Media Sector Update : Box Office Returns, Ads don`t By JM Financial Services
Operating environment for broadcasters remains challenging. A still soft, albeit sequentially better, volume growth for FMCG players – as expected by our consumer team – is negated by likely cuts to their A&P spend (Exhibit 2). Residual benefit of Loksabha elections on TV adspend in the base quarter makes YoY comp even more unfavourable. We therefore expect 5- 15% YoY decline in Z/Sun TV’s TV ad-revenues. Subscription revenues could remain flattish too, as next phase of price hikes are being negotiated. An uneventful release calendar – for both Zee Studios and Sun Pictures – mean overall revenues for Z/Sun TV could dip by 10%/2% YoY. This can limit any meaningful progress on Z’s margin expansion trajectory, we believe. PVR-Inox, however, could see some respite. Box office collections (BOC) picked up in May, and likely accelerated in June (data not yet out). Good performance by Bollywood (Houseful 5, Sitare Zameen Par) and Hollywood (Mission Impossible, Final Destinations Bloodlines) mean PVR-Inox’s share should be higher too. We therefore expect 220bps YoY increase in occupancy, driving 11% YoY increase in admits. Quarter-end releases (F1, Maah) and strong pipeline (Exhibit 8) promises Q2/Q3 to be even better. In the absence of any secular trend across players, Media remains a bottom-up sector. Z – potential value unlocking – and PVR-Inox – improving content pipeline – have visible triggers. Valuations are not demanding. These two are our preferred picks in the sector now.
* Z – Weak revenue to weigh on margin expansion: We expect Z to report INR 19bn revenues in 1QFY26, a decline of 10.6% YoY. Ad-revenues could decline by 13% YoY, dragged by 15% YoY decline in domestic TV ad-revenues. Subscription revenues could be flattish (+0.8% YoY) as Z is currently negotiating next phase of price hikes with channel (MSOs/DTH). A relatively dry quarter in terms of theatrical releases and syndication means other sales and services could dip 50% YoY, further dragging headline numbers. We expect Z5 revenues to grow in mid-to-high single digit, led by initial success of Z’s regional packs. This trend, if continues, could support Subscription revenues going further. We expect EBITDA margin to expand by 40bps QoQ to 13.5%. Weaker growth, along with elevated marketing spend towards relaunch of Z’s new brand, could weigh. A weak growth notwithstanding, Z is gaining viewership share, especially in regional genre (exhibit 12/15). That bodes well when the demand turns.
* Sun TV – Resilient, but soft: We expect Sun TV to report INR 12.6bn of revenues, a decline of 1.6% YoY. We expect ad-revenues to decline 5% YoY, relatively resilient compared to mid-teen decline for Z, given Sun TV’s ad-revenues have been relatively resilient. Subscription revenues/movie distribution could however mirror Z’s performance. Sunrisers’ sixth place finish in IPL this year, versus runner-up in 2024, will impact IPL revenues too. EBITDA margins could decline 130bps YoY as lower revenues impacts operating leverage. Cash utilisation remains a key monitorable.
* PVR-INOX enjoying box-office revival: BOC in May jumped to INR 11.4bn, after a soft April (Source: Ormax Media). An even stronger June could drive healthy sequential growth (JFM: INR 30bn). Importantly, BOC is dominated by Bollywood and Hollywood movies – where PVR-INOX has higher market share. We therefore expect PVR-INOX’s occupancy to rise 220bps YoY to 22.5%. Its ATP/SPH could be up 6%/7%, driving overall revenue growth of 20%. Pre IND-AS EBITDA margins could improve by 960bps YoY to 6.8%. PVR-Inox’s asset-light approach – 14 out of 20 screens in 1Q in FOCO/asset light model – means improving ROCE could improve even more.
* Change in estimates and stock view: We have lowered our Ad-revenue forecast for broadcasters given a weak start to the year and expectations of a gradual improvement driving 4-8% top-line cut. This has flowed down to margin estimates as well, driving EPS cuts. Our EPS for Z is further impacted by dilution impact of warrants (17% dilution) driving 13-19% cuts to FY26-28E EPS. Z’s positive stock view is however predicated on impending value unlocking. Promising content pipeline keeps us contructive on PVR-Inox.
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