One of the largest players in the media and entertainment space, Zee Entertainment is among the very few in the segment that are profitable. The company is a Pan-India broadcaster with deep reach in both the regional and national (Hindi) markets. Growth in scale while remaining profitable has helped the stock price more than double over the past couple of years.

Investors with a one-to-two year horizon can retain their Zee shares while avoiding fresh exposure at this juncture. This is mainly due to the stock’s high valuation. At ₹275, the share trades at 22 times its likely per share earnings for 2014-15, quite expensive compared with what the broader market trades at. Despite its reasonably sound growth prospects, the valuation multiple is a tad high.

Strong viewership of its general entertainment channels (GECs) regionally and in Hindi drives the company's advertising revenues. Besides, a healthy proportion of subscription-based inflow is a key positive for the company. In the near term, the increased spending by political parties in the electronic media, as the general elections commence should bolster the company’s advertising revenues.

In the first nine months of 2013-14, Zee's revenues grew by 19.3 per cent over the same period last year to ₹3,263 crore, while net profit rose by nearly 25 per cent to ₹674 crore. This followed an impressive 25 per cent-plus growth in key financial metrics in 2012-13 as well, suggesting that the company was able to hold its own even in a slowing economy.

Healthy bouquet

Zee generates over 40 per cent of its revenues from subscriptions. This is among the best in the industry and makes the company resilient to fluctuations in advertisement revenues when there are economic setbacks.

That said, the company’s advertising revenue (around 55 per cent of total revenue) has also grown at a healthy pace over the past three quarters. Its bouquet of channels includes the flagship Zee TV (Hindi GEC), Zee Cinema, and regional channels in Marathi, Bengali, Telugu and Kannada. It also operates a set of sports channels. Zee TV has been successful in attracting viewership and has consistently been among the top few channels in the lucrative Hindi GEC genre, the largest advertising market.

Shows such as Jodha Akbar, Sapne Suhane Ladakpan Ke and Qubool Hai have high ratings in the key prime time slots.

Advertising revenues tend to be concentrated heavily within the top three-four players in this genre and Zee TV's strong position helps it garner a good share of the pie.

Zee Cinema is also among the top few in the movie genre. It capitalises on its large bank of movies and broadcasts newly-released ones. For instance, it was able to garner heavy viewership by screening the blockbuster movie Chennai Express . The trend of film producers signing up with entertainment channels for showing movies soon after their release in multiplexes and single screens, should also aid Zee Cinema and Zee TV.

Even in the highly competitive regional markets, Zee is among the top three or four broadcasters. While Zee Marathi is among the top Marathi language broadcasters, the company has narrowed the viewership gap with regional players in the Bengali, Telugu and Kannada markets.

Many FMCGs, telecom and consumer durables companies are now looking to grow in the under-penetrated but fast-growing markets of Tier-2 and 3 cities and are increasing spends there.

Advertisers are likely to prefer players with a regional as well as a strong national presence. Zee, with its bouquet of channels, is well placed to tap the opportunity.

Subscription triggers

The continuing digitisation of cable networks will aid subscription growth. This is evident in the metros and other big cities. Most of the country’s cable networks are set to be digitised by 2014. In the near term, the Election Commission’s decision to increase candidate expenditure should provide a boost to advertising revenues of Pan-India players such as Zee.

A prolonged slowdown in the economy could moderate advertising revenues.