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To focus on regaining market share with aggressive content investments

* Zee reported in-line operating performance, with 8.9% yoy growth in domestic advertising revenue. LTL subscription revenue increased 5.6% yoy, while international subscription revenue recorded a decline of 31.5% yoy due to a change in accounting policy.

* Total content inventory, advances and deposits increased to Rs62.7bn from Rs56.5bn in Q3FY21, as a result of fresh content investments. In Q4FY21, Zee recovered past dues of Rs2bn+ from Dish TV, and a full recovery is expected by the end of FY22.

* The company has decided to significantly scale down investments in SugarBox, which has been a key area of concern for investors. Management expects double-digit ad growth for the industry in FY22 over FY20, provided the second Covid wave is contained in Q1.

* We have cut our FY22-23E earnings by 7-10% as we factor in lower revenues due to the ongoing slowdown and guidance of 25% EBITDA margins on aggressive content investments. We maintain Hold rating with a revised TP of Rs210 (12x FY23E EPS)

In-line operating performance

Consolidated revenues came in flat yoy at Rs19.65bn, driven by an 8% rise in ad revenues. Domestic ad revenues recorded 8.9% growth yoy. Though subscription revenue grew 8.4% yoy, it was impacted by a 31.5% decline in international subscription revenues due to a change in accounting policy. LTL subscription revenues increased 5.6% yoy. EBITDA at Rs5.4bn was in line, with adjusted programing & content cost declining 19.2% due to lower accelerated inventory amortization. This also aided in sequential margin expansion of 129bps. PAT for the quarter stood at Rs2.8bn.

Outlook:

In a positive move, the company has decided to significantly reduce potential investment of Rs5.2bn in ‘SugarBox’. This has been a major concern for investors and an overhang on the stock, given that it is not related to the core business of Zee. We had not accounted for it in our estimates due to the lack of clarity on the investment timelines on account of Covid-19 related delays. Industry ad revenue growth for FY22 is expected to be in double-digits over FY20, if the second Covid wave gets contained in Q1, with Zee targeting to grow in-line-to-better than the industry.

Domestic subscription revenue growth will be impacted by the ongoing litigation on NTO 2.0 implementation. Increased content investments in both TV and Zee5 could restrict EBITDA margins at ~25% in the foreseeable future. Zee’s target of producing 30-40 movies in a year might not be achieved this fiscal due to lockdowns across states. Management has maintained its 50% FCF/PAT guidance amid aggressive content investment plans. Key risks: 1) slower-than-expected recovery in ad revenues; 2) delayed resolution on NTO 2.0 implementation; 3) better-than-expected margin delivery; and 4) market share loss of key channels.

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