Buy Zee Entertainment Enterprises Ltd For Target Rs. 210 By JM Financial Services
10% FCF yield. Any takers ?
ZEEL’s revenue growth (+0.7% YoY) was broadly in-line. Underlying construct, however, was not. Ad-revenues declined 25% YoY, well below JMFe: -10% YoY. This was offset by lumpy other sales and services (+3x YoY). Unfavourable base, cricket heavy season and continued demand softness drove down ad-revenues. Subscription revenue growth, up 5% YoY was steady though. EBITDA margin (13.1%), though ahead of JMFe: 12.1%, declined sequentially as adverse mix (lower ad, higher syndication) weighed. Despite that, management reiterated its 18-20% EBITDA margin guidance for FY26. Although, that will need support from growth. Strategy tweaks and judicious investments underpin management’s confidence of carving out growth despite non-conducive environment. ZEEL’s return to Free-to-air (FTA) network, new templates (Mini series) and pricing interventions (regional pack for Zee5) are few notable examples. Meaningful recovery in growth however will track demand environment, in our view. Revenue/margin aside, ZEEL’s operational discipline is also reflected in improved cash conversion. ZEEL delivered (normalised) FCF/PAT of 130% in FY25. That translates into an FY25-FCF yield of 10%. As we demonstrated in Turning the page, that implies zero terminal value for the stock. ZEEL’s pan-India reach, a still substantial TV viewership share (16.6%) and improved financial health merit a much better valuation. We continue to value the stock at 15x PER. Maintain BUY with a revised TP of INR 210.
* 4QFY25 – PAT beat: ZEEL reported revenues of INR 21.8bn (+0.7%), in-line with JMFe: INR 21.9bn. Ad-revenues declined 25% YoY to INR 8.4bn, missing JMFe: INR 9.2bn. High base, cricket (early start to IPL, Champions Trophy) and weak demand impacted growth. Subscription revenues grew 5% YoY to INR 9.9bn, in-line. Lower ad-revenues were made up through higher other sales and services revenues (INR 3.6bn; up 3.3x YoY). Zee5 revenues increased 16% YoY, aided also by sale of one-off syndication revenues. That helped sharp reduction in Zee5 losses (-44% QoQ). This aided better than expected margin performance (13.1% vs JMFe: 12.1%). This however meant that margin in nonOTT segment declined 570bps YoY to 18.9%. Higher other sales and services, lower adrevenues as well as ILT20 (seasonal) weighed on margins. PAT came in at INR 1,880mn, 15% ahead of JMFe: INR 1,632mn.
* Outlook - resilient: ZEEL is hopeful of gradual growth recovery. Absence of cricket, its own interventions in new formats and judicious investments should help. ZEEL has launched lower priced regional language subscription in Zee5 to drive subscriber growth. It believes high single digit ad-revenue growth is possible. These, along with continued cost discipline should help achieve its aspiration of 18-20% EBITDA margin in FY26.
* Limited changes to EPS; valuations compelling; BUY: Our already conservative estimates mean revisions to our FY26-27E EPS is limited to -0.5%-1%. ZEEL’s judicious content investment is reflected in a) improved inventory mix – content advances, once 20% of inventory, is down to 3%; b) 130% FCF/PAT. As a result, at INR 11bn FCF in FY25, stock trades at 10% FCF yield, unjustifiably low, in our view. Any improvement in demand could trigger re-rating. BUY.
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