DSP Merrill Lynch report on Zee Entertainment:

3QFY07 Results Better Than Expectations 

Led by low base, improved competitive position and inorganic growth, ZEE  reported 3QFY07 net profits at Rs 875 million, up 167.6%YoY (after adjusting the base  for demerger). However, ex-acquisition of Taj TV (Ten Sports) net profit was Rs 755 million (MLe Rs 687 million), representing a less-spectacular 130.9%YoY growth.  Overall, we like ZEE ahead of DTH demerger, monetization of the rating increases on its front-line channel, Zee TV and higher pay-TV revenues from  increased penetration of DTH & digital cable. Maintain Buy. 

Improved positioning drives solid delivery 

Ex-Taj TV (effective Nov 13, 2006), ZEEL advertising and subscription revenues stood at Rs 1.8 (+35.6%YoY) & Rs 1.77 billion (+40.1%YoY) respectively, implying revenue growth of 34.8%YoY at ~Rs 3.7 billion. The more exciting part of the result was subscription revenues growth led by the advent of new revenue streams from digital T.V. platforms, i.e. revenues from DTH were Rs 150 million (7.7% of subs sales).  Key drivers of 167.6%YoY growth in reported profits were: 1) Low base: Last year 3Q had Zee Sports losses of Rs 340 million (primarily cricket losses), which depressed the base. However, with no cricket event during 3QFY07, Zee Sports’ operating losses were lower, at ~Rs70 million. 2) Inorganic growth: Taj TV added Rs 198 million to EBITDA, which in our view is unsustainable on a QoQ basis. 3) Above, combined with new businesses approaching breakeven and robust performance of Zee TV, led to EBITDA margin of 32.5% (vs 17.3% in 3QFY06), resulting in operating profits of ~Rs 1.4 billion (+186.9%YoY). Ex-Taj TV, EBITDA was up 145.1%YoY. 

Reiterate Buy 

We maintain our Buy rating on ZEE, as it remains our preferred play, set to capitalize on the emerging opportunity across content-to-conduit (DTH). Our PO of Rs 328 is based on sum-of-the-parts & signifies an improving outlook.