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FCF held forth despite content cost on lower capex

Zee Entertainment Enterprises’ (ZEEL) Q4FY21 ad revenues rose 8% YoY on low base; subscription revenue growth significantly slowed, which led to a small miss in revenues and EBITDA. Exceptional loss on impairment of goodwill hurt net profit. ZEEL has set an ambitious outlook on double-digit ad revenue growth in FY22 (over FY20).

It has retained FCF guidance at 50% of PAT, which is a positive surprise as it comes by cutting investments in SugarBox and ZEEL sees challenge in producing 35- 40 movies in the current situation. It expects next two years’ EBITDA margin at >25% and subsequent return to the previous run-rate of >30%. We cut our EPS estimates by 9%/8% for FY22E/FY23E on higher programming costs, and target price to Rs254 (from Rs278). Upgrade to BUY (from Add) on retained FCF guidance and accelerated investments in ZEE5, whose performance would be key rerating catalyst.

* FCF guidance at 50% of PAT retained. ZEEL is working to accelerate investments in:

1) digital (originals and movies); 2) TV (revamping shows in a few markets to win market share); and 3) movie production – lower than original plan of 35-40 movies in FY22. However, management has retained its FCF guidance at 50% of PAT as it cuts investment in SugarBox, and sees slightly lower outgo for movies, which is a positive surprise. Also, it expects movie production business to witness reduced fund outflow on purchase of rights for other movies.

* Ad revenues grow on low base; possibility of double-digit growth in FY22 (vs FY20):

ZEEL’s domestic ad revenues grew 8.9% YoY to Rs10.7bn on low base. It sees domestic ad revenue growth in double digits in FY22 (over FY20) despite the impact of lockdown in Q1FY22, which looks ambitious. ZEEL has seen its viewership share softening in key markets of Hindi and Marathi, which will incrementally pinch. And extended lockdown with limited content inventories for GEC (only up to 25-30th May’21) means it may have to show repeat programs, which earn very limited ad revenues.

* Underlying subscription revenues grew only 5.6% YoY:

Subscription revenues grew 8.4% YoY to Rs8bn due to inclusion of music business (earlier under ‘other segments’), while L2L growth was 5.6%. Company expects subscription revenue growth to be muted on NTO 2.0 overhang, where pricings are capped despite new channel additions. International subscription revenues dipped on change in accounting method.

* ZEE5 recourse:

ZEE5 revenues at Rs1.1mn, down 8.7% QoQ, were impacted due to lower ads (seasonality) and pending settlement with telcos. Its MAU rose 10% QoQ (net add of 6.7mn) to 72.6mn; DAU increase was 13% QoQ (net add 0.7mn). EBITDA loss dipped to Rs1.6bn. ZEEL is recalibrating its efforts for ZEE5 by: 1) investing in technology, which we believe is critical; 2) investing in content, both originals and movies; and 3) competitive pricing (reduced annual prices to Rs499 from >Rs1,000 earlier). We would wait to see these efforts turning into subscriber growth.

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