Reduce Zee Entertainment Enterprises Ltd. For Target Rs. 167 By Prabhudas Lilladher Pvt. Ltd.
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Quick Pointers:
* Steady state aspiration is to aim for 8-10% revenue growth (digital business will grow at a much higher rate).
* Target is to deliver 18-20% EBITDA margin in FY26E.
We cut our FY25E EPS estimates by 6% as operating margin may remain under pressure in near term as recalibration measures taken to reset the cost base by re-visiting content, technology, marketing and employee spends will take some time to unfold post-merger fall out. While Zee Entertainment Enterprise’s (ZEEL) operational performance was in-line with our expectation with EBITDA margin of 10.2% (PLe of 10.1%) bottom-line was impacted by merger related cost of Rs603mn. Likely improvement in ad-environment and accrual of benefits from NTO 3.0 is likely to result in sales CAGR of 10% over next 2 years with EBITDA margin of 11.3%/16.8% in FY24E/FY25E. We retain REDUCE with a revised TP of Rs167 (earlier Rs151) as we roll forward to FY26E valuing the stock at 12x (no change in target multiple). Effectiveness of the strategy pertaining to cost re-alignment, quantum of digital losses and recovery in ad-environment are key factors to watch out for in near term.
Topline declined by 3.0% YoY: Revenues declined by 3.0% YoY to Rs20,457mn (PLe Rs20,697mn). Ad-revenues declined 3.4% YoY to Rs10,274mn while subscription revenues increased 3.0% YoY to Rs9,213mn. Revenue from other sale & services was down 35.8% YoY due to fewer movie releases during the quarter.
EBITDA margin at 10.2%: EBITDA decreased 42.9% YoY to Rs2,092mn (PLe Rs2,090mn) with a margin 10.2% (PLe 10.1%) as against a margin of 17.4%/13.6% in 3QFY23/2QFY24 respectively. After adjusting for the one-off charge of Rs603mn (merger related costs), PAT declined 48.4% YoY to Rs1,137mn with a margin of 5.6%. Apart from this, gain from discontinued operations stood at Rs52mn.
ZEE5’s revenue grew 14.9% YoY: ZEE5’s revenues increased by 14.9% YoY to Rs2,232mn. 19 new shows/movies were launched in 3QFY24 which included 5 originals and the EBITDA loss narrowed to Rs2,440mn on sequential basis due to effective cost management strategies.
Con-call highlights: 1) Network share was down to 16.5% due to impact of cricket world cup. 2) 19 shows and movies were released on ZEE5 and losses narrowed on sequential basis due to cost optimization. 3) Zee studios released 6 movies during the quarter. 4) Bouquet prices are revised by 6-8% and subscription revenue is likely to grow by mid to high single digit going forward. 5) Operating performance should recover from 2HFY25 and EBTDA margin in FY25E is likely to better than FY24E. 6) Cost recalibration exercise will take 3-6 months. 7) Cash on books is Rs8,286mn. 8) ICC TV rights deal with Disney-Star is repudiated and ZEEL has sought a refund of Rs685mn. 9) Merger related cost for the quarter was Rs603mn.
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