Zee Telefilms Could Be Poised To Prosper on Indian TV Boom [WSJ]
By GEOFFREY A. FOWLER
November 1, 2006; Page C14
India's television business is getting ready to boom, and investors seeking a piece of the action might want to consider the nation's biggest home-grown electronic-media conglomerate, Zee Telefilms.
One of the first domestic companies to move into India's cable-television market in the early 1990s, Zee does everything from producing shows to piping them into homes. In recent years, its major business, broadcast programming, had fallen behind two global content providers -- News Corp.'s Star TV unit and Sony Entertainment Television, a division of Japan's Sony -- in terms of ratings.
But Zee has bounced back with better programming to reclaim second place from Sony and to increase its ad revenue, and it has taken initial steps to collect money from millions of unpaid "gray market" cable subscriptions and heavily promoted a direct-to-home satellite business. It also has announced a restructuring plan that will break Zee up into four listed companies -- a move that analysts say will unlock shareholder value.
Zee's shares, which trade in Mumbai and on the Indian National Stock Exchange, have nearly doubled so far this year, to 302.10 rupees ($6.72) yesterday, outpacing the 38% gain this year for the Bombay Stock Exchange's Sensitive Index.
Zee "remains the only integrated media conglomerate set to capitalize on emerging opportunity across content-to-conduit," Merrill Lynch analysts Bharat Parekh and Amish Shah wrote in a recent report. Their one-year price target for the stock is 325 rupees, up 7.6% from the current level.
The market's growth prospects seem promising. Media Partners Asia, an analyst firm covering Asian media, says revenue from India's broadband and pay-TV industries could more than double over the next five years to $9.5 billion by the end of 2011 from an estimated $4.4 billion this year.
And there are few other pure-play choices. The two major players, Star and Sony, are part of large international conglomerates. The only other major domestic player is Sun TV, which has a public float of just 10% and a geographically narrower market.
Chairman Subhash Chandra founded Zee after building a fortune making laminated tubes and running theme parks. The company, which posted revenue of $316 million in the fiscal year that ended March 31, began broadcasting in October 1992, and, along with Star, provided the first real competition for Doordarshan, India's state-controlled terrestrial broadcast network.
Today, investors see Indian media as a play on the overall consumer economy. "In a consumption-driven economy, it helps to have strong brands. Indians watch a lot of TV, and so it is a good medium for companies to build their brands," says Sharat Shroff, co-manager of Matthews India Fund, which has $488 million invested in India, including stakes in Zee and Sun TV.
Spending on advertising in India is climbing, up 14% last year to almost $3 billion, according to TAM Media Research. About 40% of that total was spent on TV ads. By contrast, advertisers in China last year spent $30 billion, based on rate-card figures, to reach that country's 1.3 billion consumers -- suggesting that India, with its own billion-plus population, has quite a bit of room to grow.
But investing in Zee does bring real risks. Last week, Zee posted a consolidated net profit of 333 million rupees for its fiscal second quarter, down 22% from 425 million rupees a year earlier. The results were hurt by a $219 million investment for the broadcasting and Internet rights to 25 international cricket matches played by India's national team over the next five years. Zee says it will recover losses for sports and other new channel costs with increased advertising rates, among other measures.
Investors also have the long-term changes in India's television industry to consider. The biggest of those is Indian cable's so-called gray market. About 68 million of India's 112 million households with TV sets have cable, but broadcasters and cable companies don't get paid for all of those connections.
Unlike in other countries, India leaves control of the "last mile" -- the final connection to customers' homes -- up to thousands of cable operators, many of them mom-and-pop shops that sometimes string cables from building to building and collect payments in cash. The Cable and Satellite Broadcasting Association of Asia estimates this system will cost its members $668 million this year because local operators don't report all the revenue they collect.
Starting in January, the industry will roll out a conditional access system, or CAS, in a handful of major metropolitan areas to help keep track of subscriptions and allow consumers to buy exactly the channels they want.
Investors have responded positively to these moves, but the jury is out on how widely and quickly CAS will be adopted across the country and how much it will cost cable companies.
Zee "is an expensive stock, and people are building in a fair amount out of expectation into the future. Let's see how quickly those turn out," says Kotak Securities analyst Sanjeev Prasad, who has a 12-month target price of 280 rupees on the stock.
The company's future also depends on its sales of direct-to-home satellite TV, a competitor to cable that should make it easier for Zee to collect subscription revenue. Zee's DishTV service has begun to scale up after acquiring access to additional content and surpassing 1.5 million subscribers, mostly within the past year. But rolling out satellite systems is expensive, and Zee now has competition from Tata Sky, a joint venture of News Corp. and Tata Group, which is poised to invest even more than Zee in its system.
Nonetheless, Zee expects its declared subscriber base to grow to 8.5 million in calendar year 2008 from 6.7 million currently. That figure includes the company's cable and direct-to-home satellite businesses. Even Kotak's Mr. Prasad says he is "more optimistic [on direct to home], because I can see a roadmap there."
Zee plans to restructure itself into four separately listed companies in January: broadcasting; news and regional broadcasting; cable TV; and direct-to-home services. The move, spurred by regulatory concerns about foreign and cross-ownership and a desire to unlock value for investors, should help Zee put more focus on -- and potentially more investment in -- its cable and direct-to-home, or DTH, services. It will also leave Zee Telefilms investors with their money spread across many different parts of India's TV value chain, from production to cable to DTH.
"It will offer the classic spinoff effect," says Media Partners Asia analyst Vivek Couto. "An institutional investor could buy straight into the business that offers cash today: broadcasting. Or he can just invest in the distribution story, with DTH and cable, which could generate cash three to five years from now." |
