Buy Zee Entertainment Enterprises Ltd For Target Rs. 200 By JM Financial Services
Pushing through
A still inconducive demand environment weighed on ZEEL’s 3Q growth (-3% YoY). Adrevenues (-8% YoY) continued its downward trend as festive uptick fizzled out quickly. Absence of marquee releases dented other sales and services (-43% YoY). Subscription revenues were the only bright spot (+7% YoY). A weak growth notwithstanding, ZEEL pushed through its operational turnaround mandate. Each of the turnaround vectors we are tracking showed improvement. Content cost declined c.250bps QoQ. Zee5 losses shrunk further (down 14% QoQ). Inventory continued its downtrend, in spite of no major releases. Cash balance improved further. Importantly, ZEEL is balancing cost measures with judicious investment towards growth, reflected in 2 ppt increase in A&P spend (as % of rev.). It admits that margin improvement from hereon has higher dependence on growth. Rural recovery offers hope. ZEEL’s own interventions – international ad-revenue growth, pricing increase, regional channel strategy – should augment that. That said, we have tempered our FY25-27E revenue expectations by 2-4%. Same has flown down to our EPS estimates. Our current estimates still imply earnings CAGR of 42% over FY24-27E. As we discussed in “Turning the page”, stock trades at trough valuations. Maintain BUY with an unchanged TP of INR 200.
* 3QFY25- Miss on growth beat on margins: ZEEL reported revenues of INR 19.8bn (-3.3% YoY), missing expectations. Ad-revenues (-8% YoY) were soft. Uptick in the early part of the festive season didn’t pan out through the quarter. Subscription revenues (+7% YoY) did better, helped by both linear TV and digital. Q3 saw a lean movie lineup. The quarter saw 5 movie releases with lacklustre performance. This impacted other sales and services (-42% YoY; 50% below JMFe). ZEEL’s TV viewership share declined 50bps QoQ to 16.9%. Margin performance was however healthy. EBITDA margin improved 10bps QoQ to 16.1%, ahead of JMFe: 14.5%. Margin improvement was led by optimization and efficiencies. Margins were strong despite wage hikes and higher ad spends. Zee5 losses narrowed further from INR 1.6bn in 2QFY25 to INR 1.4bn in 3QFY25. Adjusted PAT at INR 2.4bn was 30% above JMFe (INR 1.9bn). Reported PAT was impacted by 0.8bn provision related to arbitration proceedings. Cash on balance sheet improved significantly (44% QoQ) and inventories declined largely due to movie rights inventory declining.
* Outlook – Macro improvement needed: Ad revenues have declined across the industry and require improvement in FMCG spends to return to growth. ZEEL is optimistic about measures in the budget to boost demand. Subscription revenues are expected to continue their growth momentum on the back of price hikes. Zee5 expects a B2B deal renewal to drive growth. Strong movie pipeline in Q4 is expected to drive sequential growth. margin performance will be impacted by how well the releases do. The music business is seeing industry wide cost pressures due to competition. The margin goal of 18-20% for FY26 was reiterated. However, incremental improvement will be dependent on growth.
* EPS down to factor growth challenges; Retain BUY: We have revised our revenue estimates lower to factor softness in Ad revenues and movie business. This drives 2-4.5% cut in EPS over FY25-26E. Stock trades at trough valuations. TP remains unchanged. BUY.
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