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ZEEL’s 1QFY25 revenues grew 7.5% YoY, ahead of expectations. Construct of the beat was however mixed. Ad revenues (-3%) were softer than anticipated, as general elections and cricket weighed on GEC’s viewership. Subscription revenues growth (+9%) held up. Other sales and services (+71%) drove the beat. Bigger surprise, however, came on the margin front (+275bps QoQ) as the company demonstrated steady progress across its stated objectives. Zee5 losses declined by a third as the company rationalised tech spend, headcount and A&P spend. Content inventory reduced further (-5% QoQ), reflecting prudent content acquisition. Margin expansion despite adverse mix – higher share of other sales and services – indicates even lower core opex. ZEEL appears to be on the right track to achieve its 18-20% EBITDA aspiration by FY26. The impact of such acute cost measures on growth however should be watched closely. ZEEL believes these measures are not counter-productive as it pointed at a better 2H, aided also by seasonality. Besides, the company plans to use the proceeds from recent fund raise (USD 239mn through FCCBs) to augment growth – organic or in-organic route. Our FY25-27E EPS are down 3-4% as better margins are offset by dilution impact. Higher competitive intensity, given impending Viacom18-Star merger, is a key risk. At 14x FY26E EPS however, we see limited downside risk. We continue to value the stock at 15x forward EPS. Our TP is unchanged at INR 170. Retain BUY.

* 1QFY25 – margin surprise: ZEEL reported revenues of INR 21.3bn (+7% YoY), ahead of JMFe: INR 20.8bn. Ad-revenues (-3%) missed estimates (4% below JMFe) as cricket and general elections diverted ad-spend. Subscription revenues (+9%) were in-line. Other sales and services grew 71% to INR 2,320mn (63% above JMFe) – led by box office success of “Maidaan”. OTT revenue growth moderated to 15% (in-line) as the company shifted focus on cost optimisation. OTT losses declined by 33% QoQ to INR 1.8bn. EBITDA margins expanded by 275bps QoQ to 12.4% (JMFe: 10%). Reduction in OTT losses aide, which was partially offset by theatrical release linked rise in A&P spend (+140bps QoQ). Company recorded an exception loss of INR 286mn, related to severance cost. Adjusted PAT grew 1.2x YoY to INR 1.56bn.

* Outlook - Cautiously optimistic: ZEEL reiterated its aspiration of achiving 18-20% EBITDA margin by FY26. It expect gradual improvement in margins to continue through FY25. The company expects ad-revenues to pick-up in 2H. Better monsoons, FMCG companies’ brand marketing and festive season are likely to aid growth acceleration, per the management. That will also determine the extent of margin improvement in FY25. That said, company expects FY25 margins to be meaningfully better than FY24. Management attributed Zee5’s sequential revenue decline to seasonality (ILT20 in the base) and general elections. It however noted improvement in subscriber base and engagement metrics.

* EPS down to factor dilution; Retain BUY: We lower revenues and raise margin estimates as we cut near-term OTT growth but push forward margin recovery. FCCB-led equity dilution however results in 3-5% cut in diluted EPS. We assume straight line dilution due to FCCB draw-down (124mn shares over 3 years). Our TP remains unchanged. BUY.

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