Buy Zee Entertainment Enterprises Ltd For Target Rs.210- Motilal Oswal Financial Services Ltd
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Sluggish earnings continue; merger timeline is the key
* Zee Entertainment (Z)’s consolidated EBITDA/Adj. PAT declined 70%/77% YoY (36% miss) in 4QFY23 led by continued weakness in ad revenue (-10% YoY), 7-8% impact of FTA withdrawal and high investments in content. Z reported INR900m exceptional loss, which further led to an adj. PAT of INR669m, down 77% YoY during the quarter.
* We have cut our FY24 earnings estimate by 16% due to a slower recovery in the ad market and continued investment but largely maintain our FY25 estimate. Though we firmly believe that the merged entity will have strong competitive position in both linear and digital segments, this is not captured in the valuation. Further, merger timeline remains the key monitorable. Valuing the stock at 18x FY25E EPS, we arrive at our TP of INR210. We maintain our BUY rating on Z.
Adj. PAT down 77% YoY (36% miss) hit by revenue decline/higher opex.
* Z’s consolidated revenue declined 9% YoY to INR21.1b (8% beat) led by weak ad revenue as well as lower other sales and services revenue.
* Total opex grew 7.9% YoY to INR19.6b, due to higher opex and continued investments in Zee5 and sports (ILT20).
* As a result, EBITDA margin contracted 14.6pp YoY to 7.2% (v/s 10% est.) adversely impacted by a decline in revenue and higher opex. EBITDA stood at INR1.5b, down 70% YoY in 4QFY23.
* Zee5’s revenue came in at INR2.2b (+36% YoY), while EBITDA loss widened QoQ and YoY to INR3.1b. Adjusted for Zee5, linear TV business’s revenue/EBITDA dipped 12%/34% YoY to INR18.9/INR4.6b with EBITDA margin of 24% during the quarter.
* The company reported an exceptional loss of INR900m comprising INR620m towards employee and legal expenses pertaining to the proposed Scheme of Arrangement.
* Adjusted for the exceptional item, Z’s PAT dipped 77% YoY to INR669m (36% miss) in 4QFY23.
Highlights from the management commentary
* Contraction in 4QFY23 EBITDA margin was mainly due to investments in sports (IL-T20) and Zee5 coupled with weak revenue.
* Management expects losses in Zee5 to taper-off as a majority of the onetime investments has been completed. Investments in technology and content creation to continue though.
* Z expects the network share gain to support ad revenue and anticipates high single-digit to low double-digit growth in the segment for 3-5 years.
* The company has challenged the NCLT order directing review of clearance by stock exchanges. The next hearing is due on 16th Jun’23.
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