India Equity Research Media February 4, 2021

ZEE ENTERTAINMENT

RESULT UPDATE

KEY DATA Rating BUY Riding recovery, improving governance 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]

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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

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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. Syndication deal pertains to several global markets. Difficult to say whether such deals will continue ahead also.

 Cash from syndication deal has been received.

 Want to play a holistic film business – BO, OTT and Satellite. Will be a low margin business compared to TV business. Depends upon the selection of the films taken up for production

 Deposits declined by INR3.3bn QoQ

 Receivables increased by INR4.7bn QoQ due to sales increase, incentive payouts. WC going up as revenues increasing. FCF was negative in Q3 as WC increased and content investment ramped up

 Cash and treasury at 18.2bn as on Q3FY21

o INR3.9bn in bank balance

o INR6.5bn in FDs

o INR7.3bn in MF investments

o INR500mn of NCDs

 Money from overseas investment has been received – INR2.2bn

 No outstanding from Siti Networks as cash and carry basis continues

 Payments from Dish TV are as per plan

 Receivables from Dish TV down from INR 5bn in Q2 to INR4.6bn in Q3

 Majority of the receivables to come by Sept 2021

 Sugarbox investment to commence in Q1FY22.

 Capex for FY22 to be similar to normal years – INR2-2.5bn. Might go up as spending towards improving ZEE5 experience and ad tech.

 Content consumption witnessed spike during the quarter

 Plan to regain share in the Hindi market

 Consolidated revenue grew by 33.2% to INR27,293mn and Consol EBITDA grew 26% YoY

 Underlying EBITDA (excluding content syndication revenue and cost) stood at INR6,375mn, EBITDA margin of 29.3%

 Excluding content syndication deal of 5,512mn revenue grew 6.3%

 Domestic advertising grew by 7.5% and domestic subscription revenue grew by 9.3% on a like-to-like basis

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ZEE ENTERTAINMENT

 Advertisers seeing strong demand revival; new product launches picking up. Domestic advertising revenue for the quarter grew by 7.5% YoY and 43.6% QoQ; a sharp recovery post H1 reflects the rebound in consumer demand and spending. Seeing ad growth happening across sectors sequentially. FMCG continues to drive the bulk of ad spends. Estimate industry ad growth to be around -3% YoY

 A&P and other expenses declined by 8.3% YoY during the quarter

 Advertising was strong as Q3 was a festive season quarter.

 Expect FY22 to be good, but difficult to say by when normalcy will return

 Will be increasing investment in content across all businesses. Not finalised the plan so difficult to say of now. By Q4 will be in a better place to give some guidance on margins and FCF/PAT conversion

 Low teens sub growth possible owing to pricing and new sub addition. Need to regulatory environment to stabilise for this.

 Won’t be able to deliver on the 30% EBITDA margin in FY22.

 Content cost for TV has not changed much

 IPL impacted roughly 15% of industry ad revenues

 Buoyancy in advertising remains intact.

 Expect ad revenue to grow in Q4 as well

ZEE5  ZEE5 released 7 movies on ‘Pay Per View’ model

 ZEE5 global MAUs and DAUs stood at 65.9mn and 5.4mn respectively in Dec’20

 65.9 mn global MAUs*, 5.4 mn global DAUs* in Dec’20

 133 minutes average watch time per viewer per month in Dec’20

 Q3 Revenue and EBITDA# stood at INR1,178 mn and INR(1,757) mn

 Paid sub growth in line with the revenue growth.

 Mix of ad and subscription has not changed materially

 The ZEE5 team is more or less stabilised now

Programming  18.2% all India viewership share in Q3, continues to be strong #2 TV entertainment network in India

 Network share declined due to FTA channels losing share and decline in overall Hindi movie genre

 While TV viewership reverted to earlier level, movie genre share dropped due to lack of new movie releases

 Launched 2 new channels – Zee Zest and Zee Vajwa, taking the network channel count to 47.

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ZEE ENTERTAINMENT

 Zee Zest (Lifestyle) and Zee Vajwa (Marathi Music) launched in Q3’21, making it 6 new channels in the last 14 months

 Comparable programming cost (excluding inventory amortisation of syndicated content) grew by 11% during the quarter primarily led by increased content and transmission costs in digital business

 Reported growth of 18% includes revenue from music business which has been reclassified as subscription revenue in this fiscal. Comparable growth of 9.3% in domestic business driven by both television and ZEE5

 Regional channels performed well – Bangla, Malayalam. Lost some share in Marathi markets

ZEE Studios

 Zee Studios released Suraj Pe Mangal Bhari in theatres, first Hindi Movie to be released in theatres after COVID

 Released 5 movies during the quarter, including 4 theatrical release

 Plans to release 2 Hindi and 2 Regional Movies in Q4

Trends at a glance

(INR mn) Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20 Q2FY20 Q3FY20 Q4FY20 Q1FY21 Q2FY21 Q3FY21 Total Ad revenue 11,460 12,106 14,626 12,175 11,867 12,247 12,308 10,389 4,211 9,028 13,020 International ad revenue 590 580 907 600 545 557 738 560 371 371 577 Domestic ad revenue 10,870 11,526 13,719 11,575 11,322 11,690 11,570 9,829 3,840 8,666 12,443 Domestic subscription 4,252 5,093 5,192 4,696 6,240 6,459 6,317 6,607 6,625 7,172 7,328 International subscription revenue 934 989 993 957 848 776 820 807 818 831 1,091 Total subscription 5,186 6,082 6,185 5,653 7,088 7,235 7,137 7,414 7,443 8,003 8,419 All India viewership share (%) 19.2 19.9 20.2 NA NA 18.4 18.2 18.3 15.8 19.0 18.0 Overall Sales 17,720 19,759 21,668 20,193 20,081 21,220 20,487 19,511 13,120 17,227 27,294 Costs 12,064 13,001 14,125 14,150 13,484 14,291 14,829 22,349 10,921 14,101 20,137 EBITDA 5,657 6,758 7,543 5,683 6,598 6,929 5,658 -2,839 2,199 3,126 7,157 EBITDA margin (%) 31.9 34.2 34.8 28.1 32.9 32.7 27.6 (14.5) 16.8 18.1 26.2 Growth rate (%) International ad revenue 2.1 14.6 40.2 (9.4) (7.6) (4.0) (18.6) (6.7) (31.9) (33.4) (21.8) Domestic ad revenue 19.6 23.1 20.6 17.7 4.2 1.4 (15.7) (15.1) (66.1) (25.9) 7.5 Total ad revenues 18.6 22.7 21.7 16.0 3.6 1.2 (15.8) (14.7) (64.5) (26.3) 5.8 Domestic subscription 12.2 26.0 28.6 3.9 46.8 26.8 21.7 40.7 6.2 11.0 16.0 International subscription revenue (6.6) 1.9 1.2 1.4 (9.2) (21.5) (17.4) (15.7) (3.5) 7.1 33.0 Total subscription revenues 8.2 21.3 23.3 3.4 36.7 19.0 15.4 31.2 5.0 10.6 18.0 % of revenue Transmission & programming 37.7 36.8 36.8 43.7 38.8 42.2 41.4 66.9 50.1 48.4 51.8 Employee cost 9.7 8.5 8.5 10.0 10.0 10.0 10.1 8.2 15.3 11.5 7.6 EBITDA 31.9 34.2 34.8 28.1 32.9 32.7 27.6 (14.5) 16.8 18.1 26.2 Adjusted PAT 19.6 20.7 24.8 14.9 24.1 26.7 18.4 (21.0) 9.4 11.9 16.8 Source: Company, Edelweiss Research

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ZEE ENTERTAINMENT

Inventory, deposits and content advances’ breakdown

(INR bn) FY20 Q1FY21 Q2FY21 Q3FY21 Movie rights 39.7 39.7 38.1 37.9 Shows 9.0 8.2 10.3 6.8 Movie production, music & Others 4.5 4.4 3.6 4.0 Content advances & deposit 10.9 10.7 8.5 7.9 Source: Company, Edelweiss Research

Quarterly financial snapshot

Year to March Q3FY21 Q3FY20 % change Q2FY21 % change YTD21 FY21E FY22E Revenues 27,294 20,487 33.2 17,227 58.4 57,641 77,174 88,912 Advertisement 13,020 12,308 5.8 9,028 44.2 26,259 36,513 49,292 Subscription 8,419 7,137 18.0 8,003 5.2 23,865 31,861 33,620 Others 5,854 1,042 462.0 196 2,883.8 7,517 8,800 6,000 Total revenues 27,294 20,487 33.2 17,227 58.4 57,641 77,174 88,912 Transmission & programming 14,142 8,476 66.8 8,342 69.5 29,062 37,328 39,941 Employee costs 2,073 2,075 (0.1) 1,978 4.8 6,052 7,961 8,359 Selling & Adm expenses 3,921 4,277 (8.3) 3,782 3.7 10,045 14,336 15,626 Total expenditure 20,137 14,829 35.8 14,101 42.8 45,159 59,625 63,926 EBITDA 7,157 5,658 26.5 3,126 129.0 12,482 17,549 24,986 Depreciation 652 656 (0.5) 651 0.1 2,022 2,687 2,959 EBIT 6,505 5,002 4.1 2,474 162.9 10,460 14,862 22,027 Less: Interest Expense 21 200 (89.4) 13 61.8 80 734 515 Add: Other income 276 710 (61.1) 379 (27.3) 919 1,165 1,675 Add: Prior period items ------Add: Exceptional items (839) (401) NM (1,178) NM (3,141) - - Profit before tax 5,920 5,110 15.8 1,662 256.2 8,158 15,293 23,187 Less: Provision for Tax 1,937 1,622 NM 740 161.9 2,961 3,854 5,843 Less: Minority Interest - - NM - - - - Add: Share of profit from associates (3) (2) NM 1 (437.5) (2) (24) (24) Reported Profit 3,980 3,486 14.2 923 331.2 5,196 11,415 17,320 Adjusted Profit 4,579 3,769 21.5 1,795 155.1 8,336 11,415 17,320 No. of shares (mn) 960 960 960 960 961 961 Adjusted Diluted EPS 4.8 3.9 1.9 8.7 11.9 18.0 Tax rate (%) 32.7 31.7 44.5 36.3 25.2 25.2 As % of net revenues Transmission & programming 51.8 41.4 1,044 48.4 339 50.4 48.4 44.9 Employee costs 7.6 10.1 (253) 11.5 (388) 10.5 10.3 9.4 Selling & Adm expenses 14.4 20.9 (651) 22.0 (758) 17.4 18.6 17.6 EBITDA 26.2 27.6 (140) 18.1 808 21.7 22.7 28.1 Net profit margins 16.8 18.4 (162) 10.4 636 14.5 14.8 19.5 Source: Company, Edelweiss Research

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ZEE ENTERTAINMENT

Company Description ZEE Entertainment Enterprises (ZEE) is one of the largest media companies in India. It owns and operates Zee TV and Zee Cinema, both leading channels in the Hindi GEC and movies segments, respectively. Besides these two, the company has an attractive bouquet of several other channels including &pictures, &TV, ZEE Anmol, Zindagi, Zing, Zee Classic, Zee Action, Zee Café and Zee Studios. With the likes of Zee Marathi, Zee Bangla, Zee Telugu, and Zee Kannada, the company has an impressive bouquet of regional channels. Investment Theme GDP recovery, improvement in its market share in regional and movies genres and new launches will aid ad revenue growth. Higher penetration of DTH and the digitisation process augur well for faster growth in subscription revenue over the long term. Cautious investment in the movie production is positive for the company. We believe ZEE is well poised to benefit from this favourable environment. Key Risks  Economic slowdown likely to reflect in advertisement revenues

 Absence of sporting events and fresh programming likely to temper the subscription growth momentum in near term

 Competition from digital video streaming platforms

 High competitive intensity in the OTT/streaming space

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ZEE ENTERTAINMENT

Additional Data Management Holdings – Top 10* MD & CEO Punit Goenka % Holding % Holding CFO Rohit Gupta Invesco 18.2 Vanguard Group 5.5 LIC 4.9 Amansa 3.6 CEO - Amit Goenka International Vontobel 3.0 Blackrock 2.6 CEO - ZEE5 (India) Tarun Katial Prudential Plc 2.3 Republic of Sing 2.0 Auditor M/s Deloitte Haskins & Sells, LLP Schroders Plc 2.0 Capital Group 1.8

*Latest public data

Recent Company Research Recent Sector Research Date Title Price Reco Date Name of Co./Sector Title Ad growth recovery continues; Favourable triggers in place; Result 23-Nov-20 185.5 Buy 04-Feb-21 INOX Leisure Company Update Update Dish TV stays the course; Siti mars New content to bring cheer; Result 02-Nov-20 183.45 Buy 15-Jan-21 PVR prof; Result Update Update Zee Entertainment Enterprises - Media: Screening a medley ; Sector 18-Aug-20 174 Buy 06-Jan-21 Media Result U; Result Update Update

Rating Interpretation Daily Volume TP 175 625 612

140 520 TP 424

415 105 (INR)

310 (Mn) 70

205 35 100 Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20 0 Z IN Equity Buy Hold Reduce Feb-18 Aug-18 Feb-19 Aug-19 Feb-20 Aug-20

Source: Bloomberg, Edelweiss research Source: Bloomberg

Rating Distribution: Edelweiss Research Coverage Rating Rationale

Buy Hold Reduce Total Rating Expected absolute returns over 12 months

Rating Distribution* 163 64 14 241 Buy: >15%

>50bn >10bn and <50bn <10bn Total Hold: >15% and <-5%

Market Cap (INR) 194 52 5 251 Reduce: <-5% * stocks under review

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ZEE ENTERTAINMENT

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Copyright 2009 Edelweiss Research (Edelweiss Securities Ltd). All rights reserved.

Aditya Narain Head of Research [email protected]

10 Edelweiss Research is also available on www.edelweissresearch.com, Bloomberg - EDEL, Thomson Reuters, and Factset Edelweiss Securities Limited