Buy Zee Entertainment Enterprises Ltd For Target Rs.116 by Prabhudas Liladhar Capital Ltd
Weak ad-environment dents margins
Z IN reported weak operational performance with EBITDA margin of 4.1% (PLe 2.2%) primarily due to an adverse advertising environment, higher programming cost on account of acquisition of FIFA rights and elevated A&P spends arising from launch of new sports channels. Nonetheless, we expect margin recovery from 2HFY27E, supported by improving viewership share (peaked at 20% in week 24 during the quarter) and increased traction in digital business (revenue up 57.6% YoY). Accordingly, we expect EBITDA margins to improve to 8.9%/13.7% in FY27E/FY28E, respectively. Led by improving viewership share, rising profitability in digital business and expected recovery in ad-environment we upgrade Z IN to BUY (earlier ACCUMULATE) with a TP of INR116 (13xFY28E EPS; no change in target multiple). We have not incorporated the dilution impact arising from preferential allotment of INR31,435mn to promoters (shareholder approval has been received) given the SEBI ruling
Top line increased by 4.5% YoY:
Revenue increased 4.5% YoY to INR19,073mn (PLe INR19,296mn; CE INR19,544mn). Ad revenues declined 11.5% YoY to INR6,714mn (PLe INR6,409mn) due to ongoing Middle East crisis. Subscription revenues increased 15.8% YoY to INR11,369mn (PLe INR11,491mn) driven by higher linear subscription pricing, growth in digital subscribers and an increase in ARPU. Other sales and services revenue increased 17.0% YoY to INR990mn (PLe INR1,396mn) led by growth in studios business.
EBITDA margin stood at 4.1%:
EBITDA decreased 65.4% YoY to INR789mn (PLe INR425mn; CE INR678mn) with a margin of 4.1% (PLe 2.2%). Divergence at the EBITDA level was due to lower-than-expected operational cost at INR10,317mn (PLe INR10,902mn). PAT stood at INR743mn for 1QFY27. However, after adjusting for a fair value gain on financial instruments of INR207mn, adjusted PAT decreased 59.6% YoY to INR536mn (PLe INR65mn; CE INR507mn), with a margin of 2.8% (PLe 0.3%). Bottomline was higher than our estimate due to better operating performance and lower depreciation at INR435mn (PLe INR579mn).
ZEE5 EBITDA stood at INR44mn in 1QFY27:
ZEE5’s revenue increased by 57.6% YoY to INR4,571mn during the quarter, with EBITDA of INR44mn. 38 new shows/movies were launched including 15 originals in 1QFY27.
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