Zee Entertainment

9 October 2017 Company Update | Sector: Media Zee Entertainment BSE SENSEX S&P CNX 31,814 9,980 CMP: INR523 TP: INR630 (+20%) Buy Acquires 9X Media, expands music portfolio Additional channels to contribute 5% of domestic ad revenue Zee has acquired 9X Media’s six music channels for INR1.6b (1x FY17 sales). 9X Media holds ~26% share in the music ad market. Bloomberg Z IN The acquisition allows Zee to widen its TV portfolio and also provides channels to Equity Shares (m) 960.5 market its own music/movie production. M.Cap.(INR b)/(USD b) 497.9 / 7.8 We maintain our Buy recommendation for Zee, with a TP of INR630. 52-Week Range (INR) 575/429 1, 6, 12 Rel. Per (%) 0/-12/-19 Has acquired 9X Media’s six music channels for INR1.6b in cash Avg Val, INRm 1087.0 Zee announced the acquisition of 9X Media’s six music channels for INR1.6b, which Free float (%) 56.9 will be paid in cash. These six channels across four languages – 9XM (Latest Financials & Valuations (INR b) Bollywood), 9X Jalwa (Evergreen Hindi), 9X Jhakaas (Marathi), 9X Tashan (Punjabi), Y/E MARCH 2017 2018E 2019E 9XO (English), and 9X Bajao (Hindi Classics) – will allow Zee to expand its portfolio Net Sales 64.3 64.6 75.9 from the current 33 channels to 39 channels. EBITDA 19.3 20.3 26.9 Adj. NP 14.5 13.1 18.2 Acquired portfolio to contribute 5% of domestic ad revenue Adj. EPS (INR) 13.9 12.2 17.8 9X Media’s FY17 revenue at INR1.6b is equivalent to 5% of Zee’s domestic ad EPS Gr. (%) 80.7 -12.4 46.4 revenue and 2% of its consolidated revenue. At the EBITDA level, 9X Media had a BV/Share (INR) 89.2 95.4 106.8 RoE (%) 19.3 14.7 18.7 loss of INR51m in FY17. EBITDA margin was 7% in FY16, which turned negative to - RoCE (%) 20.7 15.7 19.5 3% in FY17. Over the next 2-3 years, revenue growth coupled with cost synergies Div. Payout (%) 13.0 22.7 19.0 should drive margin accretion. Valuations P/E (x) 37.4 42.6 29.1 Benefits for Zee P/BV (x) 5.8 5.4 4.9 1. Deeper inroads to music genre: Music is 3% of the total TV market, with about EV/EBITDA (x) 24.5 22.8 16.9 INR6b industry size. 9X Media holds a sizeable ~26% revenue market share. Zee Div. Yield (%) 0.5 0.5 0.6 already has presence in the music genre through Zetc channel, but 9X Media Shareholding pattern (%) should allow it to expand reach significantly with a dual brand strategy. It As On Jun-17 Mar-17 Jun-16 should also allow it to widen its target market through regional music, with Promoter 43.1 43.1 43.1 foray into the Punjabi market. DII 5.7 4.5 3.8 2. Wider marketing channel for own music/movie production: These channels FII 44.7 46.4 48.1 will complement Zee’s music label and movie production business. Currently, Others 6.6 6.1 5.0 the music production business may be a miniscule 2-3% of total revenue. 9X FII Includes depository receipts Media’s strong distribution will support Zee’s own music and movie production Stock Performance (1-year) reach, supporting management guidance of healthy revenue contribution from Zee Entertainmen movie/music business over the next 3-5 years. Sensex - Rebased 700 625 Expect healthy growth; remain positive with TP of INR630 The low revenue/EBITDA contribution does not change our earnings estimates. We 550 maintain our adjusted EPS estimates of INR12/18 for FY18/19, with CAGR of 13% 475 over FY17-19. We believe Zee’s efforts to (a) widen TV genre/language presence, 400 and (b) increased focus on movie/music production and events business should allow it to sustain healthy earnings growth over the next 3-5 years. RoE of ~20% by Jul-17 Jan-17 Oct-16 Oct-17 Apr-17 FY19-20 should support healthy valuations. Buy with a TP of INR630. Aliasgar Shakir ([email protected]); +91 22 6129 1565 Hafeez Patel ([email protected]); +91 22 6129 1568 Investors are advised to refer through important disclosures made at the last page of the Research Report. Motilal Oswal research is available on www.motilaloswal.com/Institutiona l-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital. Zee Entertainment Exhibit 1: 9X Media consolidated financials (INR m) Revenue EBITDA EBITDA margin (%) FY15 1,480 -104 -7% FY16 1,762 117 7% FY17 1,586 -51 -3% Source: MOSL, Company Exhibit 2: 9XM & 9X Jalwa: Television viewership (m) 9XM 9X Jalwa 101.7 98.8 92.5 77.6 76.5 79.0 Week 37 Week 38 Week 39 Source: MOSL, BARC Exhibit 3: Market share of 9X Media 9X Media 26% Others 74% Source: Industry, MOSL, Company Exhibit 4: Genre-wise share of TV ad spend Others Eng Niche 7% 2% Kids Movies Eng 3% 3% Hindi GEC Malayalam Reg Info 27% 3% 3% Music Bengali 3% 4% Kannada Sports 4% 8% Hindi + Eng News Marathi 10% 4% Telugu Tamil 5% 9% Hindi Movies 5% Source: Industry, MOSL, Company 9 October 2017 2 9 October 2017 Exhibit 8: Exhibit 7: 9X Media Exhibit 5: Exhibit 6: 37 1QFY10 1.4 4.5 5.3 5.1 4.8 5.3 5.8 6.8 5.8 6.2 6.3 7.4 6.7 7.8 8.3 9.2 8.5 9.1 9.6 9.6 36 1QFY13 18.1 2QFY10 1.6 1QFY13 1,137 2,505 33.7 39 3QFY10 1.8 2QFY13 Purchase consideration (INR b) (INR consideration Purchase ZEE ZEE 31 28.8 2QFY13 1,141 2,808 ZEE 4QFY10 1.8 37 3QFY13 - - 15.5 1QFY11 2.2 - t 3QFY13 1,136 2,962 s 41 rend ubscription a 39 2QFY11 2.4 4QFY13 %) b, (INR growth YoY and revenue d 4QFY13 1,172 3,374 18.5 3QFY11 2.6 37 in EBITDA and margins ex margins and EBITDA in 1QFY14 4QFY11 2.4 1QFY14 1,073 3,168 10.5 35 1QFY12 2.1 EBITDA (ex sports) 2QFY14 37 34.3 2QFY14 1,231 3,350 2QFY12 2.3 m) (INR trend revenue 34 3QFY14 Sales 3QFY12 2.3 3QFY14 1,243 3,322 1.6 21.5 30 International 4QFY12 2.2 34 4QFY14 1,292 3,344 17.4 1QFY13 2.5 4QFY14 30 2QFY13 2.3 1QFY15 32 1QFY15 1,189 3,238 7.3 3QFY13 2.7 33 2QFY15 872 3,373 2QFY15 4QFY13 2.8 8.5 35 - EBITDA margin (ex sports) (%) 3QFY15 1QFY14 3.0 sports (INR b) 35 3QFY15 1,007 3,455 15.0 Multiple (x) 2QFY14 3.3 Domestic 40 4QFY15 933 4,175 4QFY15 3QFY14 3.9 25.4 29 4QFY14 2.8 1QFY16 1 31 1QFY16 945 3,680 1QFY15 3.1 32.4 35 2QFY16 1,039 3,752 2QFY16 24.4 2QFY15 3.5 34 3QFY15 3.8 21 3QFY16 1,030 4,188 3QFY16 4QFY15 2.5 26.5 26 Source: Company, MOSL 4QFY16 1,262 4,682 4QFY16 Source: Company, MOSL 16.9 1QFY16 3.1 Source: Company, MOSL 28 2QFY16 3.6 32 1QFY17 4,179 1QFY17 1,103 Zee Entertainment 3QFY16 4.4 15.7 32 2QFY17 1,158 4,675 4QFY16 4.3 2QFY17 Cash 1.6 31 3.4 1QFY17 4.4 Source: MOSL 34 3QFY17 1,117 4,818 3QFY17 0.0 2QFY17 5.1 8.5 34 3QFY17 5.1 4QFY17 1,026 4,554 4QFY17 33 0.8 4QFY17 4.7 9.7 31 3 1QFY18 1,000 3,788 1QFY18 1QFY18 4.8 Zee Entertainment Exhibit 9: Zee Entertainment: A snapshot (INR b) FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E Advertisement Revenue 15.8 19.6 23.8 26.6 33.7 36.7 39.9 45.8 52.8 YoY (%) -7 24 21 12 26 9 9 15 15 Subscription Revenue 13.2 16.2 18.0 17.9 20.6 22.6 20.5 25.5 29.9 YoY (%) 17 23 11 0 15 10 -9 24 17 - Domestic 9.2 11.6 13.2 14.2 16.3 18.2 16.7 21.5 25.8 YoY (%) 28 26 13 8 14 12 -8 29 20 - International 4.0 4.6 4.8 3.7 4.3 4.4 3.8 4.0 4.0 YoY (%) -2 14 6 -23 15 3 -14 4 2 Other Sales & Sevices 1.3 1.1 2.4 4.3 3.9 5.0 4.2 4.6 5.1 YoY (%) 25 -15 113 80 -9 28 -16 10 10 Total Revenue 30.4 37.0 44.2 48.8 58.1 64.3 64.6 75.9 87.8 YoY (%) 3 22 20 10 19 11 0 18 16 Operating expenses 23.0 27.5 32.2 36.3 43.0 45.1 44.3 49.0 55.6 YoY (%) 5 19 17 13 18 5 -2 11 14 EBITDA 7.4 9.5 12.0 12.5 15.1 19.3 20.3 26.9 32.1 YoY (%) -2 29 26 4 21 27 5 33 19 EBITDA margin (%) 24.3 25.8 27.2 25.7 26.0 29.9 31.4 35.5 36.6 Revenue mix (%) Ad and broadcast revenue 52 53 54 54 58 57 62 60 60 Subscription revenue 44 44 41 37 35 35 32 34 34 -Domestic 30 31 30 29 28 28 26 28 29 - International 13 12 11 8 7 7 6 5 5 Other sales and services 4 3 5 9 7 8 6 6 6 Sports/Non-sports break-up Revenue 30.4 37.0 44.2 48.8 58.1 64.3 64.6 75.9 87.8 -Sports 3.9 5.0 6.6 5.9 6.2 6.8 0.2 0.0 0.0 -Non-sports 26.5 32.0 37.6 43.0 52.0 57.6 64.4 75.9 87.8 EBITDA 7.4 9.5 12.0 12.5 15.1 19.3 20.3 26.9 32.1 -Sports -1.5 -0.9 -1.0 -0.8 -0.8 -0.9 0.0 0.0 0.0 -Non-sports 8.9 10.4 13.0 13.3 16.0 20.2 20.3 26.9 32.1 EBITDA margin (%) 24.3 25.8 27.2 25.7 26.0 29.9 31.4 35.5 36.6 Sports -37.6 -17.5 -14.8 -13.3 -13.3 -13.3 0.0 0.0 0.0 Non -sports 33.5 32.5 34.6 31.0 30.7 35.0 31.5 35.5 36.6 Source: Company, MOSL 9 October 2017 4 Zee Entertainment Financials and Valuations Consolidated - Income Statement (INR m) Y/E March FY15 FY16 FY17 FY18E FY19E FY20E Total Income from Operations 48,837 58,125 64,342 64,599 75,924 87,771 Change (%) 10.4 19.0 10.7 0.4 17.5 15.6 Programming/Production expenses 20,135 24,658 26,295 23,576 25,980 29,241 Employees Cost 4,498 4,986 6,043 6,454 7,334 8,441 Other Expenses 11,666 13,345 12,735 14,254 15,679 17,946 Total Expenditure 36,299 42,989 45,073 44,285 48,993 55,628 % of Sales 74.3 74.0 70.1 68.6 64.5 63.4 EBITDA 12,538 15,136 19,269 20,314 26,931 32,142 Margin (%) 25.7 26.0 29.9 31.4 35.5 36.6 Depreciation 673 777 1,152 1,319 1,494 1,657 EBIT 11,865 14,359 18,117 18,995 25,437 30,486 Int.

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