NEW DELHI: JM Morgan Stanley (JMMS) feels that the valuation of Zee Telefilms, India's largest vertically integrated media and entertainment company, "looks attractive" in the Indian market context as well as the global media sector.

JMMS has also predicted that considering the strategy adopted by Zee, including its overseas presence and a huge library of programmes, the company's earnings are expected to grow 29 per cent annually over the next three years. The key driver will likely be the growth in subscription revenues in the domestic market that is expected to grow 43 per cent CAGR (compound aggregate growth rate) over the next three years.

In a report, dated early August and titled "Zee Telefilms: Down, But Definitely Not Out", JMMS, said: "The absence of any media company of comparable size and equally diversified business profile has led us to compare Zee with other Indian corporates of significant size, strong brand equity and high growth rates (this would give a flavour of the company's valuation in the Indian context)."

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The report goes on to add: "The valuation (of Zee) looks attractive compared with the large Indian corporates, with Zee trading at an 18 to 42 per cent discount on EV/E (enterprise value to EBIDTA) and P/E (price to earning) ratio for financial year 2003."

When JMMS research estimates took four Indian companies for comparison, it was found that Zee's 31 per cent earnings growth is one of the highest, second only to Ranbaxy (59 per cent). The other companies taken for comparison included Hindustan Lever, Infosys and Bharti.

Zee is India's largest vertically integrated media company with revenues of $ 220 million and a presence in film, music and education. It is a large producer and aggregator of Hindi programming with an extensive library. Zee is also one of the largest cable distributors in the country through its wholly owned subsidiary, Siti Cable, which services nearly 6.5 million cable homes and nationally enjoys 16.2 per cent market share.

Listing out the investment positives, the JMMS report, which also mentions that it does not provide individually tailored investment advise, states that since Zee's programme library is one of the largest in the country - according to the Zee management it comprises 30,000 hours of programmes and 3,000 movies - "multiple delivery" is highly profitable.

Revenues from recycled software comprised 5 to 10 per cent of the total revenue over the past three years, the report says, adding: "The company has been exploiting the library across various distribution channels to optimise revenue."

JMMS also feels that the regional bouquet of channels in the Zee stable is part of a good flanking strategy and the strong regional foray not only enables the company to command higher viewership, but also enables it to offer advertisers focussed solutions to their advertising needs.

Zee's revenue of Rs. 2.05 billion in financial year 2002 from offshore subscribers comprised pay revenues and could "grow 19 per cent over the next three years by our estimates," the Morgan Stanley report points out.

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The JMMS report, of course, lists out investment concerns too and since indiantelevision.com believes in presenting both sides of the saga, here's the flip side of the story. JMMS has noted that concerns include loss of viewership by Zee, current slowdown in ad market growth, need for improvisation in programming, high receivable days, some methods of accounting, attrition in top management and weak corporate governance in the past.

Pointing out that due to a slowdown in the growth of the overall ad market, Zee's ad revenues too, for the first time in the past decade, had declined 7.5 per cent in the FY 2002, the report optimistically points out a slow and gradual recovery in ad revenue over the next two-three years is expected. But Zee has to watch out for the cricket World Cup next year where the matches are expected to "clash with prime time shows."

The report also admits that Zee has ceded leadership to Star (which has managed to capture the eyeballs through blockbusters KBC, Kyunki and Kahaani) and adds: "We believe that Star, Sony and Zee will likely dominate and command 75-80 per cent of the ad market (with) Zee's share to stabilise at 25-30 per cent."