Buy Zee Entertainment Enterprises Ltd For Target Rs. 137 By PL Capital
Ad-revenue recovery key to re-rating
Quick Pointers:
§ Domestic ad-revenue declines 27.0% YoY to Rs7,786mn.
§ ZEE5’s EBITDA loss of Rs753mn is at an all-time low.
We increase our EPS estimates by 6%/2% for FY26E/FY27E and upgrade our rating to BUY (earlier HOLD) with a TP of Rs137 as we revise our target multiple to 11x (earlier 10x) amid sustained improvement in operating performance since last 4 quarters. Despite a weak ad-environment, ZEEL reported better than expected performance with EBITDA margin of 13.1% (PLe 12.5%) led by cost optimization efforts and narrowing losses in ZEE5. In FY25, ZEEL’s content and employee cost was down 10.4% and 9.0% respectively while operating loss in ZEE5 almost halved leading to 390 bps expansion in EBITDA margin. While this is commendable, we believe true operating leverage benefit of the ongoing cost optimization exercise is overshadowed by a weak ad-environment. Assuming a modest 8.0% CAGR in ad-revenue on a low base of FY25 is expected to result in 440bps expansion in EBITDA margin over next 2 years given the cost reset. Backed by sharp earnings recovery and attractive valuations (10.4x/8.9x our FY26E/FY27E EPS) we upgrade the stock to a BUY with a TP of Rs137 (11x FY27E EPS).
Top line remained flat YoY: Revenue was flat at Rs21,841mn (PLe Rs20,874mn). Domestic ad-revenue declined 27.0% YoY to Rs7,786mn, primarily due to weak macro backdrop, postponement of Zee Cine Awards, packed sports calendar and higher base in 4QFY24. However, total subscription revenues increased 3.9% YoY to Rs9,865mn.
EBITDA margin stood at 13.1%: EBITDA increased 35.6% YoY to Rs2,852mn (PLe Rs2,612mn, CE Rs2,801mn) with a margin of 13.1% (PLe 12.5%). EBITDA was better than our expectations on account of narrowing losses in ZEE5, and lower than expected other expenses, which came in at Rs870mn (PLe Rs1,287mn). Reported PAT stood at Rs1,886mn with a margin of 8.6%. Adjusting for a fair value gain of Rs125mn on financial instruments, adjusted PAT increased 342.4% YoY to Rs1,761mn (PLe Rs1,343mn, CE Rs1,655mn). The PAT outperformance was led by a lower-than-expected tax rate and other expenses.
ZEE5’s revenue increased 15.8% YoY: ZEE5’s revenue increased by 15.8% YoY to Rs2,747mn aided by syndication revenue. 16 new shows/movies were launched including 4 originals in 4QFY25 and EBITDA loss declined to Rs753mn.
Con-call highlights: 1) Ad-revenue will be supported in FY26E driven by Zee Anmol’s re-entry into the FTA segment. 2) ZEE5’s EBITDA loss was at an all-time low of Rs753mn supported by syndication gains. However, even after excluding syndication revenue, ZEE5’s revenue and operating performance improved sequentially in 4QFY25. 3) 20 movies were released in FY25, with 18 to 21 films slated for release in FY26E. 4) Other sales and services grew 226.4% YoY, driven by a higher number of movie releases and increased syndication revenue. 5) EBITDA margin target of 18-20% remains intact for FY26E. 6) Other expenses were lower at Rs870mn in 4QFY25, due to one-off recoveries, including reversal of provisions related to bad debts. 7) The US contributes only a small portion to overall business of ZEE studios, so any potential impact from Trump tariffs on non-US films would be negligible. 8) Cash and treasury investments rose to Rs24,064mn in 4QFY25.
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