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Weak performance; guidance toned down…

About the stock: Zee Entertainment (Zee) is one of the largest listed media companies in India, which owns and operates a bouquet of 49 TV channels across 11 languages and also an OTT app Zee5.

* The company’s TV network share dropped to 17% in Q1 vs. 18.9% in Q4 due to lockdown disruption and weak performance in categories such as Hindi GEC, Tamil and Marathi

Q1FY22 Results: Zee reported weak Q1FY22 results.

* Revenues at | 1,775 crore were up 35.3 YoY, down ~10% QoQ, with ad revenues up 120% YoY to | 927 crore, on a depressed base of Q1FY21 but down 20% QoQ. Overall subscription revenues grew 2% YoY to | 813 crore, largely driven by digital business

* EBITDA was at | 344 crore, up 56% YoY on a depressed base with margins at 19.4% (down 813 bps QoQ), due to higher operational costs

* PAT came in at | 213.7 crore, lower than estimate of | 246 crore, impacted by a weaker operating performance and higher tax rate

What should investors do?

Zee’s share price has declined by ~18% over the past five years, owing to promoter debt issue and business challenges.

* We maintain our HOLD rating

Target Price and Valuation: We value Zee at | 195 i.e. 12x FY23E EV/EBITDA

Key triggers for future price performance:

* Overall viewership share improvement, which has dipped in recent times. Turnaround in some of the regional markets like Tamil/Marathi as well as Hindi GEC, where they have lost viewership market share recently

* Recovery in margin performance and cash flow generation

* Marked ramp up in Zee5 subscribers, revenues

Alternate Stock Idea: Besides Zee, we like PVR in the media space.

* A play on reopening and improving market share of multiplexes

* BUY with a target price of | 1610

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