Zee Entertainment Enterprises Limited Show’S On; New Season Begins

Zee Entertainment Enterprises Limited Show’s on; new season begins

3R MATRIX + = - Summary We re-initiate coverage on Zee Entertainment Enterprises Limited (ZEEL) with a Right Sector (RS) ü Buy rating with a PT of Rs. 275, considering better ad growth outlook and reducing balance sheet concerns Right Quality (RQ) ü Q3FY21 numbers were strong; expect ZEEL to clock revenue/net profit growth of 18%/22% over FY21-FY23E. Right Valuation (RV) ü Management is focusing on rebuilding investor confidence by 1) improving disclosures, 2) introducing polices and 3) strengthening board composition. + Positive = Neutral - Negative We believe ZEE5 is one of the leading digital platforms, centered on regional content and would continue to leverage its reach further led by hyperlocal content.

We re-initiate coverage on Zee Entertainment Enterprises Limited (ZEEL) with a Buy Reco/View rating considering strong results for Q3FY2021, improving outlook for advertisement Reco: Buy revenue, sharp recovery of viewership share across genres, marginally lower inventories q-o-q, increase in net cash position for last three consecutive quarters, receivables CMP: Rs. 215 from Dish TV as per schedule, recovery of offshore investments and potential to make strong inroads into tier-2-3 markets though its digital platform ZEE5. Considering its Price Target: Rs. 275 patchy past (including both internal and external factors), the management is focused on rebuilding investor confidence since the beginning of FY2021 with 1) improved á Upgrade Maintain â Downgrade  disclosures (quarterly balance sheet including break-up of a content inventory and content advances and key financials for ZEE5) and 2) introducing polices pertaining to treasury management, investments and related party dealings. Further, the company has strengthened its board composition with the appointment of R Gopalan as Chairman Company details of the Board post resignation of Mr. Subhash Chandra. The company’s balance sheet Market cap: Rs. 20,680 cr and operational performance have improved over last three quarters with reduction in inventories, improvement in net cash position, recovery in advertisement demand, rise 52-week high/low: Rs. 261 / 114 in viewership share and strong performance in subscription revenues. We believe that ZEEL has taken steps in right direction. ZEE5 is one of the leading digital platform which NSE volume: 292 lakh primarily focuses on regional content, would continue to leverage its reach further (No of shares) on the back of hyperlocal content. In Q3FY2021, the management has guided higher BSE code: 505537 investments in movie production business, with 30-40 movies per year versus 10 movies currently, which implies a decline in profitability and cash generation. We estimate NSE code: ZEEL revenue and earnings would grow at a 18% and 22% CAGR over FY2021-23E as ad spends improve, new channels are launched and digital content on ZEE5 is monetised. Free float: 92.2 cr Our Call (No of shares) Valuation: ZEE5 holds key to re-rating, risk-reward favourable: With improving disclosures, change in board structure and reducing inventory and receivables, we believe that balance sheet concerns have gradually eased. Given lot of headroom for growth in Shareholding (%) the broadcasting business (30-35% untapped TV penetration), improving ad revenue outlook, ramp-up of its movie business and monetization of digital content, we expect Promoters 4.0 the company to deliver a healthy 22% CAGR in adjusted net profit over FY2021-FY2023E. The stock is currently trading at a reasonable valuation at 13x/12x of FY2022E/FY2023E FII 76.5 earnings, which is at a 60% discount to the 10-year average 1-year forward PE. We believe DII 13.8 ZEE5 could surprise positively given its strong focus on regional content, which has been dominating the overall streaming growth at present. We re-initiate our coverage on ZEEL Others 5.8 with a Buy rating, with a PT of Rs. 275. Key Risks 1) A slowdown in economy leading to lower demand and subdued realisation for Price chart advertisement revenue stream, 2) delay in monetisation benefit from digitisation and a 325 faster-than-expected content costs could affect earnings, 3) potential ownership change 275 at ZEEL as promoters own less than 5%.

225

175 Valuations (Consolidated) Rs cr

125 Particulars FY19 FY20 FY21E FY22E FY23E

75 Revenues 7,933.9 8,129.9 7,403.5 9,327.5 10,255.0 20 20 20 21 - - - - OPM (%) 32.3 20.1 24.4 26.2 26.0 Jun Oct Feb Feb Adjusted PAT 1,541.7 501.8 1,190.4 1,598.1 1,765.1 % YoY growth 14.1 -67.4 137.2 34.3 10.5 Price performance Adjusted EPS (Rs.) 16.1 5.2 12.4 16.6 18.4 (%) 1m 3m 6m 12m P/E (x) 13.4 41.2 17.4 13.0 11.7 P/B (x) 2.3 2.2 2.0 1.8 1.6 Absolute xx xx xx xx EV/EBITDA (x) 8.1 12.7 9.2 6.1 5.2 Relative to xx xx xx xx RoNW (%) 17.3 5.4 11.6 13.9 13.8 Sensex RoCE (%) 24.0 13.4 14.5 18.4 18.0 Sharekhan Research, Bloomberg Source: Company; Sharekhan estimates

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Strong macro improvement would benefit broadcasters Post a 3% y-o-y decline in ad volumes (in million seconds) on televisions in 2020, there has been a strong ad volumes growth recovery of 23% y-o-y to 133 mn seconds in January 2021. During H12020, television ad volumes were severely impacted due to the COVID-19 outbreak, strict nationwide lockdowns, lower ad spends by enterprises to maintain liquidity and shutting down of businesses. With fresh content back to television screens and the start of the Indian Premier League (IPL), television ad volumes recovered strongly in the H22020 (up 34% versus H1), which indicates television continues to be the preferred screen of the household. Being one the leading broadcasters with strong and diversified portfolios of channels, we believe ZEEL would be major beneficial from the improved outlook of ad spends.

TV ad volumes up 23% in January Ad volumes in million seconds by Genre

140 133 25% 40 36 38 40% 35 32 35% 35% 120 112 108 23% 31 20% 29 30 31% 30% 100 28% 15% 24 25 25% 80 23% 10% 20 20% 18% 16 in in seconds million

in in seconds million 60 15 13 15% 5% 40 10 10% 0% 3.24.3 20 -3% 5 5% 0 -5% 0 0% Jan-19 Jan-20 Jan-21 GEC News Movies Music Kids Ad volume (mn seconds) Growth (%) Jan.20 Jan.21 Growth (%) Source: BARC *excludes spots placed by association, social ads and cultural organisation, ads by NGOs and fillers

TV advertising to remain strong As per a KPMG report, the Indian media and entertainment (M&E) industry growth would be significantly impacted in FY2021 owing to a nationwide lockdown restrictions owing to the pandemic, slowdown in ad spends, and breaking down of content supply chains. However, the M&E sector is expected to bounce back in FY2022 rising 33.1% y-o-y to reach a size of Rs. 1.86 trillion. The TV segment is expected to bounce back 8.6% y-o-y in FY2022 on the back of strong 19% growth in ad revenue and a 4% growth in subscription revenues. The pandemic has accelerated video consumption on both television and smartphone as consumers spent more time at home. Further, OTT players especially with quality original and local content expanded their presence to tier-2-3 cities.

Digital & OTT revenue (Rs. Bn) and growth (%) TV revenue (Rs. Bn) and growth (%)

400 50% 900 15% 338 800 350 43% 41% 40% 9% 10% 300 700 9% 10% 9% 778 254 8% 769

600 714 32% 33% 708 250 218 30%

652 5% 500 200 173 26% 596 in Rs. bn in Rs. in Rs. bn in Rs. 400 150 121 20% 0% 86 17% 300 100 10% 200 -5% 50 100 -9% 0 0% 0 -10% FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E Revenue (Rs. Bn) Growth (%) Revenue (Rs. Bn) Growth (%) Source: KPMG

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Digital & OTT ad revenue (Rs. Bn) and growth (%) TV ad revenue (Rs. Bn) and growth (%) 350 50% 300 25% 262 258 292 251 20% 300 250 19% 40% 224 217 38% 203 15% 250 223 12% 35% 200 10% 10% 10% 32% 199 31% 30% 200 4% 5% 160 150 24% 0% in Rs. bn in Rs. in Rs. bn in Rs. 150 116 20% 100 -5% 86 100 12% -10% 10% 50 50 -15% -17% 0 -20% 0 0% FY17 FY18 FY19 FY20 FY21E FY22E FY17 FY18 FY19 FY20 FY21E FY22E Revenue (Rs. Bn) Growth (%) Revenue (Rs. Bn) Growth (%) Source: KPMG

Daily average time spent on TV viewing remains constant in the last three years at 220-225 minutes and a 65-67% penetration of TV in total households provides a huge headroom for subscriber growth going ahead.

% Households with TV cable connection

2019 2020 98.7% 99.3% 92.8% 92.7%

66.4% 67.2% % of% household

India USA China ARPU ($ per M) $2.9 $75.9 $3.1

Source: BCG Analysis, SNL, Ovum database

Hyperlocal OTT players likely to strong growth in subscription base going ahead According to a PwC report, overall OTT market in India is expected to grow at 21.8% CAGR reaching Rs. 11,976 crore in 2023. While, the number of OTT users are expected to grow at 20% CAGR at over 500 million users by 2023 led by higher disposable incomes, better internet connectivity, wider usage of smartphones and affordable bundled plans. Strict lockdowns have catalysted the number of users on OTT platforms, which can be witnessed from 30% growth in the number of paid subscribers between March and July 2020. As per India Brand Equity Foundation, the top five metros account for around 46% of OTT video platform users and Tier-I cities account for 35%. OTT players are collectively expected to spend Rs 4,905 crore on content in 2021. According to an EY-FICCI report, around 90% of consumers watch video content in regional languages and only 7% of the total time spent on OTT platforms in India is on English content. As a result, the premium 100 million+ English-speaking users staying in metros and tier-I cities are the addressable market for global OTT players like Netflix, Disney+, Amazon Prime and among others. The OTT content in regional languages offered especially by domestic OTT players such Zee5, Alt Balaji, Voot Select have been driving the OTT subscription base in India. As per RedSeer’s report, Hindi and Indic languages have been dominating overall streaming growth and Hindi language content accounts for more than 50% of the overall streaming. For instance, Hotstar recently stated that around 40% of its video consumption comes from regional language content with Bengali, Tamil and Telugu topping the list. As per media report, Zee5’s paid users increased by 45% y-o-y in 2020, while overall subscribers grew by 80% y-o-y. We believe local OTT player like Zee5 which is solely focusing on regional content, plans to leverage its reach further on the back of its hyperlocal content.

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Rise of paid subscribers (excluding subscriptions from bundled offers) in 2020

20 18.7

in mn 5.4 5.8 4.3 5 3.1 2.7 2.1 2.0 1.8 0.7 0 Disney+ Hotstar Amazon Prime Netflix ZEE5 SonyLiv Video 2019 2020

Source: Omdia

Improving disclosures and well progress on operational front would bode well for ZEEL Since the beginning of FY2021, company focused on rebuilding confidence with improved disclosures (quarterly balance sheet including break-up of a content inventory and content advances and financials/metrics for ZEE5) and introducing polices such introduced controls (policies pertaining to treasury management, investments and related party dealings). Further, Subhash Chandra resigned from the Board and subsequently appointed R Gopalan, independent director, as Chairman of the Board. During Q2FY2021, management initiated a strategic restructuring. It realigned the organization on three key core value chains – (1) content creation, (2) content monetisation and (3) user acquisition. Management sees a structural shift in the industry like content personalisation, integrated advertising solutions, technology and data-led innovation and disruption and increased competition. The company’s balance sheet and operational performance have improved over last three quarters with lower inventories, improvement in net cash, recovery in advertisement demand and strong performance in subscription revenues. We believe ZEEL has taken steps in right direction to build trust among investors. Trends in inventory of ZEEL 60 53.5 52.2 52.1 48.8 50 38.5 40

30 26.3 in Rs. bn 20 16.8 11.7 11.9 13.2 8.7 10 5.4 7.3

0 20 20 20 - - 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jun - Sep Dec

Source: Company, Sharekhan Research

ZEEL’s net cash and cash equivalents 45 39.7 40 35 32.4 30 25 23.1 20.0 20.6 18.2 20 16.1 in Rs. bn 14.4 14.5 12.7 12.4 13.2 15 10.2 10 5 0 20 20 20 - - 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Jun - Sep Dec

Source: Company, Sharekhan Research

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Viewership normalised, focus on ramp-up of contents in FY2022E The Zee network’s viewership bounced back to higher than pre-COVID levels post resumption of original content. The viewership shares for almost all genres have bounced back from the lows seen during the lockdown. During Q3FY2021, ZEEL network share declined due to 18.2% from 19% in Q2FY2021 owing to decline in shares of FTA channels and decline in overall Hindi movie genre. The company launched two channels in Q3FY2021, while it launched 18 original shows and two original movies released during the quarter. Management highlighted that it will step up investments in both TV and OTT in FY2022E. In Q3FY2021, the management guided for higher investments in movie production business as it plans for 30-40 movies per year versus around 10 movies currently. ZEE5 has entered the short video content segment with the beta launch of HiPi. Q3FY2021 results: Exceeding hopes on all fronts ZEEL reported a content syndication deal worth Rs. 551.2 crore during the quarter, while the syndicated content had an inventory value of Rs. 473 crore which was amortised. Q3FY2021 revenue grew 33.2% y-o-y to Rs. 2,729 crore, exceeding estimates, led by broad-based growth across its segments. Excluding content syndication deal of worth Rs, 551.2 crore, revenues grew 6.3% y-o-y in Q3FY2021. Ad revenue increased 5.8% y-o-y to Rs. 1,302 crore, ahead of our estimates, driven by FMCG category. Domestic subscription revenue grew 9.3% y-o-y on like-to-like basis, while international subscription revenue remained largely flat on y-o-y basis. Underlying EBITDA (excluding content syndication deal) margin expanded 165 bps y-o-y to 29.3%. Effectively, underlying EBITDA grew 12.7% y-o-y to Rs. 637.6 crore, ahead of our estimates, led by a better-than-expected growth in ad revenue and subscription revenue. Reported net profit came at Rs. 400 crore, up 14.4% y-o-y. Adjusted net profit grew 4.1% y-o-y to Rs. 405.6 crore. Cash & treasury investments improved by Rs. 3.7 billion q-o-q to Rs18.2 billion. Cash and treasury investments include Rs. 3.9 billion bank balance, Rs. 6.5 billion of fixed deposits, Rs. 7.3 billion of mutual Fund and Rs. 0.5 billion of NCDs. ZEE5 reported a revenue of Rs. 118 crore versus Rs. 98.9 crore in Q2FY2021 and EBITDA loss of Rs. 176 crore versus Rs. 190 crore in Q2FY2021.

Results Rs cr Particulars Q3FY21 Q3FY20 Q2FY21 YoY % QoQ % Advertising Revenues 1,302.0 1,230.8 902.8 5.8 44.2 Subscriptions Revenues 774.6 713.7 800.3 8.5 -3.2 Other sales and Services 101.6 104.2 19.6 -2.4 417.9 Total Revenues 2,178.3 2,048.7 1,722.7 6.3 26.4 Programming and Operating Cost 941.2 847.6 834.2 11.0 12.8 Staff Cost 207.3 207.5 196.7 -0.1 5.4 Admin. & Selling Expenses 392.1 427.7 378.2 -8.3 3.7 EBITDA 637.6 565.8 313.7 12.7 103.3 Depreciation 65.2 65.6 65.1 -0.5 0.1 Finance Cost 2.1 20.0 1.3 -89.4 61.8 Other Income 27.6 71.0 37.9 -61.1 -27.3 PBT 513.9 511.0 264.4 0.6 94.4 Tax Provision 193.7 162.2 74.0 19.4 161.9 Reported Net Income 399.9 349.4 94.1 14.4 325.1 Adjusted Net profit after EO 405.6 389.5 211.9 4.1 91.4 Adj. EPS (Rs.) 4.2 4.1 2.2 2.7 88.7 (%) Bps Bps EBITDA margins 29.3 27.6 18.2 165 1106 Net Profit margin 18.6 19.0 12.3 -39 632 Source: Company; Sharekhan Research

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Outlook and Valuation n Sector view – Ad growth likely to remain strong As per KPMG’s report, Indian media and entertainment (M&E) industry growth would be significantly impacted in FY2021 owing to nationwide lockdown restrictions owing to pandemic, slowdown in ad spends, and breaking down of content supply chains. However, the M&E sector is expected to bounce back in FY2022 with a growth of 33.1% y-o-y to reach a size of Rs. 1.86 trillion. The TV segment is expected to bounce back 8.6% y-o-y in FY2022 on the back of strong 19% growth in ad revenue and a 4% growth in subscription revenues. We expect TV as a medium to continue to stay relevant & the most preferred choice for advertisers given its reach to the mass audience. n Company outlook - Strongly placed among peers Zee Entertainment Enterprises Limited (ZEEL) is one of India’s leading media and entertainment companies, primarily engaged in broadcasting, movies and music production and digital business. It has strong presence in the GEC genre given deep regional penetration and has also expanded its presence in movie genre with the launch of new channels. We believe ZEE5’s focus to aggressively build on content catalogue is a step in the right direction given the hyper-competitive nature of the market. Since Q1FY2021, management focuses on rebuilding confidence with improved disclosures (quarterly balance sheet including break-up of a content inventory and content advances and financials/metrics for ZEE5), introducing polices (policies pertaining to treasury management, investments and related party dealings) and restructuring board compositions. Though reducing inventories/ receivables over last three quarters shows a gradual reduction of balance sheet concerns, the company’s decision to ramp up the movie production business (30-40 movies per years versus 10-12) would impact profitability and cash generation in FY2022E. These concerns reflect the trough valuation of the stock, which is currently trading significantly below of its 10-year average. n Valuation - Favourable risk-reward With improving disclosures, change in board structure and reducing inventory and receivables, we believe that balance sheet concerns have gradually eased. Given lot of headroom for growth in the broadcasting business (30- 35% untapped TV penetration), improving ad revenue outlook, ramp-up of its movie business and monetization of digital content, we expect the company to deliver a healthy 22% CAGR in adjusted net profit over FY2021- FY2023E. The stock is currently trading at a reasonable valuation at 13x/12x of FY2022E/FY2023E earnings, which is at a 60% discount to the 10-year average 1-year forward PE. We believe ZEE5 could surprise positively given its strong focus on regional content, which has been dominating the overall streaming growth at present. We re-initiate our coverage on ZEEL with a Buy rating, with a PT of Rs. 275.

One-year forward P/E (x) band – Trades at trough valuations

100

P/E (x) 50

0 19 21 14 15 12 11 18 16 ------Jan Jun - Apr Apr Sep Feb Aug Nov P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)

Source: Sharekhan Research

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About company Zee Entertainment Enterprises Limited (ZEEL) is one of India’s largest vertically integrated media and entertainment companies, primarily engaged in broadcasting and content development with the widest language footprint, movies and music production, live events and digital business. It is amongst the largest producers and aggregators of entertainment content in the world, with an extensive library housing over 250,000 hours of television content. ZEEL houses the world’s largest Hindi film library with rights to more than 4,200 movie titles from foremost studios and of iconic film stars. Through its strong presence worldwide, ZEEL is present across 170+ countries and has a reach to over 1.3 billion viewers.

Investment theme The company has delivered a strong revenue CAGR of 11% over FY2016-20. ZEEL’s management remains confident of delivering ad revenue growth ahead of industry growth rate. Hence, the company is considered as one of the leading players under the structural India consumption theme. A large and exclusive content library would be ZEE5’s USP and would help to target particularly semi-urban and rural subscribers. We believe ZEEL is well placed to derive benefits from anticipated GDP growth, improvement in viewership shares, new launches, higher penetration of DTH and the digitisation process.

Key Risks Unfavourable regulatory guidelines impacting subscription revenues, a slowdown in the economic environment leading to lower demand and subdued realisation for advertisement revenue stream. Delay in monetisation benefit from digitisation and increase in investments in ZEE5 could affect earnings.

Additional Data

Key management personnel Punit Goenka Managing Director and CEO Amit Goenka President - Digital Businesses & Platforms Anurag Bedi Chief Business Officer – Zee Music Rohit Kumar Gupta Chief Financial Officer Ashish Agarwal Chief Compliance Officer & Company Secretary Source: Company Website

Top 10 shareholders Sr. No. Holder Name Holding (%) 1 OFI GBL China FD LLC 10.14 2 Invesco Ltd 8.04 3 Invesco Oppenheimer 7.74 4 Vanguard Group Inc/The 5.52 5 Life Insurance Corp of India 4.89 6 Amansa Capital Private Limited 3.56 7 Vontobel Holding AG 3.01 8 Blackrock Inc 2.65 9 Prudential PLC 2.65 10 Government Pension Fund 2.48 Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 05, 2021 7 Understanding the Sharekhan 3R Matrix Right Sector Positive Strong industry fundamentals (favorable demand-supply scenario, consistent industry growth), increasing investments, higher entry barrier, and favorable government policies Neutral Stagnancy in the industry growth due to macro factors and lower incremental investments by Government/private companies Negative Unable to recover from low in the stable economic environment, adverse government policies affecting the business fundamentals and global challenges (currency headwinds and unfavorable policies implemented by global industrial institutions) and any significant increase in commodity prices affecting profitability. Right Quality Positive Sector leader, Strong management bandwidth, Strong financial track-record, Healthy Balance sheet/cash flows, differentiated product/service portfolio and Good corporate governance. Neutral Macro slowdown affecting near term growth profile, Untoward events such as natural calamities resulting in near term uncertainty, Company specific events such as factory shutdown, lack of positive triggers/events in near term, raw material price movement turning unfavourable Negative Weakening growth trend led by led by external/internal factors, reshuffling of key management personal, questionable corporate governance, high commodity prices/weak realisation environment resulting in margin pressure and detoriating balance sheet Right Valuation Positive Strong earnings growth expectation and improving return ratios but valuations are trading at discount to industry leaders/historical average multiples, Expansion in valuation multiple due to expected outperformance amongst its peers and Industry up-cycle with conducive business environment. Neutral Trading at par to historical valuations and having limited scope of expansion in valuation multiples. Negative Trading at premium valuations but earnings outlook are weak; Emergence of roadblocks such as corporate governance issue, adverse government policies and bleak global macro environment etc warranting for lower than historical valuation multiple. Source: Sharekhan Research Know more about our products and services

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