Mumbai: After three years of negative growth, it is expected that ad spend will grow by 12 per cent to 15 per cent over the next few years.

Analysts are expecting that the recession in the ad spend will halt as the economy picks up steam. Says an ABN-Amro Asia Equities (India) report: "Our discussions with various companies in the infrastructure sector indicate that the pick-up in economic activity is quite strong."

It reports said that almost all engineering companies see clear visibility of strong economic growth for the next three years at least. Should this happen, these companies will be the early beneficiaries.

The current low interest rate environment is driving consumer demand. Car sales are soaring as finance is easily available and affordable (consumers are availing of the discounts offered by various finance companies). Excellent monsoons this year should propel rural consumption, and hence demand.

"All this, coupled with rising business confidence, make us confident about strong GDP [gross domestic product] growth from this year, signalling increased ad spend," ABN Amro Securities said. This will lead to more ad spend by companies.

It also said that Zee Telefilms will be a prime beneficiary of this development. "While the market is pressuring the Zee stock given the lack of visibility on the implementation of CAS [conditional access system], we are optimistic about the company."

Zee will gain from the expected cyclical upturn in ad spend, after a three year recession. It has set a target price of Rs 202 for the Zee stock against Rs 100 earlier, showing 96-per cent upside from the current levels.

The Bull case is based on assumptions of a pick-up in ad revenue on the back of consumption-led demand. Any external factor causing a slowdown in economic growth means the anticipated recovery might not materialise, the report said.

It also pointed out that the market is too narrowly focused on CAS implementation, completely ignoring the fact that Zee will be a prime beneficiary of strong economic growth. The market is also currently focusing on cyclicals like engineering, steel and auto stocks because they will be the early beneficiaries of strong economic growth.

The firm is expecting that the Zee stock will be re-rated as revenue visibility improves. Zee has historically traded at a P/E (price earnings) multiple of 15-25x on one-year forward earnings, except during the bubble period of 1999-2000. Comparing Zee with European media stocks, the stock is undervalued.

Before 1999-2000, Zee enjoyed a near monopoly on the cable network, garnering huge ad revenues. Subsequently, competition from Star TV and Sony Entertainment took the wind out of Zee. This, coupled with a crash in media and convergence assets worldwide in 2000, put a huge pressure on Zee's financials, and the stock price reacted accordingly.

Until early 2002, ad revenue was the key driver of Zee's growth, and consumer expenditure (or subscription revenue) came a distant second. This is despite the latent potential of consumer expenditure and it being the largest component of the global media sector revenues.

In late-FY02, Zee converted its main Hindi channel into a pay channel, which boosted its subscription revenue, albeit on a low base. Subscription revenue helped the company offset the pressure from low ad revenue, a direct fallout of a recession in ad spend and low-content quality.

List of reports on Zee Group