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Event Update – Solo journey may not be easy

Quick Pointers:

Legal cost under radar amid ongoing arbitration with Sony. 

In an address to investors, Mr R Gopalan, Chairman of the Board, highlighted 1) revival plan is in place post-merger fall out and monthly reviews will be undertaken to track progress 2) an independent advisory committee has been formed to counter circulation of mis-information and 3) steps to enforce merger with Sony are still ongoing (ZEEL has approached NCLT to implement the merger scheme). We believe recalibration measures taken to reset the cost structure by re-visiting content, technology, marketing and people spends will take some time to unfold and the competitive landscape is likely to evolve after merger of Disney-Viacom18. We maintain our estimates and expect sales CAGR of 10% over next 2 years with EBITDA margin of 11.3%/16.8% in FY24E/FY25E but upgrade our rating to HOLD (earlier REDUCE) with a TP of Rs167 (12x FY26E EPS; no change in target multiple) amid ~18% correction in stock price since our last note.              

Performance impacted by external factors: Over the last few years, ZEEL’s performance was impacted by COVID, weak ad-environment and merger related sunk cost. However, amid gradual improvement in ad-environment we expect sales CAGR of 10% over next 2 years.

Revival plan in place: Operating performance is likely to improve in 2HFY25E. Although specific details of the revival plan were not disclosed, in 3QFY24 earnings call management had indicated plans to achieve 8-10% revenue growth on a steady state basis with 18-20% EBITDA margin in FY26E.

Formation of Independent Investigation Committee: ZEEL has established an "Independent Investigation Committee" in order to curb widespread misinformation surrounding the company. Chaired by Dr Satish Chandra, a retired judge of the Allahabad High Court, the committee also includes Independent Directors Mr Uttam Agarwal and Dr P V Ramana Murthy with an aim to restore investor confidence.

Monthly reviews planned: ZEEL’s newly appointed independent directors will engage in monthly sessions with management to discuss expected performance, delivery targets, and strategies for navigating challenges in the future.

Efforts to enforce merger still ongoing: ZEEL has approached NCLT to implement the merger scheme. In addition, arbitration with Sony is also ongoing. This is likely to elevate legal cost in the interim, in our view.

3^rd party content acquisition to slow down: In an effort to lower cost, 3rd party content acquisition is likely to slow down. Emphasizing on content quality, ZEEL aims to solidify its presence in the industry.

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