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Content investment to limit EBITDA margins…

Zee Entertainment’s Q4FY21 operating performance was largely in line, albeit PAT was lower due to higher-than-expected tax expenses. Domestic advertisement revenue grew 8.9% YoY to | 1070.4 crore while overall ad revenues grew 8.1% YoY on a depressed base in Q4. Domestic subscription grew 13.2% YoY (like to like growth of 5.6% YoY). EBITDA came in at | 540.8 crore with margins at 27.5%. PAT came in lower than expected at | 275.7 crore, due to higher-than-expected tax expenses and one-off impairment of digital publishing segment of | 26.5 crore.

Ad recovery to be function of pandemic tail

The management expects ad revenues to witness double digit growth (over FY20 levels) provided the Covid second wave tapers soon. The company also indicated there would be some weakness in ad revenues in Q1 due to second wave and original programming for broadcasting business is remaining only for a few days for both Hindi as well as regional channels. We bake ~23% CAGR in ad revenues in FY21-23E on a depressed base of FY21 wherein ad revenues declined 20%. The company expects subscription growth in low teens for the industry, provided there is quick resolution on NTO 2.0 implementation, which would enable pricing realignment. We bake in modest subscription CAGR of 7% in FY21-23E, as there is no clarity over NTO 2.0 implementation.

Zee5 revenues declines; margin guidance toned down…

Zee5 revenues were at | 107.5 crore (down ~9% QoQ) due to pending telco deal, while EBITDA loss was at | 162.5 crore (vs. | 175.7 crore in Q3). Zee5 recorded a global DAU of 6.1 million and 72.6 million global MAU in December. The management indicated that as a part of long term growth strategy, the company will boost investment across segments from FY22E onwards. Planned content investment is also to enhance viewership across Hindi and regional markets. Furthermore, it aims to expand movie production (as stated in Q3FY21), albeit H1FY22 spending on the same will be limited owing to Covid. This will lead to higher cash outgo with FCF, PAT conversion at 50%. It guided for EBITDA margins at 25%+ (vs.. 30%+ guidance earlier) owing to content and movie investments

Valuation & Outlook

On a depressed base, FY22 will be a strong growth year for Zee on the ad growth front, albeit extended Covid second wave impact needs to be seen. Scaling down of investment in Sugar Box (albeit we had not assumed it our estimates) and recovery of | 200 crore from Dish TV (out of total dues of | 450 crore) is a positive development. However, it will be important to monitor if the 25% margin trajectory (vs. earlier trajectory of 30%) is only for next couple of years as Zee expands investments in movies or a new normal, given the continued need to ramp up investment in content for OTT. Potential implementation of NTO 2.0 and impact on subscription revenues ahead also remains unknown. We maintain HOLD rating with a target price of | 215/share (earlier: | 250), valuing the stock at 12x FY23E P/E.

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