Stellar earnings growth, Zee5 making strong inroads
Upbeat ad/sub growth propels earnings:
Zee’s 2QFY19 revenue increased by a stellar 25% YoY to INR12.1b (3% beat). Consequently, EBITDA, too, grew strongly by 38% YoY, with the margin expanding by 320bp YoY despite continued investments in Zee5 (more than prior expectation of 200-300bp). Domestic ad/subscription growth was robust at 23%/26% YoY – ad growth was driven by 12% industry growth, Zee’s market share gains, a low base (2QFY18 impacted by GST), and estimated 1-2% contribution of Zee5. Zee5 amassed healthy 41.3m monthly active users and average daily spend of 31 minutes. Reported PAT declined 35% YoY to INR3.9b. However, adjusted for fair value losses and previous quarters’ one-offs, PAT was up 31% YoY to INR4.1b.
(1) Expect mid-high-teens ad growth in 2HFY19. (2) Subscription growth to come in ahead of guidance of low-teens, led by better phase III monetization and catch-up revenue. (3) 1HFY19 avg. margin is already at 33%, yet ZEE maintained 30%+ margin guidance given its high investment plans in Zee5 in 2H. (4) Zee5 to contribute at least 30% of revenue in next five years. (4) Peak inventory investment is behind; to be half of last year’s INR9b.
Earnings not affected by Zee5 investment:
We believe that the recent concerns about Zee5’s high investment impacting profitability are unwarranted. This is because healthy revenue CAGR (FY18-20) of 15% (driven by steady ad growth) is likely to provide room to continue investing in Zee5 (400-500bp) and still maintain margins. Over FY18-20, we expect domestic ad/subscription growth of 18%/15% to drive 18%/30% EBITDA/adj. PAT growth.
We assign P/E of 30x (seven-year average) to FY20E EPS of 19.8 – a 15% discount to three-year average multiple due to the threat from the digital media space – to arrive at a target price of INR600. Strong earnings growth, healthy RoIC and cash generation should support Zee5 and allay concerns about long-term earnings visibility, in our view. Maintain Buy.
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