Zee Entertainment
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India Equity Research | Media & Entertainment © May 21, 2021 Result Update Emkay Zee Entertainment Your success is our success Refer to important disclosures at the end of this report CMP Target Price Rs 192 Rs 210 (▼) as of (May 21, 2021) 12 months To focus on regaining market share Rating Upside with aggressive content investments HOLD (■) 9.7 % . Zee reported in-line operating performance, with 8.9% yoy growth in domestic advertising Change in Estimates revenue. LTL subscription revenue increased 5.6% yoy, while international subscription EPS Chg FY22E/FY23E (%) (10.1)/(7) revenue recorded a decline of 31.5% yoy due to a change in accounting policy. Target Price change (%) (14.2) Target Period (Months) 12 . Total content inventory, advances and deposits increased to Rs62.7bn from Rs56.5bn in Previous Reco HOLD Q3FY21, as a result of fresh content investments. In Q4FY21, Zee recovered past dues of Rs2bn+ from Dish TV, and a full recovery is expected by the end of FY22. Emkay vs Consensus EPS Estimates . The company has decided to significantly scale down investments in SugarBox, which has FY22E FY23E been a key area of concern for investors. Management expects double-digit ad growth for Emkay 15.4 17.6 the industry in FY22 over FY20, provided the second Covid wave is contained in Q1. Consensus 16.0 18.5 We have cut our FY22-23E earnings by 7-10% as we factor in lower revenues due to the . Mean Consensus TP (12M) Rs 265 ongoing slowdown and guidance of 25% EBITDA margins on aggressive content Stock Details investments. We maintain Hold rating with a revised TP of Rs210 (12x FY23E EPS). Bloomberg Code Z IN Face Value (Rs) 1 In-line operating performance Shares outstanding (mn) 961 Consolidated revenues came in flat yoy at Rs19.65bn, driven by an 8% rise in ad revenues. 52 Week H/L 261 / 135 Domestic ad revenues recorded 8.9% growth yoy. Though subscription revenue grew 8.4% M Cap (Rs bn/USD bn) 184 / 2.52 yoy, it was impacted by a 31.5% decline in international subscription revenues due to a Daily Avg Volume (nos.) 1,43,02,670 change in accounting policy. LTL subscription revenues increased 5.6% yoy. EBITDA at Rs5.4bn was in line, with adjusted programing & content cost declining 19.2% due to lower Daily Avg Turnover (US$ mn) 39.7 accelerated inventory amortization. This also aided in sequential margin expansion of 129bps. Shareholding Pattern Mar '21 PAT for the quarter stood at Rs2.8bn. Promoters 4.0% Outlook: In a positive move, the company has decided to significantly reduce potential FIIs 64.2% investment of Rs5.2bn in ‘SugarBox’. This has been a major concern for investors and an DIIs 12.4% overhang on the stock, given that it is not related to the core business of Zee. We had not Public and Others 19.5% accounted for it in our estimates due to the lack of clarity on the investment timelines on account of Covid-19 related delays. Industry ad revenue growth for FY22 is expected to be in Price Performance double-digits over FY20, if the second Covid wave gets contained in Q1, with Zee targeting (%) 1M 3M 6M 12M to grow in-line-to-better than the industry. Domestic subscription revenue growth will be Absolute (3) (8) 3 25 impacted by the ongoing litigation on NTO 2.0 implementation. Increased content investments Rel. to Nifty (7) (8) (11) (24) in both TV and Zee5 could restrict EBITDA margins at ~25% in the foreseeable future. Zee’s target of producing 30-40 movies in a year might not be achieved this fiscal due to lockdowns Relative price chart across states. Management has maintained its 50% FCF/PAT guidance amid aggressive 250 Rs % 30 content investment plans. Key risks: 1) slower-than-expected recovery in ad revenues; 2) 220 18 delayed resolution on NTO 2.0 implementation; 3) better-than-expected margin delivery; and 190 6 4) market share loss of key channels. 160 -6 Please see our sector model portfolio (Emkay Alpha Portfolio): Media & Entertainment (Page 12) 130 -18 Financial Snapshot (Consolidated) 100 -30 May-20 Jul-20 Sep-20Nov-20 Jan-21 Mar-21May-21 (Rs mn) FY20 FY21 FY22E FY23E FY24E Zee Entertainment (LHS) Rel to Nifty (RHS) Revenue 81,299 77,299 88,234 97,894 1,06,928 Source: Bloomberg EBITDA 16,346 17,901 21,866 24,495 26,730 This report is solely produced by Emkay Global. The EBITDA Margin (%) 20.1 23.2 24.8 25.0 25.0 following person(s) are responsible for the production of the recommendation: APAT 10,705 11,229 15,074 16,901 18,536 Naval Seth EPS (Rs) 10.3 11.7 15.4 17.6 19.3 [email protected] EPS (% chg) (37.9) 14.0 31.6 14.4 9.7 +91 22 6624 2414 ROE (%) 10.8 11.9 14.6 15.0 14.8 Sonali Shah P/E (x) 18.7 16.4 12.5 10.9 9.9 [email protected] EV/EBITDA (x) 11.0 9.6 7.8 6.8 6.1 +91 22 6624 2482 P/BV (x) 2.0 1.9 1.7 1.6 1.4 Source: Company, Emkay Research Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>. Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. Zee Entertainment (Z IN) India Equity Research | Result Update Other highlights . Consolidated revenue stood at Rs19.7bn, stable yoy, but was 3% below our estimate. The miss was due to lower subscription revenue and other operating income. Ad revenues of Rs11.2bn were in line with our estimate, with 8% yoy growth. Domestic ad revenues rose 8.9% yoy, driven by the improvement in macro scenario. International ad revenues were, however, down 6.1% yoy to Rs526mn. Reported subscription revenues stood at Rs8bn, up 8.4% yoy. However, after adjusting for the reclassification of the music business, LTL growth was 5.6% yoy for the quarter. International subscription revenues saw 31.5% yoy slump to Rs553mn. Other operating income was impacted by the reclassification of revenues from the music business and lower theatrical revenues. Exhibit 1: Segment-wise revenue breakdown Rs mn Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 YoY % QoQ % FY20 FY21 YoY % Ad Revenue 10,389 4,211 9,028 13,020 11,230 8.1 (13.8) 46,811 37,488 -19.9% Subscription revenue 7,414 7,974 8,003 8,419 8,034 8.4 (4.6) 28,873 32,430 12.3% Domestic 6,607 7,156 7,172 7,328 7,481 13.2 2.1 25,623 29,136 13.7% International 807 818 831 1,091 553 (31.5) (49.3) 3,251 3,293 1.3% Others 1,708 935 196 5,854 395 (76.9) (93.3) 5,614 7,381 31.5% Total Sales 19,511 13,120 17,227 27,294 19,658 0.8 (28.0) 81,299 77,299 -4.9% Source: Company, Emkay Research . The company reported EBITDA of Rs5.4bn, in line with our expectations. Adjusting for the provisions (one-time inventory write-off and provision) in the base quarter, EBITDA grew sizably, while margins stood at 27.5%. Programming and content cost declined 19.2%, after adjusting for the one-time inventory write-off of Rs2.6bn in Q4FY20. Employee expenses rose yoy. Reported other operating expenses dipped considerably yoy. However, adjusting for the one-time Covid-19-related provision of Rs3.4bn, it dipped 14% yoy. Net profit stood at Rs2.8bn vs. a loss of Rs7.7bn in Q4FY20 . Other income stood at Rs186mn vs. Rs407mn in Q4FY20. MTM gain stood at Rs207mn vs. a loss of Rs27.8bn in Q4FY20. Zee5: Revenue stood at Rs1.1bn, with EBITDA loss of Rs1.6bn. ZEE5 had 72.6mn and 6.1mn global Monthly Active Users (MAUs) and Daily Active Users (DAUs), respectively, as of Mar’21. Revision in pricing of annual packs to Rs499 resulted in increased adoption of the yearly subscription packages. International operations . Total international revenue stood at Rs1.2bn vs. Rs2bn in Q4FY20. Ad revenues continued to be in the red and declined 6.1% yoy. Subscription revenues at Rs553mn dipped considerably. Exhibit 2: Breakdown of international revenues Rs mn Q4FY20 Q1FY21 Q2FY21 Q3FY21 Q4FY21 YoY % QoQ % FY20 FY21 YoY % Ad revenue 560 371 362 577 526 (6.1) (8.8) 2,400 1,836 -24% Subscription revenue 807 818 831 1,091 553 (31.5) (49.3) 3,251 3,293 1% Other sales and services 633 150 292 5,695 154 (75.7) (97.3) 1,699 6,291 270% Total Revenue 2,000 1,339 1,485 7,363 1,233 (38.4) (83.3) 7,350 11,420 55% Source: Company, Emkay Research Emkay Research is also available on www.emkayglobal.com and Bloomberg EMKAY<GO>. Please refer to the last page of the report on Restrictions on Distribution. In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. May 21, 2021 | 2 Zee Entertainment (Z IN) India Equity Research | Result Update Balance sheet . Cash and cash equivalents improved again and stood at Rs18.9bn vs.