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Mixed performance

Zee Entertainment Enterprises’ (ZEEL) Q2FY22 print was a mixed bag with an impressive performance in ZEE5 (OTT) business, while the linear TV performance was underwhelming compared to peer. Linear TV performance is anticipated to improve from refreshed shows across GEC languages, but in the near term, this would put pressure on margins. ZEE5’s performance consistency is yet to be tested, but ZEEL remains confident of continued improvement on the back of content / technology investment. We are not overly concerned on margin pressure if ZEEL could show remarkable progress in viewership and MAU/DAU addition. ZEEL-Sony merger due diligence is progressing well, and, in fact, ZEEL expects early completion; merger closure is key for valuation rerating, in our view. We cut our EPS estimates by 8%/4% for FY22E/FY23E on higher investment, and reduce target price to Rs360 (from Rs374) valuing ZEEL at 22x FY23E EPS. We upgrade our rating to BUY from Add.

* ZEE5 performance shows significant improvement. ZEEL had made multiple changes to ZEE5, including cutting annual subscription fees, Radhe movie launch, continuous addition of originals and investment in technology. The results are remarkable with 13mn MAU (average 10mn net add in past four quarters) addition to 93.2mn and 2.2mn DAU addition (average 0.8mn net add) to 9.3mn. ZEE5 revenues rose 32% YoY (16.8% QoQ) to Rs1.3bn. EBITDA losses reduced to 1.7bn from Rs2bn in Q1FY22.

* Ad revenue growth slower compared to peer: ZEEL’s domestic ad revenue rose 20% YoY to Rs10.4bn, which is 11% lower compared to Q2FY20 vs flattish for Sun TV. This can be significantly attributed to loss of viewership in its flagship channel Zee TV and other key GEC languages. Ad volumes have fully recovered, yields are impacted which has restricted ad revenue rebound. However, exit month has been strong, and festive season has seen advertisers coming back, and impact of viewership improvement (from new show launches) will be visible in Q3FY22. The company has not seen any significant impact on ad spend due to raw material inflation for FMCG companies.

* NTO 2.0 pushed to FY23; will keep subscription revenue subdued: Domestic subscription revenue dipped 2.3% YoY to Rs7bn, and was impacted from impasse from NTO 2.0 implementation on price rise. NTO 2.0 implementation deadline is pushed to 1st April’22, which means subscription revenue will be under pressure for next 3-4 quarters.

* Content investment may keep margins under pressure: Though EBITDA rose 31.4% YoY to Rs4.1bn, EBITDA margin was only 20.8%, much below guidance of 25% (historical target of 30%). This is due to rise in content cost, up 8.3% YoY to Rs9bn; and ad spends, up 39%. This was due to >30 new shows launched in linear TV; and 13 new originals on ZEE5. The company expects >60 more shows and original launches in H2FY22, which should keep margin under pressure. Further, it is anticipating multiple movie releases across languages in H2FY22.

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