

800

900

CY07 CY08 CY09 CY10 CY11 CY12 CY13E CY14E CY15E CY16E CY17E

TV YoY gr. (RHS) Contribution to M & E mkt (RHS)


TV penetration lowest in India; C&S penetration likely to increase to 94.7% by CY16E

TV penetration levels remain one of the lowest in India. Of the 247m households in

India at the end of CY11, only 148m households own a TV set, implying TV

penetration level of only 60%. Compared to other emerging economies of Indonesia,

Brazil and China, the current level of penetration is well below these countries.

However, it is estimated that penetration levels would increase to ~64% by 2016E

though they will still be significantly below other countries. With increasing TV

penetration, we believe demand for niche content is likely to increase which would

drive growth for C&S, going forward.

Apart from increasing TV penetration,

average television viewing time is

considerably lower in India compared to

developed economies. Hence, scope for

television sector growth remains superior


January 17, 2014 33

Exhibit 41: TV penetration in India is still way below other countries

98% 97%90%

78%

61%

0%

20%

40%

60%

80%

100%

120%

China Germany Brazil Indonesia India

Source: FICCI-KPMG Report, PL Research

Exhibit 42: TV viewing time is very low compared to US, UK-mns/day

317

240

174154 146 142

100

150

200

250

300

350

US

UK

Indo

nesi

a

Indi

a

Chin

a

Vie

tnam

Exhibit 43: C&S penetration to increase over the medium term

CY10 CY11 CY12E CY13E CY14E CY15E CY16E

Total Households 239 247 255 262 270 277 284

TV Households 141 148 155 162 169 175 181

Penetration of TV households (%) 58.9% 59.9% 60.8% 61.7% 62.5% 63.2% 63.9%

C & S Households 113 123 133 144 154 164 172

Penetration of C & S households (%) 80.5% 82.8% 85.9% 89.0% 91.5% 93.4% 94.7%

Source: DISH TV presentation, PL Research


January 17, 2014 34

Income Statement (Rs m)

Y/e March 2013 2014E 2015E 2016E

Net Revenue 36,996 43,243 49,376 56,512

Raw Material Expenses 17,401 20,234 22,001 24,516

Gross Profit 19,595 23,009 27,375 31,996

Employee Cost 3,491 4,065 4,641 5,312

Other Expenses 6,561 7,611 8,641 9,833

EBITDA 9,543 11,334 14,093 16,851

Depr. & Amortization 399 366 404 445

Net Interest (1,375) (1,800) (2,086) (2,313)

Other Income 1,461 1,900 2,166 2,383

Profit before Tax 10,519 12,768 15,775 18,719

Total Tax 3,337 4,213 5,127 6,177

Profit after Tax 7,182 8,554 10,648 12,542

Ex-Od items / Min. Int. (33)

Adj. PAT 7,196 8,554 10,648 12,542

Avg. Shares O/S (m) 954.0 954.0 954.0 954.0

EPS (Rs.) 7.5 9.0 11.2 13.1

Cash Flow Abstract (Rs m)

Y/e March 2013 2014E 2015E 2016E

C/F from Operations 3,873 6,935 9,485 11,376

C/F from Investing 446 (849) (991) (1,735)

C/F from Financing (2,287) (2,923) (4,407) (4,844)

Inc. / Dec. in Cash 2,032 3,162 4,087 4,798

Opening Cash 3,274 5,316 8,478 12,565

Closing Cash 5,316 8,478 12,565 17,363

FCFF 4,154 6,186 8,714 10,572

FCFE 4,159 6,186 8,714 10,572

Key Financial Metrics

Y/e March 2013 2014E 2015E 2016E

Growth

Revenue (%) 21.7 16.9 14.2 14.5

EBITDA (%) 29.0 18.8 24.3 19.6

PAT (%) 22.2 18.9 24.5 17.8

EPS (%) 22.8 18.9 24.5 17.8

Profitability

EBITDA Margin (%) 25.8 26.2 28.5 29.8

PAT Margin (%) 19.5 19.8 21.6 22.2

RoCE (%) 24.9 26.1 28.5 29.8

RoE (%) 19.6 20.4 22.2 22.8

Balance Sheet

Net Debt : Equity (0.1) (0.2) (0.2) (0.3)

Net Wrkng Cap. (days) 173 169 160 155

Valuation

PER (x) 36.9 31.0 24.9 21.1

P / B (x) 6.8 5.9 5.2 4.5

EV / EBITDA (x) 27.2 22.7 17.9 14.7

EV / Sales (x) 7.0 5.9 5.1 4.4

Earnings Quality

Eff. Tax Rate 31.7 33.0 32.5 33.0

Other Inc / PBT 13.9 14.9 13.7 12.7

Eff. Depr. Rate (%) 3.2 2.8 3.0 3.1

FCFE / PAT 57.8 72.3 81.8 84.3

Source: Company Data, PL Research.

Balance Sheet Abstract (Rs m)

Y/e March 2013 2014E 2015E 2016E

Shareholder's Funds 39,116 44,879 51,200 58,968

Total Debt 17 17 17 17

Other Liabilities 33

Total Liabilities 39,166 44,896 51,217 58,985

Net Fixed Assets 9,975 10,257 10,544 10,835

Goodwill

Investments 8,245 8,445 8,745 9,745

Net Current Assets 20,658 25,905 31,639 38,116

Cash & Equivalents 5,317 8,478 12,565 17,363

Other Current Assets 26,734 30,190 33,278 36,635

Current Liabilities 11,393 12,764 14,205 15,881

Other Assets 288 288 288 288

Total Assets 39,166 44,896 51,216 58,984

Quarterly Financials (Rs m)

Y/e March Q4FY13 Q1FY14 Q2FY14 Q3FY14E

Net Revenue 9,643 9,733 11,013 11,032

EBITDA 2,423 2,915 3,105 2,736

% of revenue 25.1 30.0 28.2 24.8

Depr. & Amortization 115 87 91 91

Net Interest (510) (700) (395) (375)

Other Income 538 722 429 400

Profit before Tax 2,818 3,528 3,409 3,020

Total Tax 1,014 1,289 1,166 997

Profit after Tax 1,796 2,246 2,243 2,023

Adj. PAT 1,796 2,246 2,243 2,023

Key Operating Metrics

Y/e March 2013 2014E 2015E 2016E

Advt. Rev. Gr. (%) 24.0 15.0 13.0 13.0

Dom. Sub. Gr. (%) 26.3 21.5 20.2 21.0

Intl. Sub. Gr. (%) 14.0 2.5 2.0 2.0

Source: Company Data, PL Research.


January 17, 2014 35

THIS PAGE IS INTENTIONALLY LEFT BLANK


January 17, 2014 36

Prabhudas Lilladher Pvt. Ltd.

3rd Floor, Sadhana House, 570, P. B. Marg, Worli, Mumbai-400 018, India

Tel: (91 22) 6632 2222 Fax: (91 22) 6632 2209

Rating Distribution of Research Coverage

25.8%

53.9%

18.8%

1.6%

0%

10%

20%

30%

40%

50%

60%

BUY Accumulate Reduce Sell

% o

f To

tal C

ove

rage

PLs Recommendation Nomenclature

BUY : Over 15% Outperformance to Sensex over 12-months Accumulate : Outperformance to Sensex over 12-months

Reduce : Underperformance to Sensex over 12-months Sell : Over 15% underperformance to Sensex over 12-months

Trading Buy : Over 10% absolute upside in 1-month Trading Sell : Over 10% absolute decline in 1-month

Not Rated (NR) : No specific call on the stock Under Review (UR) : Rating likely to change shortly

This document has been prepared by the Research Division of Prabhudas Lilladher Pvt. Ltd. Mumbai, India (PL) and is meant for use by the recipient only as

information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of PL. It should not be

considered or taken as an offer to sell or a solicitation to buy or sell any security.

The information contained in this report has been obtained from sources that are considered to be reliable. However, PL has not independently verified the accuracy

or completeness of the same. Neither PL nor any of its affiliates, its directors or its employees accept any responsibility of whatsoever nature for the information,

statements and opinion given, made available or expressed herein or for any omission therein.

Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The

suitability or otherwise of any investments will depend upon the recipient's particular circumstances and, in case of doubt, advice should be sought from an

independent expert/advisor.

Either PL or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or

engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication.

We may from time to time solicit or perform investment banking or other services for any company mentioned in this document.

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