* In line growth in revenues despite headwinds:
Zee Entertainment Enterprises’ (ZEEL) revenue remained flat (up 0.4% YoY; in line with estimate) at Rs1,528 crore (numbers for Q4FY2016 re-stated as per IND AS accounting standard). Advertising revenue too was flat YoY at Rs846.9 crore, affected by demonetisation and lower Ad revenue from the Sports business YoY. Domestic Ad revenue grew by 8.6% YoY in Q4FY2017 (excluding Sports) while International Ad revenue declined by 53% YoY on account of a higher base (Ad revenue in the Sports business at Rs9 crore in Q4FY2017 vs Rs61.2 crore in Q4FY2016) and some regulatory headwinds in certain markets. Subscription revenue declined by 6.1% YoY to Rs557.9 crore, owing largely to higher catch-up revenues in Q4FY2016 and an overall high base because of the Sports business’ subscription revenue.
* Margins continue to beat estimates due to lower programming cost:
The Operating Profit Margin (OPM) for the quarter expanded by 370BPS YoY to 30.7%, led by a 5.6% YoY drop in the Programming Cost, as the management is yet to take a decision on fixing shows for the Prime Time slot in the flagship channel (which largely led to the lower programming cost). The management of ZEEL expects to finalise the content in the coming quarters. On the whole, the management reiterated its comfort level with OPM of 30%+, and will re-invest the savings from the sale of Sports business (likely to add 300-350BPS in FY2018) back into the core business. Adjusting for the RPS MTM gain of Rs47 crore and excluding the gain of Rs1,223 crore from the sale of the Sports business, the net profit stood at Rs245 crore, while the reported net income stood at Rs1,515.5 crore.
* Expect to maintain higher than industry Ad revenue growth in FY2018:
(1) ZEEL management has indicated that it will maintain its Ad revenue outperformance visà- vis the industry in FY2018. For the quarter, Ad revenues were affected due to demonetisation, as the largest Ad revenue source (FMCG sector) scaled back its Ad spends. The Ad revenue growth for the overall industry was flat to negative; (2) Growth in Ad revenue was largely driven by higher yields, led by an improvement in viewership across channels; (3) Growth in the domestic Subscription revenue is expected to remain in the range of low to high teens, based on the current ROI rates. However, any major change in the tariff rates could impact growth in the domestic Subscription revenue; growth in international subscription revenue remains soft; (4) ZEEL management expects to continue its investment in Movies & Music business, and is also tactically acquiring satellite rights for new movies (which has led to a sharp increase in working capital attributed to higher inventory); (5) ZEEL management has indicated that it will use the proceeds from the sale of the Sports business for the redemptions of RPS.
* Maintain Buy with price target Rs580:
ZEEL continues to focus on the five key pillars to drive long-term growth and we believe that successful execution of this strategy will have a material impact on sustainable growth going forward. We continue to remain positive on ZEEL, as it is a structural India consumption theme. Moreover, the company continues to invest across the media spectrum, like Movies, Music, Events, Digital and International markets, to maintain its high growth trajectory. We maintain our ‘Buy’ rating with a revised price target of Rs580.
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