Zee Entertainment

India Equity Research Media February 4, 2021 ZEE ENTERTAINMENT RESULT UPDATE KEY DATA Riding recovery, improving governance Rating BUY Sector relative Neutral Price (INR) 249 12 month price target (INR) 361 Zee Entertainment Enterprises’ (ZEEL) Q3FY21 revenue, EBITDA and Market cap (INR bn/USD bn) 240/3.3 PAT beat our estimates on the back of: i) an INR5.5bn content Free float/Foreign ownership (%) 1,847.5/1,126.6 What’s Changed syndication deal; and ii) sharper-than-expected recovery in advertising Target Price Rating/Risk Rating ⚊ and subscription revenues. Domestic ad revenue grew 7.5% YoY and LTL domestic subscription grew 9.3% YoY. Margins, however, dipped QUICK TAKE 140bps YoY to 26.2% and are expected to stay soft given the Above In line Below company’s plan to increase investment in content. Profit Margins Revenue Growth Given ZEEL’s consistent improvement in cash (INR18bn; up 26% QoQ) Overall – led by an INR4bn decline in inventory and advances – and the tailwind to TV advertising, we are raising the target from 16x to 20x FY22E EPS. Maintain ‘BUY’ with a TP of INR361 (from INR299). FINANCIALS (INR mn) Ad recovery and content deal buoy growth Year to March FY20A FY21E FY22E FY23E For Q3FY21, ZEEL’s revenue, EBITDA and adjusted PAT grew 33%, 26% and 21%, Revenue 81,299 77,174 88,912 95,796 respectively, on a YoY basis. Domestic ad growth rose 7.5% YoY owing to festive-led EBITDA 16,346 17,549 24,986 26,840 Adjusted profit (1,682) 11,415 17,320 19,027 advertising spike and resumption in consumer demand. Domestic subscription Diluted EPS (INR) 3.2 11.4 17.7 19.8 revenue grew 16% YoY (excluding music business, 9.3% YoY). EBITDA margin EPS growth (%) (79.0) 260.6 55.7 11.8 contracted 140bps YoY owing to the presence of a content deal (lower margin) and RoAE (%) (1.8) 11.6 15.7 15.5 EBITDA loss from ZEE5. ZEE5 clocked INR1bn in revenue against an EBITDA loss of P/E (x) 77.3 21.4 13.8 12.3 INR1.75bn. The outlook for advertising remains positive as businesses gradually EV/EBITDA (x) 14.3 12.7 8.6 7.7 Dividend yield (%) 0.1 0.2 1.5 2.0 steer towards normalcy, not to mention improving consumer sentiment. Q3FY21 conference call: Key takeaways PRICE PERFORMANCE i) Receivables increased by INR4.7bn QoQ due to increase in sales and incentive 275 51,000 payouts. FCF was negative in Q3 as working capital increased and content 240 45,800 investment ramped up. ii) Sugarbox investment to commence in Q1FY22. iii) Capex 205 40,600 for FY22 to be similar to normal years – INR2-2.5bn. Might go up as spending towards 170 35,400 improving ZEE5 experience and ad tech. iv) Advertisers seeing strong demand 135 30,200 100 25,000 revival; new product launches picking up. v) Will increase investment in content Feb-20 May-20 Aug-20 Nov-20 across mediums. By Q4, would be in a better place to give some guidance on margins Z IN Equity Sensex and FCF/PAT conversion. Outlook and valuation: Promising; maintain ‘BUY’ Explore: We expect the strong ad revival to play out in favour of ZEEL given its strong viewership across markets (refer to TV to remain the lord of the ring). ZEEL’s plan to focus across platforms is likely to deliver strong growth. We are raising the target from 16x to 20x FY22E EPS, which yields a TP of INR361. Maintain ‘BUY’. Financial model Podcast Financials Year to March Q3FY21 Q3FY20 % Change Q2FY21 % Change Net Revenue 27,294 20,487 33.2 17,227 58.4 EBITDA 7,157 5,658 26.5 3,126 129.0 Adjusted Profit 4,579 3,769 21.5 1,795 155.1 Video Corporate access Diluted EPS (INR) 4.77 3.92 1.87 Abneesh Roy Prateek Barsagade +91 (22) 6620 3141 +91 (22) 4063 5407 [email protected] [email protected] Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited ZEE ENTERTAINMENT Financial Statements Income Statement (INR mn) Balance Sheet (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Total operating income 81,299 77,174 88,912 95,796 Share capital 961 961 961 961 Gross profit 43,014 39,846 48,971 52,660 Reserves 92,479 1,02,621 1,15,394 1,28,680 Employee costs 7,805 7,961 8,359 8,944 Shareholders funds 93,439 1,03,581 1,16,355 1,29,640 Other expenses 18,863 14,336 15,626 16,876 Minority interest 110 110 110 110 EBITDA 16,346 17,549 24,986 26,840 Borrowings 9,284 3,608 1,108 708 Depreciation 4,195 2,687 2,959 3,443 Trade payables 16,803 14,318 14,226 13,000 Less: Interest expense 1,449 734 515 320 Other liabs & prov (46) (446) (96) (246) Add: Other income 2,836 1,165 1,675 2,392 Total liabilities 1,20,885 1,22,466 1,32,997 1,44,507 Profit before tax 8,099 15,293 23,187 25,469 Net block 7,594 6,511 7,011 7,681 Prov for tax 4,317 3,854 5,843 6,418 Intangible assets 5,553 5,249 6,290 7,178 Less: Other adj (24) (24) (24) (24) Capital WIP 832 1,000 1,500 1,500 Reported profit 3,758 11,415 17,320 19,027 Total fixed assets 13,979 12,760 14,802 16,359 Less: Excp.item (net) (5,440) 0 0 0 Non current inv 478 478 2,978 5,178 Adjusted profit (1,682) 11,415 17,320 19,027 Cash/cash equivalent 10,115 15,634 20,900 28,245 Diluted shares o/s 961 961 961 961 Sundry debtors 20,847 23,258 21,923 22,309 Adjusted diluted EPS 3.2 11.4 17.7 19.8 Loans & advances 3,732 3,732 3,732 4,232 DPS (INR) 0.3 0.6 3.6 5.0 Other assets 67,224 61,872 63,931 63,453 Tax rate (%) 53.3 25.2 25.2 25.2 Total assets 1,20,885 1,22,466 1,32,997 1,44,507 Important Ratios (%) Free Cash Flow (INR mn) Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Ad revenue growth (%) (7.1) (22.0) 35.0 12.0 Reported profit 3,758 11,415 17,320 19,027 Subscription growth (%) 25.5 10.3 5.5 2.9 Add: Depreciation 2,071 1,882 2,000 2,330 Dom. sub growth (%) 29.0 13.0 6.0 3.0 Interest (net of tax) 1,449 734 515 320 EBITDA margin (%) 20.1 22.7 28.1 28.0 Others (21,537) (3,673) (6,332) (8,193) Net profit margin (%) (2.1) 14.8 19.5 19.9 Less: Changes in WC 16,758 (55) 466 1,284 Revenue growth (% YoY) 2.6 (5.1) 15.2 7.7 Operating cash flow 2,499 10,303 13,969 14,768 EBITDA growth (% YoY) (36.0) 7.4 42.4 7.4 Less: Capex 1,401 1,468 5,000 5,000 Adj. profit growth (%) nm nm 51.7 9.9 Free cash flow 1,098 8,835 8,969 9,768 Assumptions (%) Key Ratios Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E GDP (YoY %) 4.8 (4.0) 7.0 6.0 RoE (%) (1.8) 11.6 15.7 15.5 Repo rate (%) 4.3 3.0 3.5 4.0 RoCE (%) 14.2 15.3 21.1 20.8 USD/INR (average) 70.7 75.0 73.0 72.0 Inventory days 438 509 474 444 Direct cost (% of sales) 47.1 48.4 44.9 45.0 Receivable days 88 104 93 84 Employee cost (%) 9.6 10.3 9.4 9.3 Payable days 151 152 130 115 SG&A expense (%) 23.2 18.6 17.6 17.6 Working cap (% sales) 101.4 113.9 105.3 107.3 Debtors days 87.8 110.0 90.0 85.0 Gross debt/equity (x) 0.1 0 0 0 Inventory days 438.5 330.0 360.0 350.0 Net debt/equity (x) 0 (0.1) (0.2) (0.2) Payable days 151.1 140.0 130.0 110.0 Interest coverage (x) 8.4 20.2 42.8 73.1 Valuation Metrics Valuation Drivers Year to March FY20A FY21E FY22E FY23E Year to March FY20A FY21E FY22E FY23E Diluted P/E (x) 77.3 21.4 13.8 12.3 EPS growth (%) (79.0) 260.6 55.7 11.8 Price/BV (x) 2.5 2.3 2.0 1.8 RoE (%) (1.8) 11.6 15.7 15.5 EV/EBITDA (x) 14.3 12.7 8.6 7.7 EBITDA growth (%) (36.0) 7.4 42.4 7.4 Dividend yield (%) 0.1 0.2 1.5 2.0 Payout ratio (%) 7.7 5.0 20.0 25.0 Source: Company and Edelweiss estimates 2 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited ZEE ENTERTAINMENT Q3FY21 conference call: Key takeaways Revenues increased due to a content syndication deal worth INR5,512mn during the quarter. The syndicated content had an inventory value of INR4,730mn which was amortized in Q3FY21 – leading to spike in operating cost.

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