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Neutral Zee Entertainment Ltd For Target Rs.215

Weak recovery, viewership loss; margin guidance cut for second quarter in a row

* Zee Entertainment (Z)’s EBITDA/PAT jumped 56% YoY (8%/28% miss) on a lower base, as ad revenue was up 2.2x YoY driven by the lower impact of the second wave v/s the previous year. However, it was still 23% below pre-COVID levels.

* We revise down our EBITDA/PAT estimate by 12% for both FY22/FY23 for the second straight quarter (after last quarter’s 5–7% cut), factoring in FY23 EBITDA at 16% above FY20 levels – as weak recovery, coupled with an intensifying content spend, should hurt earnings. Maintain Neutral.

EBITDA/PAT up 56% YoY on lower base (8%/28% miss)

* Consolidated revenues grew 35% YoY to INR17.7b (-10% QoQ; 5% beat), as ad revenue was up 2.2x YoY, driven by the lower impact of the second COVID wave v/s the first wave. Compared with pre-COVID levels (1QFY20), domestic ad revenues were lower by 22.7%.

* Zee’s total operating expenses grew 31% YoY to INR14.3b, higher than estimated, on account of higher content and marketing costs. It incurred additional costs of INR270.6m related to the shifting of shooting locations to ensure uninterrupted operations amid the lockdowns.

* The content cost increase was attributed to original content production, which has largely continued at alternate locations across states during the lockdowns.

* EBITDA came in at INR3.4b, up 56% YoY (8.4% miss), with margins at 19.4%. Adjusted for COVID-related higher costs, EBITDA was up 69% YoY, (in-line), but 19% below pre-COVID levels.

* It reported FV gains of INR97m on MTM of redeemable preference shares and exceptional expenses of INR37m toward the credit risk evaluation of SNL (Siti Network – related party) w.r.t. the Debt Service Reserve Account (DSRA guarantee) provided.

* Adj. PAT grew 56% YoY (-18% QoQ) to INR2.2b (28% miss), while reported PAT came in at INR2.1b.

* MAU/DAU improved to 80.2m/7.1m v/s 72.6m/6.1m QoQ, driving revenue growth of 4% QoQ to INR1.1b (+4% QoQ). Although, EBITDA loss increased 25% QoQ to INR2b.

* It launched a total of 11 original shows and movies released during the quarter. The all-India viewership share declined 190bp QoQ to 17% in 1QFY22.

* EBITDA loss of INR2b in Zee5 is at the peak level, which should improve significantly from FY24 – Zee5 targets a ~35% revenue contribution, backed by new overseas market launches and subscription and ad growth.

* Recovery from Dish TV is in line with revised payment plans. The balance as of Jun’21 declined to INR3.7b (v/s INR5.8b in FY20); this is expected to fully recover by end-FY22.

Valuation and view

* In the backdrop of the COVID impact and NTO 2 implementation, ad and subscription revenue trends remain weak – as the management indicated that the weak recovery may make it difficult to achieve the double-digit growth guidance given in the last quarter.

* The management therefore further reduced the margin guidance to 20–25% after revising it to 25–26% (from 32–34%) in the last quarter.

* Subsequently, we revise down our EBITDA/PAT estimate by 12% for FY22/FY23, after cutting it by ~7% in the last quarter, factoring in 16% growth v/s FY20 in FY23E.

* The stock trades at an attractive P/E valuation of 16.3x/14.1x on FY22E/FY23E. This is a far cry from its historic multiples of >25–30x around three years ago. Any potential re-rating would be governed by steady earnings growth, coupled with success in Zee5, a disciplined investment approach, and avoiding non-core investments.

* For now, we value ZEE at 16x FY23E EPS, with Target Price of INR215. Maintain Neutral.

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