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Ad revenue and market share recovery in a slow lane

* Zee reported another quarter of weak performance. Ad revenue fell by 3% yoy (up 1% on a 2-yr CAGR basis) and came in below our estimate of 8% growth. Domestic subscription revenues continued to be impacted by the delay in the implementation of NT2.0.

* The lower contribution of movies led to a 40bps qoq dip in Zee’s network market share to 17.3%. However, it gained share in Hindi GEC, while the performance of Marathi and Tamil channels was soft. ZEE5 revenues rose 24% yoy, with EBITDA loss rising 4% to Rs1.8bn.

* Q4 ad revenues should remain affected by: 1) ongoing Covid wave, 2) gradual market share recovery, and 3) weak demand and inflationary pressure hitting advertisers. Content and marketing spends were near peak levels, and should see a modest rise, going forward.

* We have cut our FY22-24 EPS estimates by 7-10% due to the weak Q3 ad revenue print and continued uncertainties regarding domestic subscription revenues. Maintain Buy with a revised Mar’23E TP of Rs410 (11x Mar’24E pro-forma broadcasting EBITDA).

Weak revenue growth: Revenues declined 3% yoy (adjusted for the content syndication deal in the base quarter). The continued weakness in network viewership share, which fell 40bps qoq and 90bps yoy to 17.3%, resulted in a 3% yoy decline in ad revenues vs. our estimate of 8%. Domestic subscription revenues declined by 3% due to the impact of continued delays in the implementation of NTO 2.0. EBITDA stood at Rs4.8bn, with a margin of 22.7%. New content launches led to an 8% increase in programming costs. Amid increased A&P spends for new content launches and continued investments in Zee5, other opex also rose by 3% yoy. There was an exceptional charge of Rs154mn in Q3 in connection with the receivables from Siti Networks.

Outlook: Despite aggressive content launches across channels, Zee’s viewership market share recovery has been trending below expectations. The 70bps network share recovery seen in Q2 was not sustained, with the share eroding by 40bps in Q3. To strengthen its viewership share, the company has aggressive content launch pipeline for Q4 after launching 55 new shows in Q2 and Q3FY22. Continued delays in market share recovery and weak ad revenue print could weigh on valuations. Although we strongly believe that acquiring the rights to a major cricket event (IPL or ICC India cricket series) will play a critical role in the OTT platforms’ significant facelift and valuation re-rating, the resulting significant increase in costs on account of aggressive bidding could lead to higher-than-estimated cash burn. The timely merger of Zee and Sony India, as well as market share improvement in the near term, will be closely monitored. Key risks: 1) integration challenges and cultural issues associated with the merger; 2) longer-than-estimated time for market share recovery; 3) delayed regulatory/shareholder approvals; 4) sustained slowdown in ad revenues; 5) higher-thanestimated losses from the digital business; and 6) significantly low OTT monetization.

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