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Zee Entertainment Enterprises 22 October 2018 22 October 2018 INDIA | MEDIA| COMPANY UPDATE TABLE OF CONTENTS Introduction 03 Key charts and tables 04 Rapid OTT evolution but no TV disruption 05 TV fundamentals continue to be robust in India 09 Indian OTT video space—game has just begun 19 OTT economics are challenging and still evolving—scale is the key 23 Zee has a potentially winning OTT strategy 29 ZEEL to outperform declining TV ad-spend growth; Upgrade to BUY 34 Financials—robust profit growth, improving RoAE, rising FCF/EBITDA ratio 40 Key risks—OTT competition, access and platform dominance, 5G 46 Glossary of abbreviations 48 ZEEL is India’s #1 TV network for non-sports entertainment with a 20% share of all-India viewership in 2QFY19 (+160bps YoY). In the last 6- years, Zee has delivered 18% CAGR in domestic ad revenues vs. 12% CAGR in TV ad spends. Zee has now embarked on a transformational journey with the launch of the Zee5 video platform; it is already #1 in original content production and the #2 entertainment OTT with 41million MAUs. RECENT REPORTS INDIA MEDIA RURAL SAFARI VIII INDIA SUGAR INDIA CONSUMER INDIA REAL ESTATE DURABLES JM Financial Institutional Securities Limited Page 2 222FWREHU2018 ,1',$_0(',$_&203$1<83'$7( =HH(QWHUWDLQPHQW(QWHUSULVHV 7UDQVIRUPDWLRQDO277MRXUQH\IURPDVWURQJIRRWLQJ :HH[SHFWUDSLGJURZWKLQFRQWHQWFRQVXPSWLRQRQ277 Zee to continue outperforming TV ad-spend growth, even as VWUHDPLQJYLGHRSODWIRUPVEXWH\HEDOOVKLIWDQGLPSDFWRQ79 transition to digital picks X p :BDVHGRQRXUIRUHFDVWRIFJURZWK DGYHUWLVLQJZRXOGEHJUDGXDOLQRXUYLHZJLYHQ DSDOWU\ LQ=HHoV)<GRPHVWLF79DGUHYHQXHVZHHVWLPDWHGRPHVWLFDG IL[HGEURDGEDQG>)%%@SHQHWUDWLRQ YHU\DIIRUGDEOH &$*5ZLOOHQGXSDWRYHU)<(YHUVXV&$*5LQ SD\79$538V EHORZDYHUDJHVPDUWSKRQHSHQHWUDWLRQ RYHUDOO79DGVSHQGLQ,QGLD>6RXUFH3LWFK0DGLVRQ@)RUWKHQH[W DQG UHODWLYHO\UREXVW79IXQGDPHQWDOVt79XQGHU VL[\HDUV>)<((@ZHIRUHFDVW=HHoVGRPHVWLFDG&$*5DW SHQHWUDWLRQORZHU DQGVWLOOULVLQJ DYHUDJHWLPHVSHQW>$76@ YHUVXV&$*5LQ79DGVSHQG%HLWEDGZHDWKHU KLJKHVWUHDFKDQGDWWUDFWLYH5R,IRUDGYHUWLVHUV,QRXUEDVHFDVH 'Hmonetization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ee has a potentially winning OTT strategy in Zee5: In LWVWKLUG277 JLYHQWKHLU,3RZQHUVKLSDELOLW\WRWDNHULVNVDQGVWURQJFDVK LWHUDWLRQ DIWHU'LWWR79DQG2=(( ZHEHOLHYH=HHKDVILQDOO\FRPH IORZV:LWKWKH=HHODXQFK=HHQRZKDVDSRWHQWLDOO\ZLQQLQJ RXWZLWKDGLIIHUHQWLDWHGRIIHULQJ=HHFRPELQHVSURYHQ1HWIOL[ 277VWUDWHJ\LQRXUYLHZZHIRUHFDVW=HHWRDFKLHYH(%,7'$ IRUPXOD>RULJLQDOVKRZVYDVWPRYLHOLEUDU\@ZLWKUHJLRQDORULJLQDOV EUHDNHYHQLQ<HDU>)<@DWDUHYHQXHVFDOHRIDERXW,15EQ ILYHODQJXDJHV DQGEURDGFDVWLQJVWUHQJWK OLYH79DQG92'79LQ ODQJXDJHV =HHKDVDK\EULGRUnIUHHPLXPoUHYHQXHPRGHO :HUHGXFHRXU'&)73IRU=HHWR,15 'HF IURP,15 $92'EDVHGRQ92'79FRQWHQWDQG692'EDVHGRQWKHUHVW 0DU EDVHGRQORZHU(%,7'$IRUHFDVWVDQGORZHUH[LWPXOWLSOH LQFOXGLQJOLYH79 SULFHGDW,15\HDU SURPRWLRQDO :HPRGHO EXWXSJUDGHWKHVWRFNWR%8<:HIRUHFDVW(%,7'$&$*5LQWKH =HHWRJHQHUDWH,15EQ(%,7'$RQUHYHQXHVRI,15EQLQ PLGWRKLJKWHHQVDQG(36&$*5RIRYHUQH[W\HDUV )<(>692' PQVXEV;,15$538@ =HHoVIRUZDUG3(KDVGHUDWHG&<7'WR[DQGLVQRZDW DGLVFRXQWWRWUDLOLQJVL[\HDUDYHUDJH>[@ZKLFKODUJHO\ Key forecast changes: OXU73FXWLVGULYHQE\ ORZHU EDNHVLQDJUDGXDOORVVLQ79oVDGVSHQGVKDUHRYHUPHGLXPWR (%,7'$tORZHUPDUJLQVLQWKHPHGLXPWHUPGXHWR277ORVVHV ORQJWHUP2XU'HF73LPSOLHVIRUZDUG3(RI[t D KLJKHUSURJUDPPHLQYHQWRU\GULYLQJORZHU)&))(%,7'$UDWLRt GHUDWLQJYVFXUUHQWO\.H\ULVNV 277ULYDOV DYHUDJHRYHUQH[W\HDUVYVHDUOLHU ORZHUH[LW DJJUHVVLYHO\UDPSLQJXSRULJLQDOFRQWHQWWRPDWFK=HH * PXOWLSOHtQRZ[(9(%,7'$YV[SUHYLRXVO\WKLVLVSDUWO\ LVDORQJWHUPULVNPD\FDWDO\VHDZKROHVDOHVKLIWRIWKHH\HEDOOV RIIVHWE\UROORYHURI'&)WR'HF IURPOLQHDU79 5HFRPPHQGDWLRQDQG3ULFH7DUJHW )LQDQFLDO6XPPDU\ ,15PQ &XUUHQW5HFR %8< Fiscal-end March, INR mn FY17 FY18 FY19E FY20E FY21E 3UHYLRXV5HFR +2/' Revenues 64,342 66,857 79,053 9 10, &XUUHQW3ULFH7DUJHW 0 Revenue growth (%) 10.7 3.9 18.2 1 1 8SVLGH 'RZQVLGH (%,7'$ 19,269 20,761 24,496 28, 33, 3UHYLRXV3ULFH7DUJHW (%,7'$JURZWK 27.3 7.7 18.0 1 1 &KDQJH Adj. PAT 13,448 14,570 15,390 18, 2 Adj. EPS (INR) 14.0 15.2 16.0 1 2 .H\'DWDs=,1 (36JURZWK 25.8 8.3 5.6 1 2 &XUUHQW0DUNHW3ULFH ,15 3( [ >D@ 0DUNHWFDS EQ ,1586 (9(%,7'$ [ 2 20. 17. 1 12. )UHH)ORDW P/B (x) 6. 5. 5. 4. 4. 6KDUHVLQLVVXH PQ 8)&))\LHOG 5. (0.5) 0.7 1.4 2.4 'LOXWHGVKDUH PQ RoAE (%) 17.8 16.5 16.4 18. 20. PRQDYJGDLO\YDO PQ ,1586 Source: Company, JM Financial. [a] Based on 'valuation' EPS (2-3% haircut for Bonus RPS). ZHHNUDQJH 6HQVH[1LIW\ ,1586 -0)LQDQFLDO5HVHDUFKLVDOVRDYDLODEOHRQ%ORRPEHUJ-0)5*2!7KRPVRQ3XEOLVKHU 5HXWHUV6 3&DSLWDO,4DQG )DFW6HW<RXFDQDOVRDFFHVVRXUSRUWDOZZZMPIOUHVHDUFKFRP3OHDVHVHH$SSHQGL[,DWWKHHQGRIWKLVUHSRUWIRU 3ULFH3HUIRUPDQFH ,PSRUWDQW'LVFORVXUHVDQG'LVFODLPHUVDQG5HVHDUFK$QDO\VW&HUWLILFDWLRQ 0 0 0 $EVROXWH 6DQMD\&KDZOD 9LVKQX.* 5HODWLYH VDQMD\FKDZOD#MPIOFRP YLVKQXNJ#MPIOFRP 7RWKH%6(6HQVH[1RWH&03DVRIFORVHRI2FW 7HO 7HO -0)LQDQFLDO,QVWLWXWLRQDO6HFXULWLHV/LPLWHG 3DJH Zee Entertainment Enterprises 22 October 2018 Key charts and tables Exhibit 1. India ad spend mix—TV/Digital convergence in 2024 (%) Exhibit 2. India C&S, Pay TV and Fixed broadband households (mn) Print TV Digital Others Total HHs C&S TV HHs Pay TV HHs Fixed BB HHs 298 275 281 262 268 21 33 42 181 34 160 169 139 149 37 40 153 139 145 147 35 129 20 8 14.5 15.3 16.5 18.1 18.0 10 10 10 2012 2018E 2024E 2013 2014 2015 2016 Mar-18 Source: Pitch Madison report for CY2012 to CY2018E, JM financial. Source: BARC, KPMG M&E report, TRAI, JM Financial. Exhibit 3. Smartphone user penetration (%) Exhibit 4. India OTT video revenues and mix (%) AVOD (%) SVOD (%) Total (INR bn) 72 139 112 87 64 43 51 25 44 25 26 28 30 28 29 29 29 72 70 72 71 71 71 FY18 FY19E FY20E FY21E FY22E FY23E India Indonesia Thailand China USA Source: Newzoo, US census bureau. Note: smartphone user base is divided by population. Source: JM Financial. Exhibit 5. Cumulative number of OTT originals (#) Exhibit 6. ZEEL—metrics for OTT ad business Mar-18 Latest Mar-19E Exit MAUs (mn) Exit DAUs (mn) [a] ATS (minutes/day) Zee5 6 29 90 50 50 45 ALT Balaji 17 25 35 40 135 150 33 120 Voot [a] 12 12 20 100 Eros Now 0 12 20 70 Amazon Prime [b] 3 6 10 18 21 11 14 Hotstar 5 6 8 7 FY19E FY20E FY21E FY22E FY23E Netflix [a] NA 5 10 Source: Companies, Media Reports, JM Financial. Note: [a] Company has announced 18 new Source: JM Financial. Note: [a] Average DAU for the exit month. originals to be released by Dec-19. [b] Indian language originals. JM Financial Institutional Securities Limited Page 4 Zee Entertainment Enterprises 22 October 2018 Rapid OTT evolution but no TV disruption We expect OTT video consumption to grow rapidly (albeit from a low base) thanks to OTT evolution to continue at continuing expansion in mobile broadband [MBB] penetration. Nonetheless, we believe breakneck speed; a revolution or traditional linear TV [i.e. C&S] will remain a relevant and resilient medium for a very long disruption is probably some time, both in terms of attracting ad-spends and in terms of generating pay TV or subscription years away revenues. In our base-case scenario, we forecast a 9.5% CAGR in TV ad spend for the next six years i.e. CY18E-24E [11.6% in CY12-18E] and a 22.5% CAGR in digital ad-spend [31%]. OTT in India is mostly Total ad spend in India is projected by us to grow at 11.0% CAGR. Thus, TV loses 300 bps complementary to traditional TV, share in total ad-spend from 37.3% level in CY18E, as digital overtakes TV in 2024E (or and not an alternative FY25E) with a 35.3% share in total ad spend compared to 17.5%/19.5% in CY17/18E. Exhibit 7. India—ad spend or ad revenue CAGR for different types of media (%) TV ad spend growth may be getting over the hill, but has a fairly Overall Print TV Digital long life left 31.0 22.5 Zee likely to outperform TV ad spend CAGR of 9.3% projected for 12.9 FY19E-25E, by roughly 200 bps; 11.6 11.0 9.5 8.5 we forecast 11.2% CAGR in domestic TV ad revenues of Zee 2.7 over same period 2012-18E 2018E-24E Source: Pitch Madison Reports for 2012-18E, JM Financial. Exhibit 8. India advertising—revenues, growth and mix Year-end December CAGR (%) CAGR (%) Ad revenues (INR bn) 2012 2017 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2012-18E 2018-24E TV 115 197 222 249 276 304 331 357 382 11.6 9.5 Print 120 186 196 205 214 220 225 227 229 8.5 2.7 Radio 9 19 21 23 25 27 30 33 37 14.2 10.0 OOH 19 31 34 37 41 45 50 55 60 10.5 10.0 Cinema 2 6 7 8 8 9 10 11 12 28.1 10.5 Digital 23 93 116 145 180 222 270 327 393 31.0 22.5 Total ad spend 287 531 595 667 745 828 916 1,011 1,113 12.9 11.0 Total ad spend ex-digital 264 438 479 522 564 606 646 683 720 10.4 7.0 Growth rates (%, YoY) TV 0.0 4.3 13.0 12.0 11.0 10.0 9.0 8.0 7.0 Print 4.0 2.7 5.0 5.0 4.0 3.0 2.0 1.0 1.0 Radio 3.0 7.2 10.0 10.0 10.0 10.0 10.0 10.0 10.0 OOH 8.4 6.0 10.0 10.0 10.0 10.0 10.0 10.0 10.0 Cinema 7.9 12.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 Digital 50.0 27.2 25.0 25.0 24.0 23.0 22.0 21.0 20.0 Total ad spend 5.2 7.4 12.0 12.1 11.6 11.1 10.7 10.3 10.1 Total ad spend ex-digital 2.5 4.0 9.3 8.9 8.1 7.4 6.6 5.8 5.4 Change (pps) Change (pps) Ad spend mix (%) 2012-18E 2018-24E TV 40.0 37.0 37.3 37.3 37.1 36.7 36.1 35.4 34.4 (2.7) (2.9) Print 41.7 35.1 32.9 30.8 28.7 26.6 24.5 22.4 20.6 (8.8) (12.3) Radio 3.2 3.5 3.5 3.4 3.4 3.3 3.3 3.3 3.3 0.2 (0.2) OOH 6.5 5.8 5.7 5.6 5.5 5.5 5.4 5.4 5.4 (0.8) (0.3) Cinema 0.5 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 0.6 (0.0) Digital 8.0 17.5 19.5 21.8 24.2 26.8 29.5 32.4 35.3 11.5 15.7 Total ad spend 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Pitch Madison, JM Financial.
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