Neutral Zee Entertainment Ltd for the Target Rs 100 by Motilal Oswal Financial Services Ltd
Another subdued quarter; FIFA boost likely in 2Q
* Zee delivered another subdued quarter, with ad revenue declining ~11.5% YoY and EBITDA slumping ~65% YoY (7% miss), despite robust ~16% YoY growth in subscription revenue (part benefit of FIFA’26).
* Zee5 delivered robust ~58% YoY revenue growth with adjusted EBITDA profitability for the third consecutive quarter. However, the continued decline in linear TV profitability (revenue -5.5% YoY, EBITDA -75% YoY) continues to take the sheen off Zee5’s turnaround.
* Management remains cautiously optimistic of recovery in ad revenue, with an improving macro-economic outlook ahead of the upcoming festive season and interventions (selective re-entry into sports, forays into kid entertainment, micro drama). The full benefit of FIFA subscription packs, along with the related content costs, should be reflected in 2Q.
* We cut our FY27/28E EBITDA estimates by 24%/14%, driven by subdued ad environment and higher content investments.
* Despite a continued trend of decline in ad revenue for the past several years, we have built in ~2% CAGR in ad revenue over FY26-29E, which has downside risks from the structural shift in ad spends to digital medium.
* We build in a CAGR of 4% in revenue over FY26-29E, while we expect the FY29E EBITDA/PAT to remain below FY25 levels.
* We reiterate our Neutral rating with an unchanged TP of INR100, premised on ~14x Sep’28E P/E.
Key highlights from the management commentary
* Ad revenue trends and outlook: Ad revenue declined ~12% YoY due to the continuation of challenging macroeconomic environment in the wake of the West Asia conflict, which created inflationary pressures and impacted advertising budgets. Management noted that the environment showed a marginal recovery toward end-1QFY27 and remains cautiously optimistic about recovery in ad revenue going into the upcoming festive.
* Fund Raise: The company has sought clarification from the regulator regarding the fundraising process and is awaiting the response. It has also approached the Securities Appellate Tribunal and filed an appeal. Management stated that it is hopeful of a resolution and the future course of action on fundraising will be determined based on the outcome of these efforts.
* Subscription: Subscription revenue growth was supported by higher ARPU and subscriber growth in the digital business, along with increased pricing in the linear business. Management stated that Zee5’s subscription growth is not solely driven by FIFA (with a large chunk of growth expected in 2Q).
* Z Music: The music business continued to deliver healthy performance. Management does not see any strategic rationale to demerge Z Music yet, and would take any such action if an opportunity for strategic sale were to arise in the future.
* Sports: Zee entered the sports business with the launch of four sports channels and secured rights for FIFA, Bundesliga, and Serie A. FIFA 2026 reached over 400m consumers across Zee’s linear and digital platforms. Management stated that the company will remain prudent in selecting sports properties with an aim to scale up the sports business sustainably.
Valuation and view
* Slowdown in FMCG’s ad spending on linear platforms continues to weigh on Zee’s domestic ad revenue (~37% decline over FY19-26).
* We believe that a sustainable recovery in ad revenue remains the key to any potential re-rating of multiples for Zee.
* We cut our FY27/28E EBITDA estimates by 24%/14%, driven by subdued ad environment and higher content investments.
* Despite a continued trend of decline in ad revenue for the past several years, we have built in ~2% CAGR in ad revenue over FY26-29, which has downside risks from the structural shift in ad spends to digital medium.
* We build in a CAGR of 4% in revenue over FY26-29E, while we expect FY29 EBITDA/PAT to remain below FY25 levels.
* We reiterate our Neutral rating with an unchanged TP of INR100, premised on ~14x Sep’28E P/E
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