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Monday, October 27, 2008

Zee News - Results Analysis - Buy Recommendations

Zee News
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs61
Current market price: Rs33

Price target revised to Rs61

Result highlights
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For Q2FY2009 Zee News Ltd (ZNL) has delivered an excellent performance, which is in line with our expectations. The company's portfolio of channels continued its stupendous performance with the overall revenues for the quarter growing by a smashing 60% year on year (yoy) to Rs127.7 crore.
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The advertising revenues grew by 60.8% yoy to Rs101.3 crore and the subscription revenues surged by 56.1% to Rs23.4 crore during the quarter. A break-up of the revenues into the existing and new channel (Zee Telugu, Zee Kannada, Zee 24 Taas and Zee Talkies) baskets shows that the revenues of the former grew by 44.7% and that of the latter zoomed by 226.4%. The revenue growth for the quarter was thus broad-based.
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The operating profit margin (OPM) improved by 328 basis points yoy to 16.6%. Hence, the operating profit grew by a handsome 99.5% to Rs21.1 crore. The margin of the existing business basket continues to be healthy at 31.1% whereas the operating loss in the new business basket has come down from Rs16.8 crore in Q1FY2009 to Rs11.2 crore for the quarter. The lower loss for the quarter is commendable as it includes the start-up losses to the tune of Rs5.46 crore incurred towards Zee Tamil (launched on October 12, 2008) and Zee 24 Ghantalu (a Telugu news channel to be launched in November 2008). Zee Telugu broke even during the quarter and Zee Kannada is expected to break even by the end of FY2009. Both the channels witnessed a sharp increase in viewership during the quarter. As a result, the net profit of ZNL grew by a good 105.1% yoy to Rs11.5 crore during the quarter.
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We believe the improvement in the profitability of Zee Telugu and Zee Kannada augurs well for the overall profitability of the company, as Zee Tamil and Zee 24 Ghantalu would add to the losses from the new business basket on account of their gestation periods.
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We like ZNL for its presence across Indian regional language markets in the news and general entertainment space. Its regional channels are increasingly becoming popular with the masses on account of which ZNL shall experience a strong traction in its advertisement and subscription revenues going ahead.

We also like ZNL’s strategy of expanding step by step (first stabilising the existing channels and then launching new channels). We believe ZNL is the best pick in the media and entertainment space, and maintain our Buy recommendation on the stock with a revised price target of Rs61. At the current market price the stock trades at attractive valuation of 10.7x FY2010E earnings per share (EPS) of Rs3.1.

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