The Earnings Forecast of Zee Media Entertainment Is Over-Optimistic in the Icicidirect Research

The earnings forecast of Zee Media entertainment is over-optimistic in the ICICIDirect Research

What is the problem?

Valuation of entertainment media firms depends on the content and the subscription. The digital disruption and the coming of international players will impact both the growth and the viewership of domestic conventional media entertainment industry. The increased digital content consumption owing to increased mobile penetration and internet bandwidth will impact the earning of these media entertainment channels. While valuing media entertainment firms, long term growth should consider these environmental changes and be not over optimistic about continuing growth.

Why is the problem important to financial analysts or investment community?

The valuation of a company is pivoted on the forecasted earnings growth rate. The assumed growth rate is based on historical growth in media consumption pattern and at times, does not take into account the upcoming disruption. The growth rate needs to be recalibrated to get better valuation of the firm. Also, all companies in media industry are assumed to grow at similar growth rate, leading to inflated industry comparable ratios (P/E).

What is the method of study? i.e., what are the relevant variables, how will they be measured, what is the model, etc.

We will study the impact of digital content media like Netflix, Amazon etc in the US markets, on the cable TV channel business. Internet based digital content media has matured rapidly and according to a report1 from BCG Perspectives, it will capture 20% of the video industry value by 2018, up from 10% in 2014. This change is also reflected in the stock prices of firms like Viacom Media Networks, Fox Entertainment Group etc, which are on the decline post 2014.  The most important variable in the study will be the revenue growth number, along with the earnings estimation post the forecast horizon.