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Multiple headwinds to limit near-term upside

* Zee’s Q4 revenues were boosted by movie production revenues. Advertising revenues were flat yoy as the sharp rise in inflation and higher input costs impacted advertisers’ spending, but they stood broadly in line with our estimates.

* Subscription revenues grew 6% yoy, driven by Zee5 and Zee Music as the pricing embargo continued to hamper subscription revenues from linear television. Zee5 saw sequential growth in DAUs, MAUs and revenue, while higher investments led to a wider EBITDA loss.

* Although it launched more than 90 new shows in FY22, Zee’s network share was down by 20bps qoq to 17.1% - second-consecutive quarter of decline. Some industry participants have removed channels from free dish, which should impact ad revenues in the near term.

* We further cut FY23E/FY24E EPS by 8.9%/10.7%, given the delay in market share recovery, headwinds for advertisers, lack of clarity on NTO 2.0 and higher investments. We also revise our TP (Mar’23E) to Rs310 (10x Mar’24E pro-forma broadcasting EBITDA)

Movie production boosts results: Zee’s consolidated revenue grew by 18.2% yoy to Rs23.2bn, largely due to higher income from the movie production business in the quarter. Advertising revenue was flat, but came broadly in line with our estimates. Total subscription revenues grew by 6.4% yoy, driven by Zee5 and Zee Music, with linear TV revenues remaining impacted by the delay in NTO 2.0 implementation. The company reported EBITDA of Rs4.9bn, down 10% yoy, while EBITDA margins contracted by 656bps yoy. Programming costs jumped 49% yoy, including movie production costs. Other operating expenses, including advertising and publicity expenses, declined 1.9% qoq. This includes some provision reversals which management did not quantify. The company reported exceptional charges relating to: 1) payment of a one-time bonus (Rs733mn); 2) legal expenses (Rs73mn); and 3) credit risk arising from Siti Networks (Rs196mn). RPAT fell 34% yoy to Rs1.8bn.

Outlook: Zee’s market share recovery was uneven this year, with this quarter seeing a further decline in network share to 17.1%. Its inability to gain market share despite launching more than 90 shows in the last year is concerning. Zee5 continued to see traction with higher MAUs and DAUs. However, higher investments widened EBITDA losses. Management has also highlighted that investments will remain elevated, signifying near-term pressure on margins. Ad revenue recovery is also likely to be more gradual, with advertisers curtailing their spending in a high-inflation scenario. Subscriber revenue growth also remains uncertain, with no visibility regarding the lifting of the pricing embargo. Though management remains positive about the original 8-9 month timeline for the merger, lack of approval from the stock exchanges so far makes us conclude that a delay is likely. Taking these near-term challenges for the business into account, we believe that any near-term upside triggers for the stock are limited. That said, the long-term story, with merger synergies, is likely to keep Zee ahead of its competitors

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