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Weak performance due to sluggish ad recover

ZEE posted a weak 3Q earnings, with a network market share loss of 40bp, leading to a 3% YoY revenue decline, 5% below our estimate (adjusted for a one-off in 2QFY22). Adjusted EBITDA/PAT declined by 24%/32% YoY. ZEE5 has seen a healthy improvement in usage and revenue, though at a low base.

We have marginally (3-4%) revised down our FY23E/FY24E EBITDA and PAT estimate, factoring in 23% PAT CAGR over FY22-24E. We see the risk of a further downward revision, subject to the pace of revenue recovery, as high content spends could accentuate the impact. However, focus on Sony deal completion can potentially change its course and will weight on the stock more than near term earning trends. We maintain our Buy rating.

Revenue/EBITDA declined by 3%/24 YoY (EBITDA misses by 16%)

Consolidated revenue declined by 22.6% YoY to INR21.1b (5% below our estimate). Adjusted for a one-time syndication deal in the corresponding quarter (3QFY21), revenue fell 3% YoY, but was up 3% v/s pre-COVID levels (3QFY20). Domestic advertisement/subscription revenue declined by ~3% YoY.

EBITDA declined by 33% YoY to INR4.8b (16% miss). Adjusted for a onetime syndication benefit in 3QFY21, EBITDA fell 24%, with a 50bp contraction in EBITDA margin to 22.7%. Adjusted for the one-time content syndication deal, overall opex/production cost was up 6%/8% YoY. Marketing cost shot up 27% YoY, possibly due to launches in ZEE5 and continued investments.

Adjusted for the exceptional item PAT declined by 32% YoY to INR3.3b, while reported PAT fell 25% to ~INR3b. An exceptional loss of INR154m is provided for receivables from SITI Networks towards DSRA guarantees granted earlier

MAU/DAU for ZEE5 grew a healthy 9%/3% QoQ to 101.9m/9.6m. It has grown by 60-80% in the last one year. Thus, driving revenue growth of 12% QoQ to INR1.5b. Operating loss remained high at INR1.8b v/s INR1.7b in 2QFY22.

ZEE’s network share fell 40bp QoQ to 17.3% due to lower contribution by movies and softness in Zee Marathi and Zee Tamil, though Zee TV regained its market share along with other regional channels.

Highlights from the management commentary

Recovery in ad revenue: A higher base effect and headwinds from the third COVID wave, despite strong releases, led to the YoY decline in ad revenue. It expects a recovery with a lag in inflows between viewership and monetization going forward.

ZEE5: The business witnessed a healthy subscriber growth, with improved DAU/MAU and average time on the back of improved content and user experience. Its content pipeline remains strong

Merger with Sony: ZEE is awaiting necessary approvals from exchanges, NCLT, and CCI. Both companies will continue to operate as separate entities until then.

The sequential increase in inventory was due to delays in the release of some completed movies on account of the third COVID wave. The management expects inventory levels to reduce as the situation normalizes

Network share fell 40bp sequentially, despite new launches, impacted by a lower number of movies released.

Valuation and view

The sluggishness in ad spends by FMCG players and rising RM prices across multiple sectors posing a risk to a recovery in ad growth.

The series of new content launches and investment in OTT should improve its network market share and sustain better ZEE5 KPIs.

We have marginally (3-4%) revised down our FY23E/FY24E EBITDA and PAT estimate, factoring in 23% PAT CAGR over FY22-24E. We see the risk of a further downward revision, subject to the pace of revenue recovery, as high content spends could accentuate the impact

Clarity on Sony acquisition timelines is key to the stock’s performance.

The stock trades at an attractive P/E valuation of 17.7x on a FY24E basis. This is a far cry from its historic multiples of 25-30x about three years back. The potential re-rating will be governed by: a) recovery in the ad market and b) early completion of the Sony merger deal.

We value ZEE at 25x FY24E EPS, with a TP of INR410 v/s INR425 earlier. We maintain our Buy rating

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