In a report entitled CAS is a reality but let's await implementation, SSB says that Zee Telefilms will continue to trade at 16x times its EPS 12 months forward and has cautioned "that implementation issues around CAS and subscriber take-up present uncertain variables that prevent sound fundamental analysis. A wait and watch approach on this would be more appropriate for now."

The report says that the implementation of CAS will no doubt have a significant impact on SSB's earnings estimates for Zee Telefilms. The roll out schedule notified by the government (six months as per legislation) and compliance with the same will decide the impact on FY04E (limited in SSB's view) and FY05E earnings.

The report points out that for SSB FY05 revenue estimates of domestic subscription revenue (Rs 2.4bn 25 per cent growth CAGR) to be maintained, the subscriber declarations from the regional cable operators need to improve substantially while at least 20-30 per cent of the metro subscribers (Mumbai, Delhi, Kolkata) need to be seeded with set-top boxes.

The per channel tariff (that is cost of subscription of stand-alone Zee TV) and the mix of subscriber declarations from metros and non metros will also be other important factors relevant to model subscription revenues from the metros.

Funding of set-top boxes and investments in cable head-ends and subscriber addressability systems for Zee’s MSO subsidiary Siticable will also need to be factored in. Lastly, the impact of CAS on advertising revenues will also need to be watched. Advertisers could shift spends to FTA channels if their connectivity post CAS implementation is significantly better than that of the pay channels.

SSB therefore says it would await further clarity (implementation specifics, schedule etc) before revising its earnings estimates for Zee.

The SSB report adds that "the inherent leverage in the broadcasting business is substantial. A channel driver program backed by all round sustained programming initiatives could change the dynamics for both advertising and subscription revenues."

It believes that "the new management led by the promoter has a long experience in this business and could engineer a turnaround more rapidly than we expect." While its new programming initiatives have been positively received, they have not resulted in a substantial rise in ratings.

On the downside, SSB says, the potential listing of Sony and Star Plus could put Zee’s valuation premium vs. the broader market (Sensex) at risk. Additionally, the company has been lax on corporate governance issues, the woes of which have also adversely affected the stock in the past.

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