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Saturday, December 3, 2016

INOX WIND LTD: WINDS WILL CHANGE !!!

Scrip Code: 539083 INOXWIND
CMP:  Rs. 185.85; Market Cap: Rs. 4,124.35 Cr; 52 Week High/Low: Rs. 378.50 / Rs. 163.00.
Total Shares: 22,19,18,226 shares; Promoters : 19,00,00,000 shares –85.62 %; Total Public holding : 3,19,18,226 shares – 14.38 %; Book Value: Rs. 83.03; Face Value: Rs. 10.00; EPS: Rs. 17.14; Dividend: 0.00 %; P/E: 10.84 times; Ind. P/E: 24.11; EV/EBITDA: 8.25.
Total Debt: Rs. 1,467.17 Cr; Enterprise Value: Rs. 5,524.30 Cr.

INOX WIND LIMITED: Incorporated on April 9, 2009 and is based in Noida, India. Inox Wind Ltd is a subsidiary of Gujarat Fluoro chemicals Limited. Inox Wind Limited manufactures and sells wind turbine generators and components in India. The company came out with an IPO on March 18 2015 offering 3,19,18,226 equity shares of Rs. 10 each for Rs. 325 per share raising Rs. 1,037.34 Cr, retail investor were given a discount of Rs. 15 per share. It got listed on April 9, 2015 at Rs. 400 made a high of Rs. 427.40 on listing day. The object of offer for sale was to invest in new equipment at the Una (Himachal Pradesh) unit to optimise the capacity of the nacelle and hub manufacturing facility, for expansion and up-gradation of existing manufacturing facilities, for long term working capital requirements, for investment in their subsidiary IWISL for the purpose of development of power evacuation infrastructure and other infrastructure developments and for other general corporate purposes. Inox Wind Ltd provides turnkey solutions for wind farm projects & offers services including wind resource assessment, site acquisition, infrastructure development, erections and commissioning, and also long term operations and maintenance of wind power projects. Company manufacture the components of wind turbine generators in-house with a view to ensuring high quality, advanced technology and reliability and maintaining cost competitiveness. Company has facilities dedicated to manufacturing nacelles, hubs, rotor blade sets and towers. Inox Wind have a perpetual license from AMSC Austria GmbH (formerly Windtec GmbH), or AMSC, a leading wind energy technology company based in Austria, to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. Inox Wind has a fully integrated state-of-the-art manufacturing plants at Una (Himachal Pradesh) for Hubs and Nacelles and Rohika, near Ahmedabad (Gujarat) for Blades and Tubular Towers. Inox Wind manufactures the key components of the Wind Turbine Generator (WTG) to ensure high quality based on the most advanced technology, reliability of performance, and cost competitiveness. Inox WTGs are designed for low wind speed sites such as those in India. Inox Wind is an ISO 9001:2008 certified company. In addition, IWL’s manufacturing units are awarded with ISO 14001:2004, OHSAS 18001:2007 and ISO 3834-2 (tower manufacturing facility). Inox Wind turbines are type certified by TUV SUD according to “The Guidelines for the Certification of Wind Turbines issued by Germanischer Lloyd” and are duly enlisted in RLMM by C-WET. Inox Wind manufacturers two different WTG models 2 MW rating: Rotor diameter of 93 meters with hub height of 80 meters Rotor Diameter of 100 meters with hub height of 80 to 92 meters. Inox Wind owns a 100 % subsidiary, Inox Wind Infrastructure Services, which does the project development in respect of wind power projects, including wind studies, energy assessments, land acquisition, site infrastructure development, power evacuation, statutory approvals, erection and commissioning and long term operation and maintenance of the wind farms. Company produced and sold 60 turbine generators and in FY 2013; 60 turbine generators of 2 MW each. INOX WIND Limited is locally compared with Suzlon Energy Ltd, Honda Siel Power Products Ltd, Triveni Turbine Ltd, TD Power System Ltd, BHEL, Siemens Ltd, Crompton Greaves Ltd, Thermax Ltd, ABB India Ltd, Alstom India Ltd, KEC International Ltd, Gamesa Wind Turbines Pvt Ltd, GE India Industrial Pvt Ltd, Vestas Wind Technology India Private ltd, Sinovel DB India Pvt Ltd and globally compared with  AZZ Inc of USA, Ametek Inc of USA, Babcock & Wilcox Enterpr of USA, Broadwind Energy Inc of USA, Enersys of USA, Franklin Electric Co Inc of USA, Areva of France, Alstom of France,  Gamesa Corp Technologica S.A. of Spain, Vestas Wind Systems A/s of Germany, Schneider Electric S.E.of France, PNE WIND AG of Germany.

Investment Rationale:

Inox Wind Ltd, an Inox Group company, is India’s fourth-largest wind turbine generator (WTG) manufacturer and commands market share of 7 % in FY15. The Inox Group is operational from 1923 in India and currently operates in industrial gases, engineering plastics, refrigerants, chemicals, cryogenic engineering, renewable energy and entertainment sectors. The Group has two publicly-listed companies – Gujarat Fluorochemicals and Inox Leisure. Inox Wind Ltd is the subsidiary of Gujarat Fluorochemicals. Inox Wind Ltd commenced its operations in March 2010, and is into manufacturing of key components of Wind Turbine Generators and other parts like nacelles, hubs, rotor blade sets, and towers used to generate electricity from wind power. It provides turnkey solutions for wind farm projects through its wholly-owned subsidiaries, and has a project site pipeline of 4GW. We live in the modern era of clean energy growth that can fuel a future of opportunity and greater prosperity for every person on the planet. Renewable energy, so far considered to be an alternative to the conventional fuel source has now progressed into becoming a regular energy source. This shift is driven by the improved cost efficiency of renewable energy sources with the help of advancements in technology combined with an increasing focus on climate change which is leading people, companies and countries to consume energy from more efficient sources. There is heightened awareness about disciplining the emitters of greenhouse gases. Governments, businesses and investors around the world are realizing that the evolution to low-emission, climate-resilient growth is imminent beneficial and already under way Now that the Paris Agreement is coming into force, countries need to get serious about what they committed to last December. Meeting the Paris targets means a completely decarbonized electricity supply well before 2050 and wind power will play the major role in getting us there. The mainstream position of renewables is evidenced in the global installations during 2015 which stood at 64 GW of wind energy and 57 GW of solar energy. Leading the passage from fossils fuels to renewable sources are the developing nations including India and China, among others. The renewable industry recorded a growth of 18 % CAGR in 2015 and is expected to attract US$5.86 trillion worth of investment till 2035. This poses massive growth potential for the sector in India. With the government’s Commitment made at COP21 to install 175 GW of renewable energy by 2022, and to reduce carbon emissions by 30- 35 % and increase renewables to 40 % of the energy mix by 2030, India is set to truly expand its renewable energy portfolio. The production is getting marked boost through the ‘Make in India’ initiative. The government has also strived to facilitate the growth of renewable energy through the establishment of a positive policy and business environment. As a result, the sector witnessed annual installations of 3,415 MW in FY15-16, higher than ever before and 48 % higher than the 2308 Mw of the previous year. A major portion of this capacity addition was accounted for by new projects in MP where more than a third of the capacity a 1290 MW was added, Rajasthan added 688 MW, Gujarat added 388 MW and AP added 363 MW, arising out of the substantial reduction in preferential tariff for new wind energy. The Indian wind energy industry is expected to grow at a rate of 30 % annually, and may even surpass this on the back of the positive policies. The Supreme Court supported Renewable Purchase Obligation (RPO) compliance, the renewable Generation Obligation (RGO), Green Corridor, interstate transmission charges waiver, inclusion of renewable energy in the priority lending sector, UDAY scheme which gives state utilities stronger credibility to invest in renewable energy and approval of National Off-shore Policy which has opened up 7,600 km of coastline for off shore wind energy generation projects have all positively affected the environment and established a US$200 billion opportunity. Foreign investment in the industry is also surging. The incremental wind based energy capacity requirement by FY22 is estimated at about 35 GW as against the current installed capacity of 27.4 GW. This is assuming annual energy demand to continue to grow at 6 %, Renewable Purchase Obligation at 12 % by FY22 and wind as a renewable energy resource contributing to a dominant share of 75 % in meeting the non-solar RPO requirement on an all India basis. The RPO norms continue to vary across the states in terms of both quantum of RPO varying from 2 % to 12.5 % in FY17 across the states and the period of RPO trajectory with only six states stipulating RPO norms till FY22. According to IRENA (International Renewable Energy Agency), technology innovation will be a significant driver of the offshore wind boom. It highlights upcoming innovations that will enable sector development, including next generation wind turbines with larger blades, and floating turbines, which will open up new markets in deeper water. These advancements, combined with other sector developments, will reduce average costs for electricity generated by offshore wind farms by 57 % over time from $170 per Mwh in 2015 to $74 per Mwh in 2045. Inox Wind Ltd is one of the largest land bank owners in this sector in the country with more than 4500 MW capacity. Inox will be one of the biggest beneficiaries of the hybrid policy for both solar and wind. Inox Wind plans to install solar panels in winds parks where it already has the common infrastructure commissioned and constructed. Since both technologies are complementary, Inox will be one of the lowest suppliers of hybrid service as well, especially when it comes to installing solar panels. Inox Wind is seeing a lot of traction as far as cash collection is concerned. With the support and encouragement received from government for wind sector, certain initiatives has been taken Non Solar Renewable Purchase Obligation - Guidelines issued from 8.75 % in FY17 to up to 10.25 % in FY19 to increase the demand from states with more wind supply, Gujarat state will have tariff at Rs. 4.19 for 5 years, Solar & Wind Hybrid Policy is been drafted for better & optimization utilization of capacity, UDAY scheme to ensure stricter enforcement of RPO with currently 16 states has joined in the scheme, lastly 1000 MW transmission utility to be connected which will facilitate supply of wind power to non-windy states. There are many initiatives taken by the new government like several states such as Rajasthan, Madhya Pradesh, Gujarat, Andhra Pradesh, Telangana, Maharashtra and Karnataka have provided preferential tariff over and above MNRE’s GBI of Rs. 0.5 per kilowatt-hour to attract investment. Some have also increased wind power tariffs by 2-15 % to attract investments. These states are expected to witness traction and will play a critical role to achieve the aggregate target of 4-5GW per annum. Several states including Tamil Nadu, Karnataka, Maharashtra and Gujarat have policies that eliminate or reduce value-added tax (VAT) for wind turbine components. The Maharashtra Energy Development Agency (MEDA) has created a green cess (tax) fund. A part of this fund is used to create infrastructure for grid connectivity with proposed wind farms. Strong evacuation infrastructure promotes investments in wind power. State governments like Rajasthan, Madhya Pradesh and Gujarat have formalized land facilitation policies to expedite wind energy projects. Major projects get delayed mainly on account of delays in land acquisition which is seen getting smoothen off. Inox wind is surely a good pick from the renewable setor on back the developments and financials improvements.

Outlook and Valuation:
Inox Wind Ltd provides turnkey solutions for wind farm projects & offers services including wind resource assessment, site acquisition, infrastructure development, erections and commissioning, and also long term operations and maintenance of wind power projects. Company manufacture the components of wind turbine generators in-house with a view to ensuring high quality, advanced technology and reliability and maintaining cost competitiveness. Company has facilities dedicated to manufacturing nacelles, hubs, rotor blade sets and towers. Inox Wind have a perpetual license from AMSC Austria GmbH (formerly Windtec GmbH), or AMSC, a leading wind energy technology company based in Austria, to manufacture 2 MW WTGs in India based on AMSC’s proprietary technology. In August 2014, INXW and AMSC amended the agreement to cover all 2MW WTGs with rotor diameters between 85 meters and 120 meters. In addition, INXW has a non-exclusive license to manufacture 2MW WTGs worldwide based on AMSC’s proprietary technology. Globally, over 15GW of aggregate production capacity operates on AMSC technology. As per the terms of license from AMSC, INXW is required to purchase Electronic Control System manufactured by AMSC or its affiliates. INXW has a non-exclusive perpetual license from WINDnovation Engineering Solutions GmbH, Germany for the technology on manufacturing Rotor blade sets. INXW procures gearboxes from DHHI (China) and Wikov Industry a.s. (Czech Republic), and generators from Emerson Industrial Automation and ABB India for its gearboxes and generators. In the equipment supply business, INXW is among the top-2 players in India; while the size of this segment is 15 % for the WTG industry, it is targeted to contribute 30 % to INXW’s revenue in FY16. The major Wind Turbine Manufactures in India are Chiranjjeevi Wind Energy, Elecon Engineering, Garuda Vaayu Shakti, Ghodawat Energy, Inox Wind, NEPC India, Pioneer Wincon,PowerWind, Regen Power Tech, RRB Energy, Siva Windturbine, Southern Wind Farm, SRC Green Power, SUZLON. INXW manufactures the key components for WTGs in-house, which ensures cost competitiveness, cost-effective logistics, and attractive margins. The long term future for wind is underpinned mainly by its order of competence and cost effectiveness in comparison with other conventional fossil fuels. New products are being introduced with a notably improved yield curve and also to yoke wind energy from low wind sites. Today India only gets 8.7 % of its power from wind energy. Thus, there exists a credible prospect for growth of wind turbine industry in India. The long term outlook of wind market continues to remain strong with rationalization of tariff structure to ensure only players with superior technology and execution capabilities across wind rich states would be emerging as the winners. The growth of the wind energy sector in India for the years to come will be sustained by the unexploited resource availability. Upbeat on the improved regulatory and financial environment, investors are expected to pour over $15 billion into India’s wind energy sector by 2020, a report by ratings and research firm CRISIL. The Indian government has pledged the continuance of significant incentives for the wind energy sector, such as accelerated depreciation and generation-based incentive. However, the wind energy sector might take a major hit, with the Budget capping the accelerated depreciation tax benefit at a maximum of 40% from April 2017. The government is also planning to launch the National Wind Energy Mission which would accelerate the development of wind energy projects and open the offshore wind energy sector as well. However this industry is still the focus of those customers who are ready to incur higher capital cost to generate higher returns. Larger rotor blades and higher hub heights offer superior PLF (plant load factor), compensating for lower tariffs and still generating attractive Internal Rate of Returns. In 2015, India announced plans to increase its renewable energy output to 175 GW by the year 2022, with 60 GW coming from wind power alone. With an installed capacity of 26,904 MW as of March 2016 of wind energy, renewable energy sources excluding large hydro, currently accounts for sub 15 % to 16 % of India’s overall installed power capacity. Wind energy holds the major portion of 65.09 % of 37,010 MW total renewable energy capacity as on Aug, 15 and continues as the largest supplier of clean energy. 70 % of wind generation happens during the five months duration from May to September coinciding with southwest monsoon duration. Fiscal 2016 saw the highest ever annual installation of 3,472 MW. This has increased the installed WTG base to 27,000 MW 15 % y-o-y growth. Inox Wind has a permanent exclusive license from AMSC (American Superconductors) to manufacture 2 MW WTGs, using its proprietary know-how. Under the authorized agreement, IWL is required to purchase all ECS (Electronic Control Systems) from AMSC. There are more than 7,000 turbines with an aggregate capacity of more than 15,000 MW profitably operating across the globe based on AMSC technology. IWL’s WTGs are equipped with DFIG (Double Fed Induction Generator) technology. IWL has entered into two strategic long term technological agreements with AMSC. This alliance has not only helped in reducing the R&D expenditure but also gives it a technological advancement edge. The other agreement provides access to custom-made rotor blade-sets design through WIND Innovation. Enhanced supply chain management coupled with cost saving due to indigenization will help in reducing the foreign exchange exposure of IWL if IWL chooses to manufacture in future. Association of IWL and AMSC for the development of 3MW WTG for India will improve efficiency at a lower cost of generation providing it with cutting edge WTG technology. IWL also has a license from Romax Technology, UK, which is a global provider of integrated software and services, for their gear box designs. With the launch of new 113 meter rotor diameter with a hub height of 120 meters which is 20 % more efficient, 40 % of the future orders are expected to consist of this product itself. The descent of IWL in unexplored southern states like Kerela, Karnataka and Tamil Nadu, is an attempt by the company to stay ahead of its competitors and to maintain a growth rate with is higher than that of the industry as it has done in the past. A decreasing current ratio, increasing leverage and falling interest coverage underpins the rising debt of the company. The total debt of the company rose by a startling 57.1 % in FY15 and 68.7% in FY16. With an increase in sales, the company had to purchase more and more components, the payment period of which is 3-6 months, depending on the credit period given by the suppliers. The company also has a huge trade receivable component sitting on its Balance Sheet as on FY16. The trade receivables in turn have risen by 69 % in FY16 which is almost in line with the growth in revenues for FY16 of 63 % which is evident by a roughly stable debtors’ turnover ratio. Less than 10 % of the receivables are more than 6 months old. The 65 % increase (y-o-y) in short term loans and advances in FY16 y-o-y is mainly due to inter corporate loans given to subsidiaries, IWSL (Inox wind Infrastructure Services Ltd.) and IRL (Inox Renewables Ltd.), at an interest rate of 10 % p.a. With the new additions to its already diversified and reputed clientele, like the Adani’s first order in the wind sector, the company boasts of a current order book of 1,104 MW as on March, 2016. Incremental orders are expected to be undertaken in the first quarter of the current fiscal as well. Winning new orders and more crucially, winning additional business from existing clients is believed to be more important than hunting for big contracts. This belief is further strengthened by Inox’s client mining skills. It has maintained optimism about future order inflows, on the back of government’s focus on renewable sector and also IWLs strong market positioning and capex pipeline of independent power producers (IPPs). The sector is expected to grow at a CAGR of 15 % over the next five years and Inox plans to grab a larger market share as it moves forward. Continuing from Q1, production in last quarter was further geared towards clearing the inventory backlog and improving the working capital cycle of the company. One of the key reasons of working capital blockage was mismatch in manufacturing capacities and therefore to this extent, last quarter Inox again focused on correcting that mismatch. The company has deliberately focused more on the production of blades and towers relative to the production of nacelles and hubs. For the first half of the current fiscal year, 162 MW of nacelles and the hubs were produced versus 332 MW last year, 366 MW of blades were produced versus 280 MW last year and 286 MW of towers were produced versus 332 MW last year 194 MW was commissioned in the first half of the current year versus 216 MW in the first half last year In terms of cost analysis for the first half of the current fiscal, raw material and EPC cost which were at 74.90% of the overall sale price in H1 last year is now down to 70.4 % which is a cost of saving of almost 4.50 %. Other variable cost was at about 3.5% last year versus 3.6% this year. Fixed overheads went up from 7.3% to 14.2 % largely because of lower production of nacelles and the hubs. Last quarter there has been a lot of logistics movement of inventory to south such as AP and karnataka, where Inox is building new projects. Logistics costs in blades and towers are almost two or three times the logistics cost of a nacelle and since the company has dispatched huge amounts of blades and towers as opposed to nacelles to overcome the inventory mismatch which was prevalent in the last few quarters. Recently, IWL expanded its Turbine capacity to 113m from the earlier 100m. As a result, management expects 5 % increase in the costs, but efficiency is expected to increase by 20 %. Further, realization of large rotor blades would increase. Considering shift in business mix where high capacity Turbines would contribute more to the financials, it is expected that the efficiency of IWL to improve. As a result, it is expected that the Adj. EBITDA margins to improve from 15.4 % in FY2016 to 16.4 % in FY2018E. The Adj. PAT margin expansion during FY2016-18E could remain around 10.6 %. Considering the 4QFY2016 Order Book, and expected strong order inflow trends, IWL stock is trading at attractive valuations. Post the 17 % correction in the IWL stock after 4QFY2016 results were announced, the stock at the current market price of Rs. 185.85, the stock is trading at a PE of 9.11x FY17E and 8.00 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 20.40 in FY17E and Rs. 23.00 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also.

KEY FINANCIALSFY15FY16 FY17EFY18E
SALES ( Crs) 2,702.274,406.504,710.205,053.80
NET PROFIT (₹ Cr)327.40421.20453.50509.80
EPS () 14.8019.0020.4023.00
PE (x)17.6020.5016.9013.60
P/BV (x)14.4011.2010.40 9.30
EV/EBITDA (x)10.008.607.706.30
ROE (%) 36.0026.0021.9020.00
ROCE (%)30.3024.8021.0021.00

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*As the author of this blog I disclose that I do not hold  INOX WIND LTD in my any of the portfolios.

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


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I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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Wednesday, November 23, 2016

ZEE ENTERTAINMENT ENTERPRISE LTD: AROUND THE GLOBE !!!

Scrip Code: 505537 ZEEL
CMP:  Rs. 449.50; Market Cap: Rs. 43,172.16 Cr; 52 Week High/Low: Rs. 589.90 / Rs. 350.10.
Total Shares: 96,04,48,720 shares; Promoters : 41,36,70,212 shares – 43.07 %; Total Public holding : 54,67,78,508 shares – 56.93 %; Book Value: Rs. 43.88; Face Value: Rs. 1.00; EPS: Rs. 10.32; Dividend: 225.00 %; P/E: 43.55 times; Ind. P/E: 35.52; EV/EBITDA: 23.69 times. Total Debt: Rs. 1.90 Cr; Enterprise Value: Rs. 42,200.76 Cr.

ZEE ENTERTAINMENT ENTERPRISES LTD: Zee Entertainment Ltd was founded in the year 1982, based in Mumbai. Company was formerly known as Zee Telefilms Limited and changed its name to Zee Entertainment Enterprises Limited in January 2007. The Company came out with an IPO in 1993 offering 90,00,000 equity shares of Rs. 10 each for Rs. 20 per share raising Rs. 18.00 Cr. ZEEL announced split in its face value from Rs. 10 to Rs.1 on September 1999, later in September 2010 it announced bonus in ratio of 1:1 and on completion of 20 years of broadcasting business in May 2013, the Company announced the distribution of about Rs. 2,015 Crs by way of Bonus issue of 6 % Non-Convertible Redeemable Preference Shares of Face value of Re. 1 each. This bonus issue was in ratio of 21 non-convertible redeemable preference shares with tenure of eight years of Re. 1 each for every 1 Equity share of Re. 1 held in a company. The bonus issue was with one-fifth of the amount i.e. around Rs. 400 Cr redeemable from fourth year onwards in five equal instalments till eight year, this was issued on March 4, 2014. ZEEL, together with its subsidiaries, operates as a vertically integrated media and entertainment company in India. It operates in three segments: Broadcasting and Content, Education, and Film Production. The Broadcasting and Content segment develops, produces, and procures television programming and film content, and delivers through satellites, cable, and Internet. It broadcasts channels, such as Hindi general entertainment channels and regional language general entertainment channels, Bollywood channels, sports channels, English entertainment channels, alternate lifestyle channels. The company broadcasts Hindi entertainment channels - Zee TV, Zee Smile, and 9X; Hindi movies channels - Zee Cinema, Zee Premier, Zee Action, and Zee Classic; English entertainment, movies, and life style channels - Zee Studio, Zee Café, and Zee Trendz; and Sports channels - TEN Cricket, TEN Action, TEN Sports, and TEN Golf. It also broadcasts Regional language entertainment channels, including Zee Marathi, Zee Bangla, Zee Talkies, Zee Telegu, Zee Kannada, ETC Punjabi, and Zee Tamil; religious and alternate lifestyle channels comprising Zee Jagran and Zee Salaam; music channels, such as Zing and ETC Music; niche and special interest channels comprising Zee Khana Khazana; and HD channels, including Zee TV HD, Zee Cinema HD, Zee Studio HD, and TEN HD. Company earns revenues by the way of advertisement and subscription revenues and syndication. The Education segment engages in distribution of software learning products; and provides education and training in information technology. Zee Entertainment Enterprises Ltd has approximately 959 million viewers in 169 countries worldwide. The Film Production segment produces and distributes films. The company has a library housing approximately 2,10,678 hours of television content and about 3,500 hours of movie titles. Effective March 29, 2010, Zee News Ltd. demerged its Regional General Entertainment channel business undertaking and transferred its operation to Zee Entertainment Enterprises Limited. It has operations in India, the United States, Canada, Europe, Africa, the Middle East, Southeast Asia, Australia, and New Zealand. ZEEL can be locally be compared with Balaji Telefilms Ltd, New Delhi Television Ltd, Sri Adhikari Bros Tele Network, Sun TV Network Ltd, Network 18 Media & Investment Ltd and TV18 Broadcasts Limited, Raj Television Networks Ltd, and Globally with UTV Media PLC of UK, CBS Corporation of USA, British Sky Broadcasting Group of UK, Viacom Inc of USA, Comcast Corp of USA, Direct TV USA, Discovery Communications of USA, Dish Network of USA, Dreamworks Animations SKG of USA, Time Warner Cable Inc of USA, TV Tokyo Holdings Corporation of Japan, Chubu-Nippon Broadcasting Co., Ltd of Japan, Wowow Incorporated of Japan, Twenty First Century Fox of USA, Walt Disney company of USA, News Corp of USA, NBC Universal of USA.

Investment Rationale:
Zee Entertainment Enterprises Limited is one of India’s leading television, media and Entertainment Company. It is amongst the largest producers and aggregators of Hindi programming in the world, with extensive library housing over 2,10,678 hours of television content. ZEE has rights to more than 3,500 movie titles from foremost studios and of iconic film stars; Zee houses the world's largest Hindi film library. Through its strong presence worldwide, Zee entertains over 67 Cr+ viewers across 169 countries. The Zee stable owns an integrated range of businesses. All of these in singularity adhere to the content to consumer value chain model of media and entertainment business. Zee is a pioneer in every aspect of content aggregation and distribution through traditional media like satellite and cable and new media like the internet, in India. Zee Entertainment Enterprise is the first listed media company in India and first to launch a Hindi General Entertainment Channel as Zee TV. The Indian Media and Entertainment (M&E) industry is a sunrise sector for the economy and is making high growth strides. Proving its resilience to the world, the Indian M&E industry is on the cusp of a strong phase of growth, backed by rising consumer demand and improving advertising revenues. The industry has been largely driven by increasing digitisation and higher internet usage over the last decade. Internet has almost become a mainstream media for entertainment for most of the people. The Indian media & entertainment sector is expected to grow at a Compound Annual Growth Rate (CAGR) of 13.9 % year-on-year to reach Rs 1,96,400 Cr (US$ 28.82 billion) by 2019. In 2015, the overall Media and Entertainment industry grew 11.7 % over 2014. The largest segment, India’s television industry, is expected to maintain its strong growth momentum led by subscription revenues, representing a year-on-year growth of about 13.2 % to reach Rs 60,000 Cr (US$ 8.8 billion) in 2017. Significantly, with the increased penetration of smartphones and expansion of 3G/4G network in India, the country is likely to see around 900 Cr mobile application (apps) downloads during 2017, which is five times more than 156 Cr in 2012. This uptick in app-downloads is also expected to increase the revenue from paid apps to an estimated over US$ 241.16 million as against US$ 144.7 million in 2014. Internet access has surpassed the print segment as the second-largest segment contributing to the overall pie of M&E industry revenues. Television and print are expected to remain the largest contributors to the advertising pie in 2018 as well. Internet advertising will emerge as the third-largest segment, with a share of about 16 % in the total M&E advertising pie. The film segment which contributed Rs 12,640 Cr (US$ 1.90 billion) in 2014 is projected to grow steadily at a CAGR of 10 % on the back of higher domestic and overseas box-office collections as well as cable and satellite rights. Digital advertising is expected to lead the CAGR with 30.2 %, followed by radio with 18.1 %. Animation and VFX, and television are expected to register a CAGR of 16.3 % and 15.5 % respectively, followed by growth rates of music at 14.0 %, films at 10 % and OOH with 9.8 % expected CAGR. Within TV, subscription revenues are expected to be three times more than advertising revenues, by 2018. Growth in the regional reach of print and radio shall provide opportunities to further improve the advertisement revenue. Recently the government of India announced Demonetization of its Rs. 500 and Rs. 1000 currency notes; this move is likely to impact multiplexes more rather than the content players and broadcast players like ZEE Entertainment Enterprises Ltd. The content interruption is unlikely as only small payments happen in cash. Print companies could see some impact while the broadcast companies will be least impacted. Ad revenue forms a major part for these companies and almost most of the payments are made in cheques so demonetization would not hurt ZEE. Zee Entertainment is likely to see a sharp increase in earnings going forward to the extent of 25 % plus over two or three years due to successful launches of new channels and is expected to do even better going ahead with increasing its market share in regional space. Also, Goods & Services Bill will be a great positive for the company. Recently, Sony Pictures Networks India (SPN) announced that it will acquire Ten Sports for Rs. 2,600 crore ($385 million) from Zee Entertainment Enterprises. The deal will raise SPN's sports profile and put it on equal footing with Rupert Murdoch's 21st Century Fox-owned Star India. The price reflects a control premium as well as a four-year, non-compete pledge. ZEE had paid $107 million (Rs. 500 crore) in instalments during 2006-11 to acquire Ten Sports from Dubai-based Abdul Rahman Bukhatir's Taj Group. Its accumulated losses from the sports business which were are pegged at Rs. 600 Rs. 640 crore. The transaction is expected to be completed in four-five months by FEB 2017. ZEE ran the sports business for close to 10 years and has got it near breakeven. However, they believe that their energies and resources should be deployed in other high-margin and profitable businesses. The valuation for TEN was very good as they got an IRR (internal rate of return) of over 15 %. Zee reported ad revenue growth of 13.7 % YoY in the quarter aided by strong growth in regional channels. This was higher than industry ad growth of 13-15% during the quarter. Zee has a leadership position in Marathi and Bengal and is in the top 3 positions in Telugu and Kannada space. During Q2FY17, Zee Tamil witnessed a marked improvement in viewership, and was the second ranked channel in August and September in the Tamil market. The company expects to continue its industry leading growth, going ahead. The company, however, sounded cautionary on moderation in FMCG and e-commerce spends, which may have some impact on industry growth in the coming quarters. As per the company, FMCG which forms 55-60 % of the TV ad spend, would thus impact ad growth by 1 % for every 2 % impact on spends. However, the company remained upbeat on telcos ad spends owing to 4G launches coupled with GST rollouts wherein potential savings in tax outgo by companies may be reinvested for ad spend. International ad growth is expected at low double to high single digits. Though the programming hours were on the lower side with 25 hours in the quarter, the management has guided at increasing ad inventory through increase in programming hours.  Higher penetration of DTH and the digitisation process augur well for faster growth in subscription revenue over the long term. And with the rapid growth in mobile usage and internet connections and looking at the content hours and quality of ZEE, the company can retain its leadership in media space and command higher premium in valuations and is well poised to benefit from this favourable environment.

Outlook and Valuation:
Zee Entertainment Enterprises Ltd (ZEEL) is one of India’s leading television, media & entertainment companies. In a reflection of India's growing influence, domestic television channels are increasing their networks internationally. Zee Entertainment is a leading provider of entertainment content across genres in the Hindi, English & regional languages. With leading channels like Zee Marathi, Zee Bangla, Zee Telugu, Zee Kannada, Zee Tamizh and ETC Channel Punjabi within its fold, Zee Entertainment would now have an unparalleled reach across the country in the fast growing regional markets. Bollywood - The Indian Film industry is acclaimed as one of the largest film industries of the world. ZEE's Hindi movie channels, Zee Cinema, Zee Premier, Zee Action and Zee Classic maintain its objective in delivering the best of programming in the Hindi Movies Genre. Zee has restructured its business into five verticals, each of which is expected to become a significant piece of the overall pie over the medium to long term Horizons. The five verticals are Broadcasting, International business, Movies & Music, Digital, Live entertainment. Broadcasting segment is currently the major portion of the business; this vertical is likely to remain the key part with focus on regional segment and improving the ratings of flagship & other GEC through new launches and improved selection of shows. Its International business segment along with broadcasting (domestic) would form the lion’s share of the business in medium term. The company would continue to address the international market for Indian content in Hindi/Regional/dubbed language. ZEE’s Movies & Music segment continues to focus on movies production both in Hindi and regional space. Zee Music Company, its music label, has built significant market share, with 60 % incremental share in acquisition of music rights of new Hindi movies, during the quarter. Zee’s Digital segment is currently in nascent stage and the company has yet to discover the market opportunity. During Q2FY17, Ditto TV, its pay over-the-top (OTT) platform, reduced its subscription price to Rs. 20 a month vs. the platform clocking 200 million video views in Q2. Its Live entertainment segment is also in nascent stage segment. The company expects huge opportunities from domestic as well as international events. During Q2FY17, Zee’s LiveEvents business rolled out its first event, ‘Wicked Weekends’ across the country. Zee acknowledged that a fall in ratings in its flagship Zee TV was owing to wrong selection of shows. A new business head has joined four to five months ago. The company has lined up a pipeline of new shows, which would be launched in H2FY17 and thus boost ratings. The company launched three new channels in domestic market - Zee Anmol Cinema - a Hindi movie channel for FTA audience; Zee Yuva, a youth focused Marathi GEC to add on to its present offerings in Marathi market; and Zee Cinemalu, a movie channel in Telugu language. In October, it also refreshed the content of Zindagi, its other Hindi GEC. The company is also in the process of launching HD versions of its regional channels. ZEE has lined up its International channel launches, two new channels in the international market in Q2FY17 – Zee One – targeted at Spanish speaking Hispanic population in US and Zee Mundo – a Bollywood movie channel in Germany, which airs movies dubbed in German. Post the launch of the above mentioned channels, its international channels bouquet is at 40 with channels dedicated to native audience at 12. ZEE’s & TV witnessed 12 % QoQ improvement in viewership. The company indicated that while it is still away from the breakeven point – i.e., 9 % to 10 % viewership market share, it is on track to meet its target to achieve breakeven within the 3 years of launch. In the Tamil market, Zee Tamil witnessed a marked improvement and was the second ranked channel in August and September. In the Telugu market, where it is third, it indicated that Gemini TV leads owing to huge movie content and Zee Telugu is superior in the fictional segment. In the Kannada market, where the company is number two, the leader (Colours Kannada) has higher content hours and high cost non fiction shows like Bigg Boss, which lends them the leadership. The Free to air (FTA) channels advertisement market size is Rs. 1500 crore including Doordarshan. As per the company, 80 % of the market size is held by 8-10 channels. Zee’s key strategic objectives are to be a multimedia entertainment conglomerate, to attain global consumption leadership, and consistently enhance shareholder value. Zee’s first priority is to attain leadership position in key genres, wherein it enjoys leadership in genres of regional markets such as Telugu, Marathi, Kannada, Odisha (Sarthak) and Bengali and has maintained top two positions. It also emphasised its leadership in Hindi movies cluster where it increased its viewership share to 34 %. Zee wants to continue its expansion in new markets and verticals like its expansion in movie production, theatres, live events and music. In FY16, Zee created a new entertainment vertical – Zee Theatre to make unique theatre content across platforms. The company has also expanded in the international market and invested in new distribution deals across the Caribbean, African and APAC markets. The company identified its focus on digital segment by creating multiple digital offering like OZee and Ditto TV and creating content which is customised for such platform. Zee also wants to attain sustainable profitable growth through efficient capital allocation and prudent cost model. Interestingly, the sale of sports business finally in Q2FY17, mirrored the management’s intention to shift focus from loss making segment to profitable segment, and they sold off loss making sports properties which improves its Operating cash flow which will remain robust at Rs. 730 crore despite acquisition of Sarthak Entertainment in FY16. Company’s FCF, however, was impacted by higher investments in building production studios and Sarthak Entertainment acquisition, while sale of air plane generated inflow of Rs. 36.7 crore. Going ahead, with most of capex cycle over in terms of any major channel launches the FCF generation should improve going ahead. Acquisition of Reliance Broadcasting Network will provide Zee an altogether new geography like Bihar, through the #1 channel over there Big Ganga and entry into the Radio channel Big FM. However, as it is subject to regulatory approvals and uncertainty over finalization of the deal time line but post the inclusion, a good bump up in the ad revenues and overall financials can be seen. On Financial side, Zee posted strong performance in Q2 as the numbers were lifted by subscription revenues which grew at 22 % yoy on the back of 24.6 % yoy growth in the domestic arm on the back of catch up revenues of the previous quarter and early closures of content deals as compared to previous year. Advertising revenues witnessed some moderation at 16 % as FMCG and e-commerce verticals lowered their ad spending a bit. The company in the Hindi GEC had a market share of 24 % with & TV combined, whereas it remained strong in the Marathi space with 55 % market share. The highlight of the quarter was the Tamil channel of Zee which climbed up to second spot while in the Telugu and Kannada markets Zee remained at 3rd and 2nd spots respectively. In Oriya market, Sarthak TV continued its dominance. Other sales and services which included syndication of sports business, Zee Music Company, Ditto TV etc grew by 16.4 % yoy. On the margin front, EBITDA margins have been continuously inching higher quarter by quarter. In Q2, they came in at 28.9 % higher 2.90 % yoy as sports losses reduced and subscription revenues moved up. Programming costs as a % of sales moved up to 45.3 % up by 1.50 % yoy and 3.50 % qoq on higher cost involved with movie production and India cricket series. Other expenses as a % of sales moved down to 16.8 % 3.00 % qoq and 4.80 % yoy on account of cost control and low carriage fees. Despite higher depreciation and lower other income, PAT adjusted for exceptional losses came in at Rs. 327 Cr which was 17.3 % higher yoy. Higher market share gains are on the cards as Zee Anmol, regional channels, newly launched channels and the movies basket are expected to continue their excellence. Even internationally, the revenues are growing at a hefty pace on new content. This will enable the ad revenues to grow at a rate of 18 % to 20 % in the coming years higher than the industry average. Subscription revenues will continue to get trigger from finalization of content deals, digitization albeit with a delay and the long term positives to be seen from the new tariff regulations. Hiving off of the sports business will offer a good riddance from a business which was dragging down the profitability. This will lift up the margins from FY18E. The company hopes that Digital will be a key part of its Growth in the future and hence the company geared for expansion on that front as well.   At the current market price of Rs. 449.50, the stock is trading at a PE of 33.79 x FY17E and 26.13 x FY18E respectively. The company can post Earnings per share (EPS) of Rs. 13.30 in FY17E and Rs. 17.20 in FY18E. It is expected that the company’s surplus scenario is likely to continue for the next three years keeping its growth story in the coming quarters also. 

KEY FINANCIALSFY16FY17EFY18EFY19E
SALES ( Crs) 5,851.506,832.807,880.809,042.70
NET PROFIT (₹ Cr)1,060.201,277.201,652.201,926.80
EPS () 10.7013.3017.2020.10
PE (x)48.1038.6029.9025.60
P/BV (x)7.906.705.705.00
EV/EBITDA (x)32.3026.1021.3018.00
ROE (%) 18.00 18.8020.7020.80
ROCE (%)15.9017.9017.8017.90

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This is a personal blog and presents entirely personal views on stock market. Any statement made in this blog is merely an expression of my personal opinion. These informations are sourced from publicly available data. By using/reading this blog you agree to (i) not to take any investment decision or any other important decisions based on any information, opinion, suggestion, expressions or experience mentioned or presented in this blog (ii) Any investment decisions taken if any would be his/hers sole responsibility. (iii) the author of this blog is not responsible. 


As a Disclosures I Confirm that : 
I confirm that I shall not deal or trade in securities mentioned in this article within thirty days before and five days after the publication of this article. I also confirm that I will not deal or trade directly or indirectly in securities mentioned in this article in a manner contrary to the ideas put forth in the article. I have not received any financial compensation for writing this article.
 

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