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Encouraging revenue trends; but margin guidance cut

* ZEE’s revenue stood flat YoY with in line EBITDA v/s a loss in 4QFY20. Adjusted PAT was 18% lower than our estimate due to goodwill impairment and higher effective tax.

* We have revised down our FY22E/FY23E EBITDA/PAT by ~7%/5% on reduced margin guidance due to increased content investment in both broadcasting and the digital business. Lower investment guidance towards Sugarbox is a key positive. Maintain Neutral.

Revenue/EBITDA in line; adjusted PAT hit by one-offs and higher tax

* Consolidated revenue was flat YoY at INR19.6b (in line), as ad revenue was up 8% YoY driven by continued recovery in the macro advertising environment (in line). On an LTL basis, subscription revenue grew by 6% YoY (excluding revenue from music subscription), primarily driven by ZEE5 subscription revenues.

* ZEE’s total operating expenses declined 36% YoY to INR14b (in line). There was a higher one-time expense in 4QFY20. On an LTL basis, programming costs declined by 8% due to lower original programming in 4QFY21.

* EBITDA came in at INR5b (in line) with margin at 27.5%.

* The company reported a FV gain of INR207m due to change in the market price of redeemable preference shares and exceptional expenses of INR295m towards goodwill impairment charges on the sale of its digital publishing business to Rapidcube Technologies (related party).

* Adjusted PAT declined 31% YoY to INR2.7b (18% miss), while reported PAT came in at INR2.8b.

* The company declared a dividend of INR2.5/share.

* Over the last two years, cumulative content investment, advances, and deposits have gone up by 8%. Within that, the composition has changed as nearly 50% of content advances and deposits have shifted to inventory and movie rights.

* Revenue declined by 5%, but EBITDA/adjusted PAT grew 10%/13% in FY21.

Highlights from the management commentary

* Earnings guidance: The management expects double-digit revenue growth in FY22 (over FY20) and EBITDA margin of over 25%.

* Cash flow: It is aiming at a FCF/PAT conversion of 50% in FY22.

* Aggressive on ZEE5 and content: The company is intensifying its content and movie release line up on ZEE5. It has also revised its pricing to INR499 annually (from INR999 earlier) to drive subscriber growth.

* Sugarbox: The management is scaling down its investment in Sugarbox against its earlier commitment on account of a delay in the rollout of projects and effects from the COVID-19 pandemic.

Valuation and view

* The management indicated that revenue trends have been encouraging before the second COVID wave hit earnings. It guided at strong double-digit growth in FY22 (over FY20) as it plans to aggressively ramp up its broadcasting and digital content, along with sharp pricing in ZEE5 to drive earnings.

* Reduction in non-core investments in Sugarbox due to the COVID-19 pandemic, recovery of INR3.5b from related parties out of receivables of INR21b, and movement of nearly 50% of content advances and deposits to inventory is a welcome step. The management has guided at 50% PAT to FCF conversion.

* Higher investments on original content in both broadcasting as well as ZEE5, movie acquisition as well as movie production will pull down margin to 25-26%, much below historic levels of ~32-34% (more on this in our recent note).

* We revise down our FY22E/FY23E EBITDA/PAT estimate by 7%/5%. The stock trades at an attractive valuation of 12x/10x FY22E/FY23E. This is a far cry from its historic multiples of 25-30x. Any potential re-rating will be governed by: a) steady earnings growth, coupled with a consistent and disciplined investment approach, and b) avoiding non-core investments.

* For now, we value ZEE at 11x FY23E EPS, with a TP at INR210. Maintain Neutral.

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