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Gradual recovery in market share, ad spends

* Zee Entertainment (Z)’s EBITDA / adj. PAT jumped 31%/70% YoY (6%/7% miss) on a lower base, as ad revenues were up 21% YoY, (11% below preCOVID – 2QFY20), given the impact of COVID in the first half of the quarter.

* We largely maintain our estimates, factoring in FY23E EBITDA/PAT at 10%/17% above FY20 levels, after two consecutive quarters of cuts in estimates and margin guidance. Gradual improvement in network market share and Zee5 KPIs bode well, but clarity on acquisitions and leadership are key to the stock performance. We maintain Neutral.

EBITDA up 31% YoY on lower base (6% miss)

* Zee’s consolidated revenues grew 14.9% YoY to INR19.8b (11.5% QoQ; inline), as ad revenue was up 20.7%, partially impacted by COVID in 1HFY22. Compared with pre-COVID levels (1QFY20), domestic ad revenues were lower by 11%.

* Zee’s total operating expenses grew 11% YoY to INR15.7b (in-line) on account of higher programming and marketing costs, led by new content launches across markets and investments in ZEE5. An additional cost of INR53.9m was incurred towards pandemic-related shifts in shooting locations. Subsequently, EBITDA came in at INR4.1b, up 31.4% YoY (5.7% miss), with margins at 20.8%.

* Adj. PAT grew 70% YoY (29% QoQ) to INR2.8b (7% miss), while reported PAT came in at INR2.7b (up 27% QoQ).

* Zee5’s MAU/DAU grew by a healthy 16%/31% QoQ to 93.2m/9.3m. It has grown by 70–80% in the last year. This has led to revenue growth of 17% QoQ to INR1.3b and curtailed EBITDA loss to INR1.7b v/s INR2b in 1QFY22.

* It launched 13 original shows/movies (24/75 new launches in 1HFY22/FY21), while the all-India viewership share in 2QFY22 improved to 17.7% (70bp QoQ).

Highlights from management commentary

* Ad revenue recovery: Ad revenues are expected to reach pre-COVID levels in 2HFY22 on the back of easing restrictions and a strong content pipeline.

* NTO 2.0: Disruption is expected in subscription revenues in 1HFY23 as the implementation timeline is being shifted to Apr’22. Revenues would grow over the long term.  Zee5: The business is seeing healthy subscriber growth on the back of improved content and user experience. The content pipeline remains strong for 2HFY22.

* SONY merger: The due diligence process is well underway and expected to be completed within the given timeline.  Outlook: The company has reiterated its medium-term margin targets at 25%.

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