The Merrill Lynch report still maintains
a "BUY rating on the Zee stock based on:
1. Attractive valuations at 10x FY04E EPS vs the Asian (ex-Australia)
average of 16x.
2. Rise in subscription revenues driving Zee's leading earnings growth
in the global sector (20 per cent YoY) during these challenging years.
3. Recent stock underperformance; and
4. Improvement in the balance sheet.
The following are some relevant excerpts from the report:
* Zee delivered 52 per cent YoY growth in recurring PAT (excl. earlier
period PAT of Rs 20 million for subsidiary, Padmalaya and Rs 386
million extraordinary write-off), to Rs 800 million in tough times.
* Importantly, Zee turned cash flow positive and this led the company
to repay term debt of Rs 1.13 billion. Net debt at end-FY03 was
Rs 5.9 billion - down 11 per cent YoY. This was aided by recovery
from debtors (170 days in FY03 vs 213 in FY02) and should address
market's liquidity concerns.
* Sales grew 17 per cent YoY. A 16 per cent YoY fall in ad revenues
led by the World Cup on competing channels was more than offset
by 54 per cent YoY growth in global subscription revenues and consolidation
of film subsidiary, Padmalaya.
* Ignoring changes in the base (4Q FY02) made by the company to
match unaudited nos. with audited FY02 results, Merrill Lynch analysts
estimate that the 4Q recurring PAT grew 33 per cent YoY in a tough
quarter.
* The report mentions that the debtor days were further reduced
to 155 in May 2003 according to the Zee management. This could lead
to repayment of another Rs 1 billion of loans in 1Q FY04, adds the
report.
* The report says that the Zee management claimed its readiness
to supply a digital set-top box at Rs 3,500/pc (US$74) on the conditional
access system (CAS).
* The report says that the key risk is the company's ability to
increase penetration of Zee Turner in domestic pay markets and maintain
the creative execution of the broadcasting business.
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