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ZEEL’s 2QFY24 headline numbers exceeded expectations. Revenues grew by 20% YoY, ahead of JMFe: 11%. Growth construct was however on expected lines. Ad-revenues growth (-3% YoY) remained weak. Subscription revenues (+8% YoY) sustained momentum supported by post NTO 3.0 price hikes. Other sales and services revenue was strong, as anticipated. But extent of uptick (c.3x YoY) surprised positively. Stable non-OTT EBITDA margins (-80bps QoQ) suggests margin uplift (+585bps QoQ) was not owing to strong theatrical revenues alone. Lower OTT losses (INR 882mn QoQ) helped. Sequential decline in OTT opex ( a first since 1QFY22) mean OTT investments have likely peaked – a positive. Management sounded cautiously optimistic, especially on ad-growth, as rural recovery is still weak. Share loss of FMCG ad-spend to sports is also curtailing optimism, in our view. We share the sentiment, reflected in minor tweaks to our pro-forma FY24-26E EPS (up 1-4%). Importantly, merger appears on track. The company is closely engaged with Sony and expects to complete pre-merger formalities within next few weeks. We raise our TP to INR 390 (from INR 370), largely on roll-forward. A beat in 2Q notwithstanding, near-term stock movement will be anchored to the progress on merger. We are optimistic.

* 2QFY24 – a beat: ZEEL reported revenues of INR 24.4bn, 8.4% above JMFe (INR 22.5bn). Ad revenues declined 3.3% YoY vs expectation of 2% decline. Subscription revenues grew by 8% YoY (JMFe: 11%). Zee5 revenues grew by 59% YoY which would have supported subscription revenues, in our view. Revenue beat was driven by stronger than expected other sales and revenues (INR 5.7bn vs JMFe: INR 3.5bn) as Gadar 2 and regional movies (e.g King of Kota) along with higher syndication revenues helped. EBITDA margins improved by 585bps QoQ to 13.6% (JMFe: 9.9%). Lower losses in Zee5 and operational leverage aided margin expansion. Exceptional items due to merger related legal expenses (INR 1,197mn) resulted in an in-line PAT (before discontinuing operations).

* Outlook and merger progress: Management remains cautiously optimistic on ad-revenue growth. There are early signs of higher FMCG spend. But rural recovery is still nascent. Besides, some ad-spend has got diverted to cricket (Asia Cup and on-going Cricket World Cup), likely at the expense of GECs. That said, ZEEL is better positioned to get back its fair share of ad-spend, given consistent improvement in its viewership share (+90bps QoQ). Management mentioned that the company is closely engaged with Sony on merger matters. It expects most legal formalities (condition precedents etc) to be closed within the next few weeks. Sharp rise in provision for merger related expenses (including stamp duty) suggest the company is working with a short time frame to conclude the proceedings, contrary to few media articles (here).

* Raise pro-forma EPS by 1-4%; Maintain BUY: We have raised our FY24-26E EPS by 3-5% for ZEEL and 1-4% for merge-co as we build 2Q beat and better margins. We continue to value the stock at 25x forward pro-forma EPS. Roll-forward takes or TP up to INR 390. Improving demand outlook and combined strength of the merge-co makes us constructive. Though near-term will be determined by merger progress. BUY.

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