Neutral Zee Entertainment Ltd for the Target Rs. 100 by Motilal Oswal Financial Services Ltd
Weak ad revenue, high A&P spends lead to washout 2Q
* Zee Entertainment (Zee) reported weak 2QFY26, with 54% YoY decline in EBITDA (13% miss), due to persisting weakness in domestic ad revenue (- 12% YoY) and higher A&P spends (up 42% YoY).
* However, Zee5’s performance remained robust with ~32% YoY revenue growth and further reduction in operating loss to INR312m (vs. a loss of INR658m QoQ and INR1.6b YoY).
* Management remains hopeful of a recovery in ad revenue in 2HFY26, driven by i) improvement in its viewership share, ii) recent GST cuts boosting consumer sentiment ahead of the festive season, and iii) improved traction in new initiatives. However, achieving the earlier guidance of 8-10% revenue growth and exit margins of ~18% by FY26 appears difficult.
* We cut our FY26-28E EBITDA by 6-10% and adj. PAT by 10-14%, driven by persistent weakness in ad revenue and higher content and A&P spends.
* We build in a CAGR of 3%/2%/2% in revenue/EBITDA/PAT over FY25-28E. However, we see downside risks to from a structural shift in ad revenue to digital medium (Zee’s ad revenue down 30% from FY19 levels).
* We reiterate our Neutral rating with a revised TP of INR100 (earlier INR115), premised on ~12x Dec’27 EPS.
Washout quarter; higher A&P spend dents profitability
* Consolidated revenue declined ~2% YoY (+8% QoQ) to INR19.7b (in line), driven by continued weakness in ad revenue.
* Advertisement revenues declined 11% YoY to INR8.1b (-17% YoY in 1Q), as domestic ad revenue fell 12% YoY (vs. -19% YoY in 1Q) due to a slowdown in FMCG spending.
* Subscription revenue grew 5.5% YoY to INR10.2b (+4% QoQ), driven by healthy ~8% YoY growth in domestic subscription revenue.
* Revenue from other sales and services grew 8% YoY to INR1.4b (+65% QoQ), likely driven by higher syndication revenue and movie releases.
* EBITDA declined sharply by 54% YoY to INR1.5b (-36% QoQ, 13% miss) as margin contracted ~860bp YoY to 7.4% (-505bp QoQ and 110bp miss).
* The sharp EBITDA decline is largely attributable to 42% YoY increase in advertisement expenses for promotion of new shows and films.
* Employee expenses declined 6% YoY (9% lower than our estimates), while operational costs grew by a modest ~2% YoY (7% below).
* Reported PAT declined 64% YoY to INR765m (-47% QoQ, 23% miss) due to lower EBITDA and a higher tax rate.
* 1HFY26 revenue/EBITDA/adj. PAT declined 8%/37%/38% YoY due to weak ad revenue (-14% YoY) and higher A&P spends (+17% YoY).
* Based on our estimates, the run-rate for revenue/EBITDA/PAT in 2HFY26 stands at 7%/2%/16%, which could have downside risks if ad revenue continues to fall.
* Zee had OCF outflow of INR790m in 1HFY26 (vs. INR3.9b OFC generation YoY), driven by 37% YoY decline in EBITDA and adverse WC movement. FCF outflow stood at INR1.5b (vs. INR3.4b FCF generation in 1HFY25).
* Zee’s net cash declined to INR18.3b (vs. INR21b in Mar’25), largely driven by FCF outflow.
Zee5: 32% revenue growth leads to further reduction in operating losses
* Zee5 revenue grew 32% YoY to INR3.1b (~7% QoQ), driven by healthy trends in usage and engagement metrics.
* Operating losses reduced further to INR312m (vs. ~INR658m loss QoQ and ~INR1.6b loss YoY).
* Adjusted for Zee5, linear TV business revenue declined 6% YoY, while EBITDA declined sharply by 63% YoY to INR1.8b as margins contracted ~1650bp YoY to 10.7%, driven by higher A&P spends and operating deleverage.
Key highlights from the management commentary
* Ad revenue trends and outlook: Domestic advertising environment continues to be soft. However, management remains cautiously optimistic on ad recovery in 2HFY26, driven by i) improvement in its viewership share, ii) recent GST cuts boosting consumer sentiment ahead of the festive season, and iii) improved traction in new initiatives.
* Earlier guidance unlikely to be met in FY26: The guidance of 8-10% revenue growth and ~18% exit margin for FY26 appears difficult to achieve, given the weakness in ad revenue and high investments in content and A&P spends in 1H.
* Higher A&P spends: The increase in A&P spends was driven by launch of two new regional GEC channels and increase in new content and movie releases.
* Subscription trends and outlook: Digital subscription growth was primarily driven by improved traction for language packs in Zee5 and renewal of linear distribution contracts with DPOs.
* Promoter stake increase: Promoters remain keen on raising the stake in the company and are evaluating various modes for the same but have not considered purchasing the stake from the open markets yet.
Valuation and view
* Zee’s aspiration to deliver a revenue CAGR of 8-10% with its current portfolio and improve EBITDA margins to an industry-leading range of 18-20% by FY26 seems unachievable, given the weak performance in 1HFY26.
* We believe that a sustainable recovery in ad revenue remains the key to any potential re-rating of multiples for Zee.
* We cut our FY26-28E EBITDA by 6-10% and adj. PAT by 10-14%, driven by persistent weakness in ad revenue and higher content and A&P spends.
* Despite a consistent decline in ad revenue (down ~30% from FY19 levels), we have built in ~2.5% CAGR in ad revenue over FY25-28, which continues to have downside risks from the structural shift in ad spends to digital mediums.
* We build in a CAGR of 3%/2%/2% in revenue/EBITDA/PAT over FY25-28E.
* We reiterate our Neutral rating with a revised TP of INR100 (earlier INR115), premised on ~12x Dec’27 P/E.
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