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Investments to impact EBITDA, cash flows…

Zee Entertainment reported a good set of Q3FY21 numbers with growth in ad and subscription revenue. Revenues grew sharply by 33.2% YoY to | 2729.4 crore owing to content syndication deal of | 551.2 crore. Domestic ad increased 7.5% YoY to | 1244.3 crore during the festive quarter while on comparable basis, domestic subscription grew 9.3% YoY driven by both TV business and Zee5. Reported EBITDA came in at | 715.7 crore, up 26.5% YoY with margins at 26.2% YoY. Consequently, reported PAT jumped 14.4% YoY | 399.9 crore.

Festive season leads to revenue growth

Zee’s ad revenue increased 5.8% YoY during the quarter. While ad pricing was within range of last year levels, ad volume was boosted during festive quarter. Rise in ad spend from categories like auto, FMCG, e-commerce etc. led the growth. We expect ad growth momentum to continue. We bake ~36% ad growth in FY22E on a low base of FY21. Subscription growth of 9.3% also lifted revenues. However, clarity on implementation of NTO 2.0 is key for subscription outlook. We bake in subscription growth of 7.5% in FY20-23E on a like to like basis (~10.7% CAGR on reported basis given the post realignment of music revenues). Sustained growth in viewership and Zee5 ramp up will be key monitorable for the same. Zee5 revenues were at | 117.8 crore (up 19% QoQ), while EBITDA loss was at | 175.7 crore (vs. | 189.4 crore in Q2). Zee5 recorded a global DAU of 5.4 million and 65.9 million global MAU in December.

Planned investment likely to impact margins

Zee’s cash and investments were at | 1793 crore in Q3. The management indicated as a part of long term growth strategy, the company will boost investment across segments from FY22E onwards. Planned content investment is also to enhance viewership across Hindi and regional markets. This will lead to higher cash outgo and margins may be under pressure. As the management has not guided quantum of investment, we conservatively bake margins of 25% in FY22, vs earlier guidance of 30%.

Valuation & Outlook

While Zee has gained viewership in Hindi, Kerala and Bangla, it has lost leadership position in Marathi market. Pick up in Marathi market and overall viewership is important considering the recent expansion in channel portfolio. Potential implementation of NTO 2.0 and impact on subscription revenues ahead also remains unknown. Zee’s proposed heavy investment in movie business (traditionally volatile profitability compared to broadcasting) may impact operating margins. We would await finer details (likely by Q4 end) before turning constructive. We roll over valuations to FY23E and maintain HOLD rating with a target price of | 250/share (vs. earlier TP: | 195). We value the stock at 13x FY23E P/E (vs. 11x FY22E P/E earlier) with increase in target multiple due to faster ad recovery and earnings growth prospects on benign base, going ahead.

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