Zee Entertainment (ZEEENT)

CMP: | 412 Target: | 410 ( -1%) Target Period: 12 months HOLD

April 10, 2019 NTO challenges to impact revenue growth Zee Entertainment (ZEE), like most other broadcasters, is facing a challenge to maintain distribution reach under Trai’s new tariff order (NTO) implementation. While the chaos of tariff implementation is industry wide, it is pertinent to note that Zee’s absence from some of the distribution Particulars platform operators (DPOs) base bouquet (refer page 2) is a matter of Particulars Amount concern. Therefore, we believe the interim NTO led disruption could impact Market Capitalization (| crore) 39,571.2 the subscription as well as ad revenue growth trajectory in FY20. Total Debt (FY18) (| crore) 1.0 Consequently, we lower our FY20E domestic subscription as well as Cash & Inv. (FY18) (| crore) 2,981.2 EV (| crore) 36,590.9

advertisement revenues estimates to ~7% and ~10% vs. 15% and 16%, Update Company respectively. Furthermore, we continue to believe that while promoter stake 52 week H/L (| ) 610/ 288 Equity capital (| crore) 96.0 sale in the near term is a certainty given their need to pay off debt, deal Face value (|) 1.0

valuation and structuring would be key. We downgrade the stock to HOLD

and cut the target price to | 410/share. Promoter stake sale at higher price Price Performance (t) and subsequent open offer (if any), remain upside risks. 14,000 700 Absent from Den, , Ortel & base bouquet 12,000 600 10,000 500 We highlight that Zee GEC channels are missing from some of the leading 8,000 400 DPOs such as DEN Network, Hathway Cable and GTPL Hathway. We note 6,000 300 4,000 200 that with combined subscribers’ strength of ~14 million of Hathway, DEN, and semi urban/rural subscribers’ preference towards DPOs bouquet, it 2,000 100

could have a meaningful impact on subscription and advertisement revenue 0 0

growth. Furthermore, the company is also facing headwinds on the

Jul-18

Oct-17

Apr-19

Feb-17 May-16 distribution side even in the regional space. For example, is Price (R.H.S) Nifty (L.H.S) unavailable in the base pack of rival Sun TV’s DTH arm Sun Direct while Zee

Oriya (earlier Zee Sarthak), a leading GEC in Odisha, is unavailable in the Key Highlights base pack of cable TV provider Ortel, which is also owner of rival channel Tarang TV. Consequently, we lower our FY20E domestic subscription as  Absence from some of the distribution platform operators well as advertisement revenues estimates to ~7% and ~10% vs. ~15% and (DPOs) base bouquet to impact

~16%, respectively. For FY19-21E, we build in 8.9% and 11.9% CAGR in subscription and advertisement subscription and advertisement revenues, respectively. growth

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 Lower our FY20E domestic – Valuation & Outlook subscription as well as ad revenues estimates to ~7% and ~10% vs. We highlight that Zee’s premium valuation has been driven by industry 15% and 16%, respectively leading ad and subscription growth – a function of viewership market share  Downgrade the stock to HOLD and expansion, which currently is clouded by NTO led disruption. We also cut the target price to | 410/share believe that NTO implementation, apart from providing consumers a choice, (vs. | 500 earlier) has led to higher power in DPO’s hands in bundling channels. Zee’s absence

in base bouquet could be detrimental. Consequent, to revenue estimates, Research Analyst Securities ICICI

we revise our FY20 earnings downwards by 10.7%. Therefore, we Bhupendra Tiwary downgrade the stock to HOLD. We introduce FY21 estimates and roll over [email protected] our valuations, valuing it at 20x FY21E P/E (vs. 25x FY20E) to arrive at a target

price of | 410. Sameer Pardikar [email protected]

Key Financial Summary

(Year-end March) FY17 FY18 FY19E FY20E FY21E Net Sales (| crore) 6,434.1 6,685.7 7,805.4 8,463.3 9,459.8 EBITDA (| crore) 1,926.9 2,076.1 2,506.2 2,708.3 3,074.4 Adj. Net Profit (| crore) 1,285.2 1,393.3 1,571.8 1,714.7 1,970.1 Adj.EPS (|) 13.4 14.5 16.4 17.9 20.5 Adj. P/E (x) 30.8 28.4 25.2 23.1 20.1 Price / Book (x) 4.6 4.4 3.8 3.3 2.9 EV/EBITDA (x) 18.6 17.6 14.4 12.8 10.9 RoE (%) 15.0 15.3 15.1 14.5 14.5 RoCE (%) 21.2 25.6 24.8 23.3 23.0

Source: ICICI Direct Research, Company

Company Update | Zee Entertainment ICICI Direct Research

Exhibit 1: Change in Estimates

FY19E FY20E FY21E (| Crore) Old New % Change Old New% Change Introduced Comments Lowering ad as well as subscription Revenue 7,754.1 7,805.4 0.7 8,806.1 8,463.3 -3.9 9,459.8 revenues on NTO related issues EBITDA 2,483.3 2,506.2 0.9 2,906.0 2,708.3 -6.8 3,074.4 EBITDA Margin (%) 32.0 32.1 8 bps 33.0 32.0 -100 bps 32.5 PAT 1,505.7 1,558.1 3.5 1,920.1 1,714.7 -10.7 1,970.1 Earnings downward, a reflection of EPS (|) 15.7 16.2 3.5 20.0 17.9 -10.7 20.5 topline pressure Source: Company, ICICI Direct Research

Exhibit 2: DEN Network basic pack lacks Zee Channels in GEC segment

Source: Company, ICICI Direct Research

Exhibit 3: Zee channels are also missing from GTPL’s basic Hindi pack

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 2 Company Update | Zee Entertainment ICICI Direct Research

Exhibit 4: Zee TV missing from Hathway’s base pack 1, which includes key GECs Star TV and Colors

Source: ICICI Direct Research, Company

ICICI Securities | Retail Research 3 Company Update | Zee Entertainment ICICI Direct Research

Exhibit 5: Hathway’s base pack 2 also noticeably excludes Zee TV

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 4 Company Update | Zee Entertainment ICICI Direct Research

Financial Summary

Exhibit 6: Profit & Loss statement Exhibit 7: Cash Flow Statement (Year-end March) FY18 FY19E FY20E FY21E (Year-end March) FY18 FY19E FY20E FY21E Total operating Income 6,685.7 7,805.4 8,463.3 9,459.8 Profit after Tax 1,479.1 1,558.1 1,714.7 1,970.1 Growth (%) 3.9 16.7 8.4 11.8 Add: Depreciation 182.1 238.1 262.4 293.3 Operational Cost 2,527.5 2,910.9 3,173.7 3,547.4 Add: Interest paid 144.8 138.3 131.0 137.0 Employee Expenses 665.7 731.5 846.3 946.0 (Inc)/dec in Current Assets -1,390.5 -878.0 -321.3 -810.5 Admin & Other Expenses 839.0 942.6 973.3 1,040.6 Inc/(dec) in CL and Provisions 358.5 306.3 180.0 272.6 Marketing Expenses 577.3 714.2 761.7 851.4 Others 0.0 0.0 0.0 0.0 Total Operating Expenditure 4,609.5 5,299.2 5,755.1 6,385.4 CF from op. activities 774.0 1,362.7 1,966.7 1,862.4 EBITDA 2,076.1 2,506.2 2,708.3 3,074.4 (Inc)/dec in Investments -183.2 -550.0 -850.0 -850.0 Growth (%) 7.7 20.7 8.1 13.5 (Inc)/dec in Fixed Assets -346.3 -300.0 -300.0 -300.0 Depreciation 182.1 238.1 262.4 293.3 Others -143.7 -0.3 -0.4 -0.1 Interest 144.8 138.3 131.0 137.0 CF from inv.activities -673.2 -850.3 -1,150.4 -1,150.1 Other Income 433.6 310.3 320.0 340.0 Issue/(Buy back) of Equity 0.0 0.0 0.0 0.0 Exceptional Items (134.6) 21.3 - - Issue of Preference Shares -383.2 0.0 0.0 0.0 PBT 2,317.5 2,418.8 2,634.9 2,984.2 Inc/(Dec) in loan funds (0.2) - - - Interest paid 144.8 138.3 131.0 137.0 Minority Interest (1.4) (0.3) (0.4) (0.1) Others -863.8 -531.5 -517.0 -529.0 PAT from Associates 1.2 2.4 1.6 0.4 CF from fin. activities -1,102.4 -393.3 -386.0 -392.0 Total Tax 840.9 863.5 922.2 1,014.6 Net Cash flow -1,001.6 119.1 430.3 320.3 PAT 1,479.1 1,558.1 1,714.7 1,970.1 Opening Cash 2,613.3 1,611.7 1,730.8 2,161.1 Growth (%) -33.4 5.3 10.1 14.9 Closing Cash 1,611.7 1,730.8 2,161.1 2,481.3 Adjusted PAT 1,393.3 1,571.8 1,714.7 1,970.1 Source: Company, ICICI Direct Research Growth (%) 8.4 12.8 9.1 14.9 Reported EPS (|) 15.4 16.2 17.9 20.5

Source: Company, ICICI Direct Research

Exhibit 8: Balance Sheet Exhibit 9: Key Ratios (Year-end March) FY18 FY19E FY20E FY21E (Year-end March) FY18 FY19E FY20E FY21E Liabilities Per share data (|) Equity Capital 96.0 96.0 96.0 96.0 EPS 15.4 16.2 17.9 20.5 Preference Share Capital 1,524.5 1,524.5 1,524.5 1,524.5 Adjusted EPS 14.5 16.4 17.9 20.5 Reserve and Surplus 7,465.7 8,768.7 10,228.4 11,943.5 BV 94.6 108.2 123.4 141.2 Total Shareholders funds 9,086.2 10,389.3 11,849.0 13,564.0 DPS 3.4 2.7 2.7 2.7 Total Debt 1.0 1.0 1.0 1.0 Cash Per Share 7.0 9.5 12.2 15.3 Others 14.2 13.9 13.5 13.4 Operating Ratios (%) Total Liabilities 9,101.4 10,404.1 11,863.4 13,578.4 EBITDA Margin 31.1 32.1 32.0 32.5 EBIT Margin 28.3 29.1 28.9 29.4 Assets PAT Margin 20.8 20.1 20.3 20.8 Gross Block 1,596.8 1,896.8 2,196.8 2,496.8 Inventory days 143.5 140.0 130.0 130.0 Less: Acc Depreciation 673.9 911.9 1,174.3 1,467.5 Debtor days 83.9 83.9 83.9 83.9 Net Block 923.0 984.9 1,022.5 1,029.3 Creditor days 62.8 62.8 62.8 62.8 Capital WIP 78.1 78.1 78.1 78.1 Return Ratios (%) Total Fixed Assets 1,001.0 1,063.0 1,100.6 1,107.3 RoE 15.3 15.1 14.5 14.5 Investments 2,056.0 2,606.0 3,456.0 4,306.0 RoCE 25.6 24.8 23.3 23.0 Inventory 2,627.8 2,993.8 3,014.3 3,369.3 RoIC 34.4 36.1 37.2 38.4 Debtors 1,536.5 1,793.9 1,945.1 2,174.1 Valuation Ratios (x) Loans and Advances 1,340.4 1,564.9 1,696.8 1,896.6 P/E 26.8 25.4 23.1 20.1 Other Current Assets 179.8 209.9 227.6 254.4 EV / EBITDA 17.6 14.4 12.8 10.9 Cash 1,611.7 1,730.8 2,161.1 2,481.3 EV / Net Sales 5.5 4.6 4.1 3.6 Total Current Assets 7,296.2 8,293.2 9,044.8 10,175.6 Market Cap / Sales 5.9 5.1 4.7 4.2 Creditors 1,149.7 1,342.2 1,455.4 1,626.7 Price to Book Value 4.4 3.8 3.3 2.9 Provisions 97.5 113.8 123.4 137.9 Solvency Ratios Other current liabilities 581.6 679.0 736.2 822.9 Debt/EBITDA 0.0 0.0 0.0 0.0 Total Current Liabilities 1,828.7 2,135.0 2,314.9 2,587.5 Debt / Equity 0.0 0.0 0.0 0.0 Net Current Assets 5,467.5 6,158.3 6,729.9 7,588.1 Current Ratio 4.6 4.5 4.4 4.4 Quick Ratio 2.5 2.5 2.5 2.5 Other non current assets 576.9 576.9 576.9 576.9 Total Assets 9,101.4 10,404.1 11,863.4 13,578.4 Source: Company, ICICI Direct Research

Source: Company, ICICI Direct Research

ICICI Securities | Retail Research 5 Company Update | Zee Entertainment ICICI Direct Research

RATING RATIONALE ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock

Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) – 400 093 [email protected]

ICICI Securities | Retail Research 6 Company Update | Zee Entertainment ICICI Direct Research

ANALYST CERTIFICATION

We /I, Bhupendra Tiwary MBA, Sameer Pardikar, MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts are not registered as research analysts by FINRA and are not associated persons of the ICICI Securities Inc. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report...

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