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Weak ad revenue and higher content costs drag down profitability

? Consolidated EBITDA/Adj PAT declined by 29.5%/41% YoY (12%/22% miss), due to continued weakness in ad revenue (-15.6% YoY), a 4-5% impact of the FTA withdrawal and high content investments. Zee posted a high exceptional loss of INR1.7b, which led to a 92% YoY fall in PAT to INR243m.

? We lower our FY24 PAT estimate by 11% due to a slower recovery in the ad market and continued investments. But we firmly believe the merged entity will have a strong competitive position in both linear and digital segments, which is not captured in the valuation. The NCLT’s decision on the lenders’ plea remains a key monitorable. We maintain our Buy rating with a TP of INR265.

Adj. PAT down 41% YoY (22% miss) hit by weak revenue; high exceptional loss

? Consolidated revenue remained flat YoY at INR21.1b (in line, 3% above 3QFY20), affected by weak ad revenue (8% miss), partially offset by growth in subscription revenue.

? Advertisement revenue declined 15.6% YoY (14% below 3QFY20) to INR10.6b (8% miss) due to the FTA withdrawal (Zee Anmol) and a slowdown in FMCG spends amid the challenging macro-economic environment.

? Subscription revenue grew by 13% YoY (25% above 3QFY20) to INR8.9b (7% beat), aided by underlying organic growth in Zee5, Zee Music and the recognition of subscription revenue from Siti Network.

* Overall operating expenses grew by 8.6% YoY to INR17.7b, due to higher programming costs in movies and the linear business and continued investment in Zee5.

* As a result, EBITDA margin contracted 670bp YoY to 16% (v/s 17.6% est), hampered by weak growth in revenue and higher opex. EBITDA stood at INR3.4b, down 29.5% YoY. ? Zee reported an exceptional loss of INR1.7b, which included:

* ~INR590m related to the provision of income recognized from Siti Networks Limited (SNL)

* A one-time impairment loss of INR255m toward NCD pertaining to Zee Learn (admitted by NCLT under corporate insolvency)

* ~INR162m related to the provision for DSRA guarantee towards SNL; As the matter remains subjudice, the company continues to recognize this provision as and when the amount becomes due.

* INR689m towards employee and legal expenses pertaining to the proposed scheme of arrangement ? Adjusted for the exceptional item, PAT declined 41% YoY to INR1.9b (22% miss).

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