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ZEEL had multiple (known) headwinds getting into 4Q – a weak ad-growth environment, partial blackout of channels and a tough comp (absence of FTA channel + strong theatrical revenue in the base). In that context, revenue growth, albeit weak (-9%), beat our subdued expectations (4% above JMFe). ZEEL’s sustained investment in content, while a drag on nearterm profitability, should stand them in good stead once the demand turns, as has been the case in previous cycles. Healthy OTT growth and improvement in viewership share are encouraging signs. We sense that impending merger with Sony is shaping ZEEL’s strategy to stay on the investment course to get into a post-merger position of strength. While a few minor hurdles still remain, we believe the merger is now closer. A weak environment drives 4-5% cut to our FY24/25E pro-forma EPS. But we remain constructive on the stock. We reiterate BUY with an unchanged TP of INR 300.

* 4QFY23 – better than feared growth: Consolidated revenues came in at INR 21.1bn (-9% YoY), 4% ahead of JMFe (INR 20.3bn). Revenue beat was driven by better than expected OTT revenues (+36% YoY; 7% above JMFe) and other sales and services (-25% YoY; +35% above JMFe). Domestic subscription revenue (ex-OTT) was weak as expected (-6% YoY; 2% above JMFe) due to partial blackout of channels by ZEEL in response to DPOs’ refusal to sign the new interconnect deal (with price hike). The issue has since been resolved. Other sales and services, on the other hand, were likely aided by ZEEL’s decision to sell digital rights of the movie “Mrs Chatterjee vs Norway” to Netflix (as against retaining the rights for Zee5/linear TV), in our view. This however had an adverse impact on margins as the entire content cost gets amortised upfront in such cases. Content cost as % of revenues was up 9ppt YoY. Additionally, lower ad/subs growth, incremental cost to broadcast ILT20 and absence of catch up revenues from Siti Cable (INR 599mn) led to sharp decline in EBITDA margin (7.2%, 490bps below JMFe). The company took exceptional charges of INR 900mn towards IPRS settlement and merger related cost. There was also a one-off charge due to discontinued operation (INR 1,231mn) resulting in reported loss of INR 1.96bn for Q4. Adjusted PAT of INR 171 mn was 9% below JMFe.

* Merger getting closer; BUY: The company is seeing early signs of improving ad-spend. But IPL in 1Q and world cup cricket in 3QFY24 might impact ad-spend towards GECs, in our view. ZEEL’s balancing act between price and subscriber growth could mean subscription revenues growth might also be gradual. We see a back-ended recovery in FY24 at best. That said, the comp gets better now. We therefore build 10%/4.5% ad/sub revenue growth in FY24. Our pro-forma EPS estiamtes for FY24/25E are down 4-5%. We however believe the stock performance will be anchored more on the merger progress. NCLT’s recent order in the IDBI case is a positive development in that regard. While a few issues still remain, those are not directly related to ZEEL and should not be a road-blocker, in our view. At 12x FY25E merge-co EPS, we believe the negatives are adequately priced in. A merger-led re-rating in FY24E and improving earnings trajectory in FY25 should drive stock performance from hereon. BUY.

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